Question

Assume that on December 31, 2016, 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: The agreement requires equal rental payments of $68,299 beginning on December 31, 2016 The fair value of the building on December 31, 2016 is $500,513 1. 2. The building has an estimated economic life of 12 years, a guaranteed residual value of $12,000, and an expected residual value of $7,800. Kimberly-Clark depreciates similar buildings on the straight-line method. 3. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. 4. Kimberly-Clark's incremental borrowing rate is 8% per year. The lessor's implicit rate is not known by Kimberly-Clark 5.

Answer 1

Question 2

Lease Agreement-Kimberly Clark-Corp

Date of Agreement                                                         31/12/16

Annual Rent                                                                       $68,299/-

Rate of Interest                                                                                8%

Residual Value                                                                  $12000/-

Expected life                                                                      12 years

Lease period                                                                      10 years

A	Jounral Entries	Amount in $
31-12-2016	Leasehold Asset	3,72,428
	Sheffield Storage Company		3,72,428
31-12-2016	Sheffield Storage Company	68,299
	Bank		68,299
31-12-2017	Amortisation of Leased Asset	37,243
	Leasehold asset		37,243
31-12-2017	Sheffield Storage Company	33,722
	Finance Charges	34,577
	Bank		68,299
31-12-2018	Amortisation of Leased Asset	37,243
	Leasehold asset		37,243
31-12-2018	Sheffield Storage Company	36,420
	Finance Charges	31,879
	Bank		68,299
B	Right to use the Asset	3,66,977
C	Lease Liability	3,99,693
	Notes
	Calculation of Amortisation
	Estimated PV of Lease value	3,72,428
	Residual Value	NA
	Expected Value	$ 7,800
	Estimated Life	12 Years
	Amortisation period	10 Years
	Amortisation on Straight Line
	(372428)/10	37,243
	Lease Liability
0	31-12-2016	68,299	1.00	68299
1	31-12-2017	68,299	1.08	63240
2	31-12-2018	68,299	1.17	58555
3	31-12-2019	68,299	1.26	54218
4	30-12-2020	68,299	1.47	46483
5	30-12-2021	68,299	1.85	36900
6	30-12-2022	68,299	2.72	25113
7	30-12-2023	68,299	5.03	13568
8	29-12-2024	68,299	13.69	4989
9	29-12-2025	68,299	68.91	991
10	29-12-2026	68,299	943.44	72
				372428
	Lease Liability-As changed As decrease in yearly lease payments
0	31-12-2016	67,299	1.00	67299
1	31-12-2017	67,299	1.08	62314
2	31-12-2018	67,299	1.17	57698
3	31-12-2019	67,299	1.26	53424
4	30-12-2020	67,299	1.47	45803
5	30-12-2021	67,299	1.85	36360
6	30-12-2022	67,299	2.72	24746
7	30-12-2023	67,299	5.03	13369
8	29-12-2024	67,299	13.69	4916
9	29-12-2025	67,299	68.91	977
10	29-12-2026	67,299	943.44	71
				366977
	Calculation of Amortisation
	Estimated PV of Lease value	3,66,977
	Residual Value	NA
	Expected Value	$ 7,800
	Estimated Life	12 Years
	Amortisation on Straight Line
	(366977)/10	36,698
	Lease Liability-As changed Yearly Insurance charges paid to Lessor
0	31-12-2016	73,299	1.00	73299
1	31-12-2017	73,299	1.08	67869
2	31-12-2018	73,299	1.17	62842
3	31-12-2019	73,299	1.26	58187
4	30-12-2020	73,299	1.47	49886
5	30-12-2021	73,299	1.85	39601
6	30-12-2022	73,299	2.72	26952
7	30-12-2023	73,299	5.03	14561
8	29-12-2024	73,299	13.69	5354
9	29-12-2025	73,299	68.91	1064
10	29-12-2026	73,299	943.44	78
				399693