Assume that on January 1, 2011, Stora Enso (FIN) signs a 10-year non-cancelable lease agreement to lease a storage building from Balesteros Storage Company. The following information pertains to this lease agreement.

1. The agreement requires equal rental payments of $90,000 beginning on January 1, 2011.

2. The fair value of the building on January 1, 2011, is $550,000.

3. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Stora Enso 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. Stora Enso’s incremental borrowing rate is 12% per year. It is impracticable to determine the lessor’s implicit rate.

6. The yearly rental payment includes $3,088.14 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 2011 and 2012. Stora Enso’s corporate year- end is December 31.