Lessee Entries; Capital Lease with Executory Costs and Unguaranteed Residual Value
Response to the following problem:
Assume that on January 1, 2014, 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, 2014.
2. The fair value of the building on January 1, 2014 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 $2,471 of executory costs related to taxes on the property.
Instructions
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 2014 and 2015. Kimberly-Clark's corporate year-end is December 31.