Exercise 21-3 Assume that on January 1, 2017, Kimberly-Clark Corp. signs a 10-ye

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 $77,800 beginning on January 1, 2017. 2. The fair value of the building on January 1, 2017 is $406,000. 3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $11,000. 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 $13,643 of executory costs related to taxes on the property.

Explanation / Answer

Yearly payment 77800 Less:Executory cost 13643 Minimum annual lease payment 64157 Present value of minimum lease payment=64157*6.32825=406001.5=406000 Date Account title Debit Credit 1/1/2017 Lease building 406000 Lease liability 406000 (To record lease) Executory cost 13643 Lease liability 64157 Cash 77800 (Note:1) (To record first payment) 12/31/2017 Depreciation expense 40600 Accumulated depreciation 40600 (406000/10) (To record depreciation) Interest expense 41021 Interest payable 41021 (To record interest) (Note:1) 1/1/2018 Executory cost 13643 Interest payable 41021 Lease liability 23136 Cash 77800 (To record second payment) 12/31/2018 Depreciation expense 40600 Accumulated depreciation 40600 (406000/10) (To record depreciation) Interest expense 38245 Interest payable 38245 (To record interest) (Note:1) Notes: 1. Lease amortization schedule Date Annual lease payment less executory cost Interest @12% Reduction in liability Lease liability Jan 1,2017 406000 Jan 1,2017 64157 0 64157 341843 Jan 1,2018 64157 41021 23136 318707 Jan 1,2019 64157 38245 25912 292795

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