Question
Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Sheffield Storage Company. The following
Assume that on December 31, 2019, 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 $67,199 beginning on December 31, 2019. | |
2. | The fair value of the building on December 31, 2019 is $491,847. | |
3. | The building has an estimated economic life of 12 years, a guaranteed residual value of $10,500, and an expected residual value of $7,400. 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-Clarks incremental borrowing rate is 8% per year. The lessors implicit rate is not known by Kimberly-Clark. |
Suppose that in addition to the $67,199 annual rental payments, Kimberly-Clark is also required to pay $5,000 for insurance 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? (Round answer to 0 decimal places, e.g. 5,275.)
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