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 $67,199 beginning on December 31, 2019.
2.		The fair value of the building on December 31, 2019 is $491,847.
3.		The building has an estimated economic life of 12 years, a guaranteed residual value of $10,500, and an expected residual value of $7,400. 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.

Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

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.)

Date	Account Titles and Explanation	Debit	Credit
12/31/1912/31/2012/31/21	enter an account title To record the lease on December 31 2019	enter a debit amount	enter a credit amount
	enter an account title To record the lease on December 31 2019	enter a debit amount	enter a credit amount
	(To record the lease)
12/31/1912/31/2012/31/21	enter an account title To record first lease payment on December 31 2019	enter a debit amount	enter a credit amount
	enter an account title To record first lease payment on December 31 2019	enter a debit amount	enter a credit amount
	(To record first lease payment)
12/31/1912/31/2012/31/21	enter an account title To record amortization of the right-of-use asset on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset on December 31 2020	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)
12/31/1912/31/2012/31/21	enter an account title To record interest expense on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2020	enter a debit amount	enter a credit amount
	(To record interest expense)
12/31/1912/31/2012/31/21	enter an account title To record amortization of the right-of-use asset on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset on December 31 2021	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)
12/31/1912/31/2012/31/21	enter an account title To record interest expense on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2021	enter a debit amount	enter a credit amount
	(To record interest expense)

eTextbook and Media

List of Accounts

  

  

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?

Right-of-use asset

$enter the Right-of-use asset in dollars

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List of Accounts

  

  

Suppose that in addition to the $67,199 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.)

Lease liability

$enter the Lease liability in dollars

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List of Accounts

  

  

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 $10,500. 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.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Answer 1

Answer:

PV of minimum lease payment ($67,199*7.24688)	486,984
PV of guaranteed residual value ($10,500*0.463193)	4,170
Lease liability	491,154

Date	Annual lease payment	Interest expense @8%	Reduction of lease liability	Lease liability
12/31/2019				491,154
12/31/2019	67,199		67,199	423,955
12/31/2020	67,199	33,916	33,283	390,672
12/31/2021	67,199	31,254	35,945	354,727

Answer-1:
Date	General Journal	Debit	Credit
12/31/2019	Right-of-use asset	491,154
	Lease liability		491,154
12/31/2019	Lease liability	67,199
	Cash		67,199
12/31/2020	Amortization expense	49,115
	Right-of-use asset		49,115
12/31/2020	Lease liability	33,283
	Interest expense	33,916
	Cash		67,199
12/31/2021	Amortization expense	49,115
	Right-of-use asset		49,115
12/31/2021	Lease liability	35,945
	Interest expense	31,254
	Cash		67,199

Answer-2:
Lease liability	$         491,154
Lease incentive	(1,000)
Legal fees	5,000
Right-of-use asset	$         495,154
Answer-3:
PV of minimum lease payment ($67,199*7.24688)	$ 486,984
PV of guaranteed residual value ($10,500*0.463193)	4,170
PV of insurance payment ($5,000*7.24688)	36,234
Lease liability	527,388