Assume that on 1 January 2020, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Trevino Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $83,824 beginning on 1 January 2020. 2. The fair value of the building on 1 January 2020 is $550,000. 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 non-renewable. 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. In addition to the annual rental payment, lessee is required to pay an annual insurance fee of $3,088 to lessor directly. The annual insurance fee is paid on every 1 January, starting from 1 January 2020. Required: (All the journal entries should be rounded to the nearest dollar.) a) 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 2020 and 2021. Kimberly-Clark's corporate year end is 31 December. b) What would be the lease liability if Kimberly-Clark knows the implicit rate is 8%?
Assume that on 1 January 2020, Kimberly-Clark Corp. signs a 10-year noncancelable lease agreement to lease a storage building from Trevino Storage Company. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of $83,824 beginning on 1 January 2020. 2. The fair value of the building on 1 January 2020 is $550,000. 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 non-renewable. 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. In addition to the annual rental payment, lessee is required to pay an annual insurance fee of $3,088 to lessor directly. The annual insurance fee is paid on every 1 January, starting from 1 January 2020. Required: (All the journal entries should be rounded to the nearest dollar.) a) 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 2020 and 2021. Kimberly-Clark's corporate year end is 31 December. b) What would be the lease liability if Kimberly-Clark knows the implicit rate is 8%?
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Assume that on 1 January 2020, Kimberly-Clark Corp. signs a 10-year noncancelable lease
agreement to lease a storage building from Trevino Storage Company. The following
information pertains to this lease agreement.
1. The agreement requires equal rental payments of $83,824 beginning on 1 January 2020.
2. The fair value of the building on 1 January 2020 is $550,000.
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 non-renewable. 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. In addition to the annual rental payment, lessee is required to pay an annual insurance
fee of $3,088 to lessor directly. The annual insurance fee is paid on every 1 January,
starting from 1 January 2020.
Required: (All the journal entries should be rounded to the nearest dollar.)
a) 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 2020 and 2021.
Kimberly-Clark's corporate year end is 31 December.
b) What would be the lease liability if Kimberly-Clark knows the implicit rate is 8%?
Right-of-Use Asset
Lease Liability
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