E$20\mathrm{.}4($LO$2,4)$ Lessee Entries, Finance Lease and Unfuaranteed Residual Value

Assume that on December $31,2024,$ Kimberly$-$Clark Corp. signs a $10-$year,

noncancelable 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 beginning on

December $31,2024$ of $71,830.$

$2)$ The fair value of the building on December $31,2024$ is $$525,176.$

$3)$ Estimated economic life of the building in years: $12$ years.

$4)$ Guaranteed residual value of the building: $$10,000.$

$5)$ Expected residual value: $$7,000.$

Kimberly$-$Clark depreciates similar buildings on the straight$-$line method.

$6)$ The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor.

$7)$ Kimberly$-$Clark's annual incremental borrowing rate is $8\%$

Lessor's implicit rate is not known by Kimberly$-$Clark

Instructions

a$.$ 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 $2024,2025,$ and $2026.$ Kimberly$-$Clark's fiscal year$-$end is December $31.$

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c$.$ Suppose that in addition to the $$71,830$ annual rental payments, Kimberly$-$Clark is also required to pay the following directly to the lessor, Sheffield Storage: Annual payment for insurance costs on the building of $ $5,000.$ How would this executory cost affect the initial measurement of the lease liability and right$-$of$-$use asset?

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