Question

Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $67,399 beginning on December 31, 2019. 2. The fair value of the building on December 31, 2019 is $492,833. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $9,500, and an expected residual value of $6,200. Kimberly-Clark depreciates similar buildings on the straight-line method. 4. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 5. Kimberly-Clark’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not known by Kimberly-Clark.

Prepare the journal entries on the lessee’s books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2019, 2020, and 2021. Kimberly-Clark’s fiscal year-end is December 31. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

Suppose the same facts as above, except that Kimberly-Clark incurred legal fees resulting from the execution of the lease of $5,000, and received a lease incentive from Sheffield to enter the lease of $1,000. How would the initial measurement of the lease liability and right-of-use asset be affected under this situation?

Suppose that in addition to the $67,399 annual rental payments, Kimberly-Clark is also required to pay $5,000 for insurance costs each year on the building directly to the lessor, Sheffield Storage. How would this executory cost affect the initial measurement of the lease liability and right-of-use asset? (Round answer to 0 decimal places, e.g. 5,275.)

Now suppose that, at the end of the lease term, Kimberly-Clark took good care of the asset and Sheffield agrees that the fair value of the asset is actually $9,500. Record the entry for Kimberly-Clark at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made). (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Answer 1

11)

1) Amortisation schedule   Year   CF Discount factor @ 8% Disc. CF Accretion @8% Year end balance   2020     67,399 0.9259           62,406          36,532      425,786 2021     67,399 0.8573           57,784          34,063      392,450 2022     67,399 0.7938           53,503          31,396      356,447 2023     67,399 0.7350           49,540          28,516      317,564 2024     67,399 0.6806           45,871          25,405      275,570 2025     67,399 0.6302           42,473          22,046      230,217 2026     67,399 0.5835           39,327          18,417      181,235 2027     67,399 0.5403           36,414          14,499      128,335 2028     67,399 0.5002           33,716          10,267        71,203 2029     67,399 0.4632           31,219            5,696           3,804 2029        9,500 0.4632             4,400 NA Total   683,490        456,653       226,837
Year	Journal entries in the books of Jack	Debit	Credit
Year 1	Right of use asset	456,653
	Lease liability		456,653
Year 1 to 10	Depreciation (SLM - 10 years after residual value -$ 6200	45,045
	Right of use asset		45,045
2020	Finance costs	36,532
	Lease liability		36,532
2021	Finance costs	34,063
	Lease liability		34,063
2022	Finance costs	31,396
	Lease liability		31,396

2)

Accounting in the books of Lessee	Lease liability and Right of use asset to be recognised		Amortisation schedule
			Year	CF	Discount factor @ 8%	Disc. CF	Accretion @8%	Year end balance
Lease Liability			2020	66,399	0.9259	61,481	35,995	419,539
Fixed payments less any lease incentives receivable for 10 years ($ 67399- $ 1000)	663,990		2021	66,399	0.8573	56,926	33,563	386,704
Less : service component	-		2022	66,399	0.7938	52,710	30,936	351,241
Variable payments	-		2023	66,399	0.7350	48,805	28,099	312,941
Amount guaranteed by Lessee	9,500		2024	66,399	0.6806	45,190	25,035	271,577
Purchase options	-		2025	66,399	0.6302	41,843	21,726	226,905
Total	673,490		2026	66,399	0.5835	38,743	18,152	178,658
			2027	66,399	0.5403	35,873	14,293	ekkarill92 Next > < Previous Related Solutions Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease... Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $67,899 beginning on December 31, 2019. 2. The fair value of the building on December 31, 2019 is $497,614. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $12,000, and an expected residual value... Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease... Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Sheffield Storage Company. 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