AC 302 WEEK 6 Exercise 21 Question 3
Assume that on January 1 2014 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 $72,000 beginning on January 1, 2014.
2. The fair value of the building on January 1, 2014 is $440,000.
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 $2,471 of executory costs related to taxes on the property.
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 2014 and 2015. Kimberly-Clark- 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. Round present value factor calculations to 5 decimal places, e.g. 1.25124 and the final answer to 0 decimal places e.g. 58,971.)
Date Account Titles and Explanation Debit Credit
1/1/14
(To record the lease.)
(To record first payment.)
12/31/14
(To record depreciation.)
(To record interest.)
1/1/15
(To record second payament.)
12/31/15
(To record depreciation.)
(To record interest.)
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Exercise 21-3
Capitalized amount of the lease:
Yearly payment $72,000
Executory costs (2,471 )
Minimum annual lease payment $69,529
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