Question
Assume that on 1 January 2022, K Corporation signs a 10-year noncancelable lease agreement to lease a storage building from T-Tower Company. K Corporation's financial
Assume that on 1 January 2022, K Corporation signs a 10-year noncancelable lease agreement to lease a storage building from T-Tower Company. K Corporation's financial year end is 31
December. The following information pertains to this lease agreement.
- The agreement requires equal rental payments of $83,824 beginning on 1 January 2022.
- The fair value of the building on 1 January 2022 is $550,000.
- The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. K Corporation depreciates similar buildings on the straight-line method.
- The lease is non-renewable. At the termination of the lease, the building reverts to the lessor.
- K Corporation's incremental borrowing rate is 12% per year. The lessor's implicit rate is not known by K Corporation.
- 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 2022.
Required: (Note: all the journal entries must be rounded to the nearest dollar.)
a) Prepare the following for K Corporation:
i. present value of the lease payments.
ii.lease amortization schedule
ill.journal entries in the lessee's book to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the year 2022.
b) What would be the lease liability if K Corporation knew the implicit rate is 8%?
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