Exercise 21-3 Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-ye
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Question
Exercise 21-3
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.
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 enter 0 for the amounts. 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.)
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Date
Account Titles and Explanation
Debit
Credit
(To record the lease.)
(To record first payment.)
(To record depreciation.)
(To record interest.)
1/1/18
(To record second payament.)
(To record depreciation.)
(To record interest.)
1. The agreement requires equal rental payments of $73,200 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017 is $467,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,800. 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 11% per year. The lessor’s implicit rate is not known by Kimberly-Clark. 6. The yearly rental payment includes $1,761 of executory costs related to taxes on the property.Explanation / Answer
Yearly Payment = $73,200
Executory Costs = $1,761
Minimum Annual Lease Payments = Yearly Payments - Executory Costs
= $73,200 - $1,761 = $71,439
Present Value of Minimum Lease Payments = Minimum Lease Payments*PVAF(11%, 10 yrs) (beginning of year)
= $71,439*6.53705 = $467,000
Journal Entries (Amounts in $)
Interest expense for 2017 and 2018 will be calculated on the balance of lease liability on Dec 31, 2017 and Dec 31, 2018 respectively.
Date Account Titles and Explanations Debit Credit 1/1/17 Leased Buildings 467,000 Lease Liability 467,000 (To record the lease) Executory Costs 1,761 Lease Liability 71,439 Cash 73,200 (To record first payment) 12/31/17 Depreciation Expense (467,000/10 yrs) 46,700 Accumulated Depreciation-Capital Leases 46,700 (To record depreciation) Interest Expense [(467,000-$71,439)*11%] 43,512 Interest Payable 43,512 (To record interest) 1/1/18 Executory Costs 1,761 Interest Payable 43,512 Lease Liability (Bal Fig.) ($73,200-$1,761-$43,512) 27,927 Cash 73,200 (To record second payment) 12/31/18 Depreciation Expense (467,000/10 yrs) 46,700 Accumulated Depreciation-Capital Leases 46,700 (To record depreciation) Interest Expense [($467,000-$71,439-$27,927)*11%] 40,440 Interest Payable 40,440 (To record interest)Related Questions
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