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 $76,100 beginning on January 1, 2017.

2. The fair value of the building on January 1, 2017 is $414,000.

3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $9,700. 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 $10,679 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

(To record the lease.) (To record first payment.)(To record depreciation.)(To record interest.)(To record second payment.)(To record depreciation.)(To record interest.)

Answer 1

Prepare the journal entries as follows:

Date	Account Title and Explanation	Debit	Credit
1/1/2017	Leased building	$414,000
	Lease liability		$414,000
	To record capital lease liability
1/1/2017	Executory costs	$10,679
	Lease lability	$65,421
	Cash		$76,100
	To record annual rental paid
12/31/2017	Depreciation expense (414,000 ÷ 10)	$41,400
	Accumulated depreciation - Leased building		$41,400
	To record annual depreciation expense
12/31/2017	Interest expense (Note: lease amortization schedule)	$41,829
	Interest payable		$41,829
	To record interest expense
1/1/2018	Executory costs	$10,679
	Lease lability	$23,592
	Interest payable	$41,829
	Cash		$76,100
	To record annual rental paid
12/31/2018	Depreciation expense (414,000 ÷ 10)	$41,400
	Accumulated depreciation - Leased building		$41,400
	To record annual depreciation expense
12/31/2018	Interest expense (Note: lease amortization schedule)	$38,998
	Interest payable		$38,998
	To record interest expense

Notes:

Compute minimum annual lease payment as follows:
Particulars	Amount
Annul lease payment	$76,100
Less: Executory costs	$10,679
Minimum annual lease payment	$65,421
Compute present value of minimum lease payments as follows:
Particulars	Amount
Minimum annual lease payment	$65,421
× PV of Annuity due @ 12% for 10 years	6.32825
Present value of annuity	$414,000

Lease amortization schedule:
Date	Annual Rent	Interest Expense @ 12%	Reduction in Liability	Lease liability
1/1/2017				$414,000
1/1/2017	$65,421	$0	$65,421	$348,579
1/1/2018	$65,421	$41,829	$23,592	$324,987
1/1/2019	$65,421	$38,998	$26,423	$298,565