Exercise 21-3

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.		The agreement requires equal rental payments of $77,400 beginning on January 1, 2017.
2.		The fair value of the building on January 1, 2017 is $453,000.
3.		The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,200. 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 12% per year. The lessors implicit rate is not known by Kimberly-Clark.
6.		The yearly rental payment includes $5,816 of executory costs related to taxes on the property.

Prepare 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. (Hint: Do the table for ten periods based on present value of minimum lease payments.)

Date	Account Title	Debit	Credit
1/1/17
	(To record the lease.)
12/31/17
	(To record depreciation.)
	(To record interest.)
1/1/18
	(To record second payament.)
12/31/18
	(To record depreciation.)
	(To record interest.)