E21-3 (LO2,4) Lessee Entries, Capital Lease with Executory Costs and Unguaranteed Residual Value Assume that on January 1, 2017, 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. Equal rental payments, as required in the lease agreement, beginning on January 1, 2017 $72,000

2. Fair value of the building on January 1, 2017 $440,000

3. "Estimated economic life of the building in years " 12 Unguaranteed residual value of the building $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's annual incremental borrowing rate 12% Lessor's implicit rate is not known by Kimberly-Clark.

6. Amount of executory costs included in the yearly rental payment $2,471 Executory costs relate to taxes on the property.

Instructions: Calculate the Present value of the lease payments and prepare a lease amortization table and the journal entries on the lessees books to reflect the signing of the lease agreement and to record the payments and expenses related to this lease for the years 2017 and 2018. Kimberly-Clarks corporate year-end is December 31. Please show formulas and work.

Capitalized amount of the lease: Yearly Payment 72,000 Executory Costs (2,471)

Minimum Annual Lease Payment 69,529

Present value of minimum lease payments using Excel's PV function: Lease Amortization Schedule Date "Annual Payment Less Executory Costs" Interest "Reduction of Lease Liability" "Lease Liability"

Debit Credit 1/1/17 Leased Building

1/1/17

12/31/17

12/31/17

1/1/18

12/31/18

12/31/18