ACCT 304 Chapter 16 QUIZ
E213 Lessee Entries Capital Lease with Executory Costs and Unguaranteed Residual Value Assume
that on January 1, 2012, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage
building from Trevino Storage Company. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments of $90,000 beginning on January 1, 2012.
2. The fair value of the building on January 1, 2012 is $550,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of
$10,000. 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- incremental borrowing rate is 12% per year. The lessor- implicit rate is not known
by Kimberly-Clark.
6. The yearly rental payment includes $3,088 of executory costs related to taxes on the property.
Instructions
Prepare the journal entries on the lessee- books to reflect the signing of the lease agreement and to record
the payments and expenses related to this lease for the years 2012 and 2013. Kimberly-Clark- corporate
year end is December 31.
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