Exercise 213 Assume that on January 1 2017 KimberlyClark Cor

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. . The agreement requires equal rental payments of $75,000 beginning on January 1, 2017 2The fair value of the building on January 1, 2017 is $475,000 1. 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. . The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. s Kimberly-Clark\'s incremental borrowing rate is 10% per year. The lessor\'s implicit rate is not known by Kimberly. Clark. 8 The yearly rental payment includes $4,724 of executory costs related to taxes on the property. 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.) Click here to view factor tables De Accoent Tities and Explanation Te rocond the lease Te record firs paymest Te record depreciation (Terword interest , To record second payament To recorddepreciation To rocord intcnest

Solution

Annual payment 75000 Less:Executory costs 4724 Minimum annual lease payment 70276 Present value of minimum annual lease payment Year Annual Lease Payment Present value @ 10% (At the beginning of the year) Present Value 1 70276 1 70276 2 70276 0.909090909 63887.2727 3 70276 0.826446281 58079.3388 4 70276 0.751314801 52799.3989 5 70276 0.683013455 47999.4536 6 70276 0.620921323 43635.8669 7 70276 0.56447393 39668.9699 8 70276 0.513158118 36062.6999 9 70276 0.46650738 32784.2727 10 70276 0.424097618 29803.8842 Present vale of minimum lease payment 474997.158 Present value of minimum lease payment is more than 90% of fair value ($475000) of the leased asset Hence, it is a capital lease Journal entries: Date Account titles and explanations Debit Credit 2017 1-Jan Leased building 475000 Lease liability 475000 (Recording lease liability) 1-Jan Executory cost 4724 Lease liability 70276 Cash 75000 (Payment of annual lease rental) 31-Dec Depreciation expense (475000/10) 47500 Accumulated depreciation-Leased building 47500 (Depreciation recorded) 31-Dec Interest expense 40472 Interest payable 40472 (Interest due) (Note:1) 2018 1-Jan Executory cost 4724 Interest payable 40472 Lease liability (Note:1) 29804 Cash 75000 (Payment of annual lease rental) 31-Dec Depreciation expense 47500 Accumulated depreciation-Leased building 47500 (Depreciation recorded) 31-Dec Interest expense 37492 Interest payable 37492 (Interest due) (Note:1) Notes: 1. Lease amortization schedule: A B C D Date Annual Lease Payment Interest at 10% Reduction of lease liability Lease Liability (Previous in D*10%) (A-B) (Previous in D-C) Jan 1,2017 475000 Jan 1,2017 70276 0 70276 404724 Jan 1,2018 70276 40472 29804 374920 Jan 1,2019 70276 37492 32784 342136