Question

Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable 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 $66,599 beginning on December 31, 2019. 2. The fair value of the building on December 31, 2019 is $487,267. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $10,000, and an expected residual value of $7,500. 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 8% per year. The lessor's implicit rate is not known by Kimberly-Clark. Click here to view factor tables. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.)

Answer 1

Answer with working is given below

Credit Debit $483,886 $483,886 $66,599 Date Journal 31-12-2019 Right-of-Use Asset To Lease Liability (To Record Lease) 31-12-2019 Lease Liability To Cash (To record first lease paymnet) 31-12-2020 Amortization expenses To Right-of-Use Asset (To record amortization of the right-of-use Asset) $66,599 $48,389 $48,389 $33,216 $33,383 31-12-2020 Lease Liability Interest Expense To Cash (Being Lease Liability and Interest recorded) $66,599 $48,389 $48,389 31-12-2021 Amortization expenses To Right-of-use Asset (To record amortization of the right-of-use Asset) $35,873 $30,726 31-12-2021 Lease Liability Interest Expense To Cash (Being Lease Liability and Interest recorded) $66,599 Calculation of the Right-of-use asset Lease Liability Lease Fees Lease incentives Right-of-use Asset $483,886 $5,000 -$1,000 $487,886 Initial Direct Cost and lease incentive do not affect the initial measurement of lease liability They only affect the measurement of right to use Asset c) Annual insurance Cost $5,000 PV Factor 7.2469 0.5002 Outflow $66,599 $2,500 Total PV $482,635 $1,251 Present value of Rental payment Present value of guaranteed residual value ($10,000 - $ 7,000) Present value of Annual Insurance payment Present value of minimum lease payment 7.2469 $5,000 $36,234 $520,121 The annual insurance payment is considered part of annual payments similar to rental payments The present value of annual insurance payments should be included in initial measurement of lease liability and right to use the asset also Journal Credit Debit $2,500.00 Lease Liability To Gain on lease $2,500.00

Calculation of Lease Liability Lower of PV of Minimum lease payments or Fair value of building PV Factor Outflow Present value of Rental payment 7.2469 $66,599 Present value of guaranteed residual value 0.5002 $2,500 ($10,000 - $ 7,500) Present value of minimum lease payment Total PV $482,635 $1,251 $483,886 Fair value of building $487,267 Lease Liability will be lower of above 2 $483,886 Amortisation Schedule Reduction Date Opening Balance Interest at 8% of Lease Liability Annual Lease Payment $66,599 $66,599 $66,599 31-12-2016 31-12-2017 31-12-2018 $483,886 $417,287 $384,071 Liability $66,599 $33,216 $35,873 $33,383 $30,726 $417,287 $384,071 $348,198 Amortisation expenses will be Right-of-Use Asset value/10 $48,389