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 $67,999 beginning on December 31, 2019.
2.		The fair value of the building on December 31, 2019 is $497,876.
3.		The building has an estimated economic life of 12 years, a guaranteed residual value of $11,000, and an expected residual value of $7,100. 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.

Answer 1

Working as follows:

Minimum lease payment = $67,999

Guaranteed residual value = $11,000

Compute present value minimum lease payments as follows:

	Working
Minimum annual lease payment [1 + PVAF(8%, 9 years)]	[$67,999 × 7.24688]	$492,780
Guaranteed residual value [($11000-$7100 = $3900) [PVF(8%, 10)]	$3900 × 0.463193	$1,806
Lease Liability		$494,586

Lease Amortization Schedule as follows:

Date	Annual Lease payment	Interest @8%	Reduction of Lease Liability	Lease Liability
Dec. 31, 2019				$494,586
Dec. 31, 2019	$67,999	-	$67,999	$426,587.00
Dec. 31, 2020	$67,999	$34,126.96	$33,872.04	$392,714.96
Dec. 31, 2021	$67,999	$31,417.20	$36,581.80	$356,133.16

_____________________________________________________

Prepare journal entries as follows:

Date	Account Titles	Debit	Credit
Dec. 31, 2019	Right-of-use-Asset	$494,586
	Lease Liability		$494,586
Dec. 31, 2019	Lease Liability	$67,999
	Cash		$67,999
Dec. 31, 2020	Amortization Expense	$49,458.6
	Right-of-use-Asset		$49,458.6
	[$494586/10 year]
Dec. 31, 2020	Interest Liability	$33,872
	Interest expense	$34,127
	Cash		$67,999
Dec. 31, 2021	Amortization Expense	$49,458.6
	Right-of-use-Asset		$49,458.6
	[$494586/10 year]
Dec. 31, 2021	Interest Liability	$36,582
	Interest expense	$31,417
	Cash		$67,999