Question

Assume that on December 31, 2016, 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 $66,999 beginning on December 31, 2016. 2. The fair value of the building on December 31, 2016 is $490,629. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $11,000, and an expected residual value of $8,100. 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. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) Collapse question part (a) Partially correct answer. Your answer is partially correct. Try again. 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 2016, 2017, and 2018. 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.)

Answer 1

Minor Amounts may differ due to rounding of factor. We can use excel for accurate solution. You can use your discount factor in your question.
Period	Lease payment	Discount factor @ 8%	Present value
0	66,999.00	1.000000	66,999.00
1	66,999.00	0.925926	62,036.11
2	66,999.00	0.857339	57,440.84
3	66,999.00	0.793832	53,185.97
4	66,999.00	0.735030	49,246.27
5	66,999.00	0.680583	45,598.39
6	66,999.00	0.630170	42,220.73
7	66,999.00	0.583490	39,093.27
8	66,999.00	0.540269	36,197.47
9	66,999.00	0.500249	33,516.18
10	2,900.00	0.463193	1,343.26
Present value of lease payable			486,878
Last year cash flow include difference between guaranteed residual value of $11,000 and expected residual value of $8,100 (11000-8100)
Amortization Expense (486878/10)			48,688

Lease amortization table – lessee
Period	Beginning balance of lease payable	Lease payment	Interest expense (beginning balance of lease payable * 8)	Reduction in lease payable (lease payment - interest expense)	Beginning balance of lease payable (beginning balance of lease payable - reduction in lease payable)
0	486,878	66,999	-	66,999	419,879
1	419,879	66,999	33,590	33,409	386,470
2	386,470	66,999	30,918	36,081	350,388
3	350,388	66,999	28,031	38,968	311,420
4	311,420	66,999	24,914	42,085	269,335
5	269,335	66,999	21,547	45,452	223,883
6	223,883	66,999	17,911	49,088	174,795
7	174,795	66,999	13,984	53,015	121,779
8	121,779	66,999	9,742	57,257	64,522
9	64,522	66,999	5,162	61,837	2,685
10	2,685	2,900	215	2,685	0

Lessee
Journal entries
Date	General journal	Debit	Credit
12/31/16	Right-of-Use Asset	486,878
	Lease liability		486,878
	(To record lease agreement.)
12/31/16	Lease liability	66,999
	Cash		66,999
	(To record lease payment.)
12/31/17	Amortization Expense	48,688
	Right-of-Use Asset		48,688
	(To record amortization of Right-of-Use Asset)
12/31/17	Interest expense	33,590
	Lease liability	33,409
	Cash		66999
	(To record lease payment.)
12/31/18	Amortization Expense	48,688
	Right-of-Use Asset		48,688
	(To record amortization of Right-of-Use Asset)
12/31/18	Interest expense	30,918
	Lease liability	36,081
	Cash		66999
	(To record lease payment.)