Question

Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-year noncancelable 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 $77,100 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017 is $411,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $9,900. 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 12% per year. The lessor’s implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes $12,153 of executory costs related to taxes on the property. 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 2017 and 2018. Kimberly-Clark’s corporate year-end is December 31. (Hint: Do the table for ten periods based on present value of minimum lease payments.) (Credit account titles are automatically indented when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.) Click here to view factor tables Date Account Titles and Explanation Debit Credit choose a transaction date enter an account title to record the lease enter a debit amount enter a credit amount enter an account title to record the lease enter a debit amount enter a credit amount (To record the lease.) enter an account title to record first payment enter a debit amount enter a credit amount enter an account title to record first payment enter a debit amount enter a credit amount enter an account title to record first payment enter a debit amount enter a credit amount (To record first payment.) choose a transaction date enter an account title to record depreciation enter a debit amount enter a credit amount enter an account title to record depreciation enter a debit amount enter a credit amount (To record depreciation.) enter an account title to record interest enter a debit amount enter a credit amount enter an account title to record interest enter a debit amount enter a credit amount (To record interest.) 1/1/18 enter an account title to record second payment enter a debit amount enter a credit amount enter an account title to record second payment enter a debit amount enter a credit amount enter an account title to record second payment enter a debit amount enter a credit amount enter an account title to record second payment enter a debit amount enter a credit amount (To record second payament.) choose a transaction date enter an account title to record depreciation enter a debit amount enter a credit amount enter an account title to record depreciation enter a debit amount enter a credit amount (To record depreciation.) enter an account title to record interest enter a debit amount enter a credit amount enter an account title to record interest enter a debit amount enter a credit amount (To record interest.)

Answer 1

Date	Account titles and explanation	debit	credit
1/1/17	lease building	411,000
	lease liability		411,000
	(To record the lease.)
1/1/17	executory cost	12153
	lease liability	64947
	cash		77100
	(To record first payment.)
12/31/17	depreciation expense ($411,000/10 years)	41100
	accumulated depreciation -capital lease		41100
	(To record depreciation.)
12/31/17	interest expense (411000-64947)*12%	41526
	interest payable		41526
	(To record interest.)
1/1/18	executory cost	12153
	interest payable	41526
	lease liability	23421
	cash		77100
	(To record first payment.)
12/31/18	depreciation expense ($411,000/10 years)	41100
	accumulated depreciation -capital lease		41100
	(To record depreciation.)
12/31/18	interest expense
	interest payable
	(To record interest.)

Notes:

Capitalized amount of the lease:

          Yearly payment.................................................................................................................... $77100

          Executory costs...................................................................................................................    (12153)

          Minimum annual lease payment......................................................................................... $64947

Present value of minimum lease payments

          $64947 X 6.32825 = $411000

KIMBERLY-CLARK CORP.

                                                          Lease Amortization Schedule

                                                                            (Lessee)

                                                                                                                                                                       

Date	Annual Payment Less Executory Costs	Interest (12%) on Liability	Reduction       of Lease Liability	Lease Liability
1/1/17				$411,000.00
1/1/17	$64947	$              0	$64947	346053
1/1/18	64947	41526	23421	322632
1/1/19	64947	38716	26231	296401