E21-3 (Lessee Entries; Capital Lease with Executory Costs) Assume that on January 1, 2008, 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.
1.) The agreement requires equal rental payments of $72,000 beginning on January 1, 2008.
2.) The fair value of the building on January 1, 2008 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 $2,470.51 of executory costs related to taxes on property.
Instructions
Prepare the journal entries on the lessee's books to reflect the signing of the lease agreement and to record payments and expenses related to this lease for the years 2008 and 2009, Kimberly Clark's corporate year end is December 31.
Click here for the solution: Assume that on January 1, 2008, Kimberly Clark Corp. signs a 10 year noncancelable lease agreement to lease a storage building from Sheffield Storage Company
