Exercise 21-3 Assume that on January 1, 2014, Kimberly-Clark Corp. signs a 10-ye
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Question
Exercise 21-3
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.
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.)
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’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 $2,471 of executory costs related to taxes on the property.Explanation / Answer
Date
Account Titles and Explanation
Debit
Credit
1/1/14
Leased Building
440,000
Leased Liability
440,000
(To record the lease.)
Executory Cost
2,471
Lease Liability
69,529
Cash
72,000
(To record first payment.)
12/31/14
Depreciation Expense($440,000/10)
44,000
Accumulated Depreciation- Capital Leases
44,000
(To record depreciation.)
Interest Expense
44,456.52
Interest Payable
44,456.52
(To record interest.)
1/1/15
Executory Cost-property Taxes
2,471
Interest Payable
44,456.52
Lease Liability
25,072.48
Cash
72,000
(To record second payament.)
12/31/15
Depreciation Expense
44,000
Accumulated Depreciation-Capital Leases
44,000
(To record depreciation.)
Interest Expenses
41,447.82
Interest Payable
41,447.82
(To record interest.)
Date
Account Titles and Explanation
Debit
Credit
1/1/14
Leased Building
440,000
Leased Liability
440,000
(To record the lease.)
Executory Cost
2,471
Lease Liability
69,529
Cash
72,000
(To record first payment.)
12/31/14
Depreciation Expense($440,000/10)
44,000
Accumulated Depreciation- Capital Leases
44,000
(To record depreciation.)
Interest Expense
44,456.52
Interest Payable
44,456.52
(To record interest.)
1/1/15
Executory Cost-property Taxes
2,471
Interest Payable
44,456.52
Lease Liability
25,072.48
Cash
72,000
(To record second payament.)
12/31/15
Depreciation Expense
44,000
Accumulated Depreciation-Capital Leases
44,000
(To record depreciation.)
Interest Expenses
41,447.82
Interest Payable
41,447.82
(To record interest.)
Date
Account Titles and Explanation
Debit
Credit
1/1/14
Leased Building
440,000
Leased Liability
440,000
(To record the lease.)
Executory Cost
2,471
Lease Liability
69,529
Cash
72,000
(To record first payment.)
12/31/14
Depreciation Expense($440,000/10)
44,000
Accumulated Depreciation- Capital Leases
44,000
(To record depreciation.)
Interest Expense
44,456.52
Interest Payable
44,456.52
(To record interest.)
1/1/15
Executory Cost-property Taxes
2,471
Interest Payable
44,456.52
Lease Liability
25,072.48
Cash
72,000
(To record second payament.)
12/31/15
Depreciation Expense
44,000
Accumulated Depreciation-Capital Leases
44,000
(To record depreciation.)
Interest Expenses
41,447.82
Interest Payable
41,447.82
(To record interest.)
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