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 $66,199 beginning on December 31, 2016. 2. The fair value of the building on December 31, 2016 is $484,368. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $10,000, and an expected residual value of $7,900. 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 8% per year. The lessor’s implicit rate is not known by Kimberly-Clark.

Answer 1

1

Amount to be capitalized includes:
	Minimum annual lease payment				$     66,199
	Guaranteed residual value				$     10,000
Present value of minimum lease payments using Excel's PV function:
	Minimum annual lease payment				$   479,737
	Guaranteed residual value				973
	Lease liability				$   480,709

12/31/16	Lease Liability			66,199
		Cash			66,199
12/31/17	Amortization Expense			48,071
		Right-of-Use Asset			48,071
12/31/17	Lease Liability			33,038
	Interest Expense			33,161
		Cash			66,199
12/31/18	Amortization Expense			48,071
		Right-of-Use Asset			48,071
12/31/18	Lease Liability			35,681
	Interest Expense			30,518
		Cash			66,199

Lease Amortization Schedule

Date	Annual Lease Payment	Interest (8%) on Liability	Reduction of Lease Liability	Lease Liability
12/31/16				$    480,709
12/31/16	$   66,199	$        -	$     66,199	414,510
12/31/17	66,199	33,161	33,038	381,472
12/31/18	66,199	30,518	35,681	345,791

working notes for the answer