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) 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

Kimberly-Clark Co

Basic Computations:

Annual rental payments = $66,999

Incremental borrowing rate 8%

Present value of minimum lease payments = annual rental payments x pv factor for an annuity due at 8% at the end of 10 periods

= 66,999 x 7.2469 = $485,535

Interest expense – Dec 31, 2017 = (485,535 – 66,999) x 8% = 418,536 x 8% = $33,483

Reduction of lease liability = (66,999 – 33,383) = $33,516

Lease liability balance = 418,536 – 33,516 = $385,020

Dec 31, 2018

Interest expense = 385,020 x 8% = $30,802

Reduction of lease liability = 66,999 – 30,802 = $36,197

Lease liability balance = 385,020 – 36,197 = $348,823

Journal entries:

Date	Account Titles and Explanation	Ref. No.	Debit	Credit
31-Dec-16	Leased Building		$485,535
	Lease Liability			$485,535
	(To record leased asset and related lease liability)
31-Dec-16	Lease Liability		$66,999
	Cash			$66,999
	(To record first rental payment)
31-Dec-17	Lease Liability		$33,516
	Interest Expense		$33,483
	Cash			$66,999
	(To record first annual rental payment)
31-Dec-17	Depreciation Expense		$49,063
	Accumulated Depreciation - Capital Lease			$49,063
	(To record annual amortization on leased asset; 490,629/10 = $49,063)
31-Dec-18	Lease Liability		$36,197
	Interest Expense		$30,802
	Cash			$66,999
	(To record annual payment)
31-Dec-18	Depreciation Expense		$49,063
	Accumulated Depreciation - Capital Lease			$49,063
	(To record annual amortization on leased asset; 490,629/10 = $49,063)