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 $66,799 beginning on December 31, 2019.
2.		The fair value of the building on December 31, 2019 is $488,254.
3.		The building has an estimated economic life of 12 years, a guaranteed residual value of $9,000, and an expected residual value of $6,300. 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 factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Part 1

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. (Credit account titles are automatically indented when amount is entered. Do not indent manually. Round answers to 0 decimal places e.g. 5,275.)

Date	Account Titles and Explanation	Debit	Credit
12/31/1912/31/2012/31/21 12/31/1912/31/2012/31/21	enter an account title To record the lease on December 31 2019	enter a debit amount	enter a credit amount
	enter an account title To record the lease on December 31 2019	enter a debit amount	enter a credit amount
	(To record the lease)
12/31/1912/31/2012/31/21 12/31/1912/31/2012/31/21	enter an account title To record first lease payment on December 31 2019	enter a debit amount	enter a credit amount
	enter an account title To record first lease payment on December 31 2019	enter a debit amount	enter a credit amount
	(To record first lease payment)
12/31/1912/31/2012/31/21 12/31/1912/31/2012/31/21	enter an account title To record amortization of the right-of-use asset on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset on December 31 2020	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)
12/31/1912/31/2012/31/21 12/31/1912/31/2012/31/21	enter an account title To record interest expense on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2020	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2020	enter a debit amount	enter a credit amount
	(To record interest expense)
12/31/1912/31/2012/31/21 12/31/1912/31/2012/31/21	enter an account title To record amortization of the right-of-use asset on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title To record amortization of the right-of-use asset on December 31 2021	enter a debit amount	enter a credit amount
	(To record amortization of the right-of-use asset)
12/31/1912/31/2012/31/21 12/31/1912/31/2012/31/21	enter an account title To record interest expense on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2021	enter a debit amount	enter a credit amount
	enter an account title To record interest expense on December 31 2021	enter a debit amount	enter a credit amount
	(To record interest expense)

eTextbook and Media

List of Accounts

Part 2

Suppose the same facts as above, except that Kimberly-Clark incurred legal fees resulting from the execution of the lease of $5,000, and received a lease incentive from Sheffield to enter the lease of $1,000. How would the initial measurement of the lease liability and right-of-use asset be affected under this situation?

Right-of-use asset

$enter the Right-of-use asset in dollars

eTextbook and Media

List of Accounts

Part 3

Suppose that in addition to the $66,799 annual rental payments, Kimberly-Clark is also required to pay $5,000 for insurance costs each year on the building directly to the lessor, Sheffield Storage. How would this executory cost affect the initial measurement of the lease liability and right-of-use asset? (Round answer to 0 decimal places, e.g. 5,275.)

Lease liability

$enter the Lease liability in dollars

eTextbook and Media

List of Accounts

Part 4

Now suppose that, at the end of the lease term, Kimberly-Clark took good care of the asset and Sheffield agrees that the fair value of the asset is actually $9,000. Record the entry for Kimberly-Clark at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made). (Credit account titles are automatically indented when the amount is entered. Do not indent manually.)

Account Titles and Explanation	Debit	Credit
enter an account title	enter a debit amount	enter a credit amount
enter an account title	enter a debit amount	enter a credit amount

Answer 1

1)
Date	Account titles and Explanation	Debit	Credit
12/31/19	Right - of- use Assets	488254
	Lease Liability		488254
	(To record the lease)
	Present value of minimum lease payments = 66799 x PVIFA(8%,10)
	Present value of minimum lease payments = 66799 x 7.24689
	Add: Present value of salvage value (9000 x pv(8%,10)
1/1/20	Lease Liability	66799
	Cash		66799
	(To record the first lease payments)
12/31/20	Depreciation Expense ($484,085/10)	48825
	Right - of- use Assets		48825
	To record amortisation
12/31/21	Interest Expense	33716
	Lease Liability	33083
	Cash		66799
	(To record interest expense)
12/31/21	Depreciation Expense ($484,085/10)	48825
	Right - of- use Assets		48825
	To record amortisation
12/31/21	Interest Expense	31070
	Lease Liability	35729
	Cash		66799
	(To record interest expense)
Schedule 1              KIMBERLY-CLARK CORP.
Lease Amortization Schedule
(Lessee)
Date	Annual Payment	Interest (8%) on Liability	Reduction of Lease Liability	Lease Liability
31/12/19				488254
31/12/19	66799		66799	421455
31/12/20	66799	33716	33083	388372
31/12/21	66799	31070	35729	352643
31/12/22	66799	28211	38588	314055
31/12/23	66799	25124	41675	272381
31/12/24	66799	21790	45009	227372
31/12/25	66799	18190	48609	178763
31/12/26	66799	14301	52498	126265
31/12/27	66799	10101	56698	69567
31/12/28	66799	5565	61234	8334
31/12/28	9000	667	8333	0
Part 2)
Lease Liability	66799
Right- of - use assets
Initial  Right-of - use Aasets	$                                             488,253.72
Add: Initial direct Cost (Legal fees)	$                                                 5,000.00
Less incentives	$                                                (1,000.00)
Total Right-of - use assets	$                                             492,253.72
Part 3
Capitalized amount of the lease:
Yearly payment	66799
Insurace costs	5000
Minimum annual lease payment	61799
Right-of-use assets =
Present value of minimum lease payments = 61799 x 7.24689	$                                                  447,851
Add: Present value of salvage value (9000 x pv(8%,10)	$                                                      4,169
Add: Present value of Insurace  (5000 x 7.244689	$                                                    36,234
Right of - use Assets	$                                                  488,254