Question

(E21-4 L02.4) EXCEL 1-4 (L02,4) EXCEL (Lessee Entries, Finance Lease and Unguaranteed Residual Value) Assume that on December 31, 2010, 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 $71.830 beginning on December 31, 2016. 2. The fair value of the building on December 31, 2016, is $525.176. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of $10,000, and an expected residual value of $7,000. 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 lesson 5. Kimberly-Clark's incremental borrowing rate is 8% per year. The lessor's implicitrate is not known by Kimberly-Clark Instructions (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 2016, 2017, and 2018. Kimberly-Clark's fiscal year-end is December 31. (b) Suppose the same facts as above, except that Kimberly-Clark incurred legal fees resulting from the execution of the lease of $5,000, and received a lease incentive from Sheffield to enter the lease of $1,000. How would the initial measure- ment of the lease liability and right-of-use asset be affected under this situation? (c) Suppose that in addition to the $71,830 annual rental payments, Kimberly-Clark is also required to pay $5,000 for insur ance costs each year on the building directly to the lessor, Sheffield Storage. How would this executory cost affect the initial measurement of the lease liability and right-of-use asset? (d) Return to the original facts in the problem. Now suppose that, at the end of the lease term, Kimberly-Clark took good care of the asset and Sheffield agrees that the fair value of the asset is actually $10,000. Record the entry for Kimberly Clark at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made).

Answer 1

a.

Debit(S) Credit($) Date Accounts titles 12/31/2016 Right of use of assets 521,934 Lease liability 521,934 (To record lease) Lease Liability 71,830 Cash 71,830 (To record first lease payment) 12/31/2017 Amotization expense 52,193 Right use of assets 52,193 (To record the amortization of the right of use assets) Lease liability 35,822 Interest expense 36,008 Cash 71,830 (To record interest expense) /31/2018 Amortization expense 52,193 Right use of assets 52,193 (To record the amortization of the right of use assets) Lease liability 38,687 Interest expense 33,143 Cash 71,830 (To record interest expense)

Working notes: Particular Present value of rental payment (71,830* 7.24689) Add: Present value of guaranteed residual value (3,000 * 0.4632) Lease Payment Fair Value of building Lease Liability Value 520,544 1,390 521,934 525,176 521,934

Annual Lease Reduction in Date Interest $ 8% Lease Liability liability Payment |31/12/2016 31/12/2016 31/12/2017 31/12/2018 521,934 71,830 71,830 450,104 71,830 36,008 35,822 414,282 38,687 71,830 33,143 375,595

b.

Right use of assets: Lease liability Add: Legal fees Less: incentive Right use of assets 521,934 5,000 1,000 527,934

c.

Lease liability: Particular Present value of rental payment (71,830 7.24689) Add: Present value of guaranteed residual value (3000 0.4632) Add: Present value of annual insurance payment (5,000* 7.24689) Lease liability Value 520,544 1,390 36,234 558,168

d.

Account titles Debit($) Credit($) Date Lease liability 3,000 Gain on lease 3,000

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Answer 2

	Stora Enso
	Lease Amortization Schedule
a	Date	Annual   Lease Payment plus URV	Interest   (8%) on lease Receivable	Recorvery   of lease receivable	Lease   Receivable
							*
	31/12/2018				€           521.934,00		Present value of rental payment	€            520.544
	31/12/2018	€             71.830,00	€                                  -	€         71.830,00	€           450.104,00		Present value of guaranteed residual value	€                1.390
	31/12/2019	€             71.830,00	€                       36.008,32	€         35.821,68	€           414.282,32		lease liability	€            521.934
	31/12/2020	€             71.830,00	€                       33.142,59	€         38.687,41	€           375.594,91
	Tanggal	Keterangan		Debit	Kredit
	31/12/2018	Right of Use of assets		€      521.934,00
		Lease liability			€         521.934,00
		Lease liability		€       71.830,00
		Cash			€           71.830,00
	31-Des-19	Depreciation Expense		€       52.193,40
		Right of Use of assets			€           52.193,40
		Lease liability		€       35.821,68
		Interest Expense		€       36.008,32
		Cash			€           71.830,00
	01-Jan-20	Depreciation Expense		€       52.193,40
		Right of Use of assets			€           52.193,40
		Lease liability		€       38.687,41
		Interest Expense		€       33.142,59
		Cash			€           71.830,00
b	Right use of assets :
	Lease liability	€         521.934,00
	legal fees	€             5.000,00
	Incentive	€             1.000,00
		€       525.934,00
c	Lease liability :
	Present value of rental payment		€                         520.544
	Present value of guaranteed residual value		€                             1.390
	Present value of annual insurance payment		€                           36.234
	lease liability		€                         558.168
d	Account  titles	Debit	Credit
	Lease liability	€             3.000,00
	Gain on lease		€                         3.000,00