Problem: Assume that on January 1, 2017, 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 $73,400 beginning on January 1, 2017.
2. The fair value of the building on January 1, 2017 is $465,000.
3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $9,400. 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 lesson.
5. Kimberly-Clark's incremental borrowing rate is 11% per year. The lessor's implicit rate is not known by Kimberly-Clark.
6. The yearly rental payment includes $2,267 of executory costs related to taxes on the property.
Required: 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.
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