E21-3



E21-3. Assume that on Jan 1, 2011 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 90000 beginning on Jan 1, 2011. 2. The fair value of the building on Jan 1, 2011 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 nonrenewable. At the termination of the lease the building reverts to the lessor. 5. Kimberly Clark incremental borrowing rate is 12% per year. The lessors implicit rate is not known by Kimberly Clark. 6. The yearly rental payment includes 3,088.14 of executory costs related to taxes on the property. Prepare the journal entries on the lessee books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2011 and 2012. Kimberly Clark corporate year end is dec. 31.

Capitalized amount of the lease:

Yearly payment $90,000.00

Executory costs (3,088.14)

Minimum annual lease payment $86,911.86

Present value of minimum lease payments

$86,911.86 X 6.32825 = $550,000.00

1/1/11 Leased Building Under Capital

Leases 550,000.00

Lease Liability 550,000.00

1/1/11 Executory Costs—Property Taxes 3,088.14

Lease Liability 86,911.86

Cash 90,000.00

12/31/11 Depreciation Expense 55,000.00

Accumulated Depreciation—

Capital Leases 55,000.00

($550,000 ÷ 10)

12/31/11 Interest Expense

(See Schedule 1) 55,570.58

Interest Payable 55,570.58

1/1/12 Executory Costs—Property Taxes 3,088.14

Interest Payable 55,570.58

Lease Liability 31,341.28

Cash 90,000.00

12/31/12 Depreciation Expense 55,000.00

Accumulated Depreciation—

Capital Leases 55,000.00

12/31/12 Interest Expense 51,809.62

Interest Payable 51,809.62

Schedule 1 KIMBERLY-CLARK CORP.

Lease Amortization Schedule

(Lessee)

| |Annual Payment Less Executory | | | |

| |Costs | |Reduction of Lease | |

| | |Interest (12%) on Liability |Liability | |

|Date | | | |Lease Liability |

|1/1/11 | | | |$550,000.00 |

|1/1/11 |$86,911.86 |$ 0 |$86,911.86 |463,088.14 |

|1/1/12 |86,911.86 |55,570.58 |31,341.28 |431,746.86 |

|1/1/13 |86,911.86 |51,809.62 |35,102.24 |396,644.62 |

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