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:
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 2017 and 2018.
Kimberly-Clark’s corporate year-end is December 31.

Capitalized amount of the lease:

Present value of minimum lease payments using Excel's PV function:

Debit Credit
1/1/17

1/1/17
12/31/17

12/31/17

1/1/18

Lease Amortization Schedule

Annual
Payment Reduction
Less Interest of
Executory (12%) Lease Lease
Date Costs on Liability Liability Liability

12/31/18

12/31/18
E21-6 (LO4) Lessor Entries, Sales-Type Lease
Crosley Company, a machinery dealer, leased a machine to Dexter Corporation on January 1,
2017. The first payment is received on January 1, 2017. Collectability of lease payments is
reasonably predictable, and no important uncertainties surround the amount of costs yet to be
incurred by Crosley. The machine has no residual value and reverts to Crosley at the termination
of the lease. Information concerning the lease appears below.

Lease term in years 8

Annual payments at the beginning of each year $ 35,013
Cost of purchasing machine during 2016 by Crosley $ 160,000
Rate used by Crosley to set the annual rental payment 11%
Economic life of machine in years 10

Instructions:
(a) Compute the amount of the lease receivable using Excel's present value function.

(b) Prepare all necessary journal entries for Crosley for 2017.

Debit Credit
1/1/17

1/1/17

12/31/17
P21-4 (LO2,4) Balance Sheet and Income Statement Disclosure—Lessee
The following facts pertain to a noncancelable lease agreement between Alschuler Leasing
Company and McKee Electronics, a lessee, for a computer system.

Inception date October 1, 2017

Lease term 6
Economic life of lease equipment 6
Fair value of asset at October 1, 2017 $ 300,383
Residual value at end of lease term $0
Lessor's implicit rate 10%
Lessee's incremental borrowing rate 10%
Annual lease payment due at the beginning of each year,
beginning with October 1, 2017 $ 62,700
Amount of executory costs per year $ 5,500

The collectability of the lease payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes
responsibility for all executory costs, which are paid each October 1, beginning October 1, 2017,
and are not included in the rental payment. The asset will revert to the lessor at the end of the
lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and
the lessee in accounting for this lease. The lease is to be accounted for properly as a capital
lease by the lessee and as a direct-financing lease by the lessor.

Annual Interest (10%) Reduction of Balance of

Lease on Unpaid Lease Lease
Payment / Liability / Liability / Liability /
Date Receipt Receivable Receivable Receivable
10/01/17 $ 300,383
10/01/17 $ 62,700 $ 62,700 237,683
10/01/18 62,700 $ 23,768 38,932 198,751
10/01/19 62,700 19,875 42,825 155,926
10/01/20 62,700 15,593 47,107 108,819
10/01/21 62,700 10,882 51,818 57,001
10/01/22 62,700 5,699 57,001 0
$ 376,200 $ 75,817 $ 300,383

Instructions:
(a) Assuming the lessee's accounting period ends on September 30, answer the following
questions with respect to this lease agreement.
(1) What items and amounts will appear on the lessee's income statement for the year
ending September 30, 2018?

(2) What items and amounts will appear on the lessee's balance sheet at September 30,
2018?

(3) What items and amounts will appear on the lessee's income statement for the year
ending September 30, 2019?
 (4) What items and amounts will appear on the lessee's balance sheet at September 30,
2019?

(b) Assuming the lessee's accounting period ends on December 31, answer the following
questions with respect to this lease agreement.

(1) What items and amounts will appear on the lessee's income statement for the year
ending December 31, 2017?

(2) What items and amounts will appear on the lessee's balance sheet at December 31,
2017?
(3) What items and amounts will appear on the lessee's income statement for the year
ending December 31, 2018?

(4) What items and amounts will appear on the lessee's balance sheet at December 31,
2018?
 ween Alschuler Leasing
.

October 1, 2017
years
years

and there are no important

The lessee assumes
1, beginning October 1, 2017,
the lessor at the end of the
uipment.

r use by both the lessor and

d for properly as a capital

30, answer the following

ome statement for the year

lance sheet at September 30,

ome statement for the year

lance sheet at September 30,

31, answer the following

ome statement for the year

lance sheet at December 31,

ome statement for the year

lance sheet at December 31,

P21-5 (LO3,4) Balance Sheet and Income Statement Disclosure—Lessor
The following facts pertain to a noncancelable lease agreement between Alschuler Leasing
Company and McKee Electronics, a lessee, for a computer system.

Inception date October 1, 2017

Lease term 6
Economic life of lease equipment 6
Fair value of asset at October 1, 2017 $ 300,383
Residual value at end of lease term $0
Lessor's implicit rate 10%
Lessee's incremental borrowing rate 10%
Annual lease payment due at the beginning of each year,
beginning with October 1, 2017 $ 62,700
Amount of executory costs per year $ 5,500

The collectability of the lease payments is reasonably predictable, and there are no important
uncertainties surrounding the costs yet to be incurred by the lessor. The lessee assumes
responsibility for all executory costs, which are paid each October 1, beginning October 1, 2017,
and are not included in the rental payment. The asset will revert to the lessor at the end of the
lease term. The straight-line depreciation method is used for all equipment.

The following amortization schedule has been prepared correctly for use by both the lessor and
the lessee in accounting for this lease. The lease is to be accounted for properly as a capital
lease by the lessee and as a direct-financing lease by the lessor.

Annual Interest (10%) Reduction of Balance of

Lease on Unpaid Lease Lease
Payment / Liability / Liability / Liability /
Date Receipt Receivable Receivable Receivable
10/01/17 $ 300,383
10/01/17 $ 62,700 $ 62,700 237,683
10/01/18 62,700 $ 23,768 38,932 198,751
10/01/19 62,700 19,875 42,825 155,926
10/01/20 62,700 15,593 47,107 108,819
10/01/21 62,700 10,882 51,818 57,001
10/01/22 62,700 5,699 57,001 0
$ 376,200 $ 75,817 $ 300,383

Instructions:
(a) Assuming the lessor's accounting period ends on September 30, answer the following
questions with respect to this lease agreement.

(1) What items and amounts will appear on the lessor's income statement for the year
ending September 30, 2018?
 (2) What items and amounts will appear on the lessor's balance sheet at September 30,
2018?

(3) What items and amounts will appear on the lessor's income statement for the year
ending September 30, 2019?

(4) What items and amounts will appear on the lessor's balance sheet at September 30,
2019?

(b) Assuming the lessor's accounting period ends on December 31, answer the following
questions with respect to this lease agreement.

(1) What items and amounts will appear on the lessor's income statement for the year
ending December 31, 2017?

(2) What items and amounts will appear on the lessor's balance sheet at December 31,
2017?
(3) What items and amounts will appear on the lessor's income statement for the year
ending December 31, 2018?

(4) What items and amounts will appear on the lessor's balance sheet at December 31,
2018?
 ween Alschuler Leasing
.

October 1, 2017
years
years

and there are no important

The lessee assumes
1, beginning October 1, 2017,
the lessor at the end of the
uipment.

r use by both the lessor and

d for properly as a capital

30, answer the following

ome statement for the year

ance sheet at September 30,

ome statement for the year

ance sheet at September 30,

31, answer the following

ome statement for the year

ance sheet at December 31,

ome statement for the year

ance sheet at December 31,