Chapter 21 ? Part 1 AE21-1 On January 1, 2007, Burke Corporation signed a 5-year noncancelable lease for a machine. The terms of the lease called for Burke to make annual payments of $8,728 at the beginning of each year, starting January 1, 2007. The machine has an estimated useful life of 6 years and a $5,100 unguaranteed residual value. The machine reverts back to the lessor at the end of the lease term. Burke uses the straight-line method of depreciation for all of its plant assets. Burke's incremental borrowing rate is 9%, and the Lessor's implicit rate is unknown. Instructions (a) What type of lease is this? Capital Lease (b) Compute the present value of the minimum lease payments. (Hint: Use present value tables in chapter 6 and round your answer to the nearest dollar. Use rounded amounts for future calculations. If you use a calculator instead of the tables, compute present value factors for $1.00 with five decimals). $ 37004 (c) Prepare all necessary journal entries for Burke for this lease through January 1, 2008. (List multiple debit/credit entries in order of magnitude.) E21-3 Assume that on January 1, 2008, 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. The agreement requires equal rental payments of $72,000 beginning on January 1, 2008. The fair value of the building on January 1, 2008 is $440,000. The building has an estimated economic life of 12 years, with an unguaranteed residual value of $10,000. Kimberly-Clark depreciates similar buildings on the straight-line method. The lease is nonrenewable. At the termination of the lease, the building reverts to the lessor. Kimberly-Clark's incremental borrowing rate is 12% per year. The lessor's implicit rate is not known by Kimberly-Clark. The yearly rental payment includes $2,470.51 of Executory Costs-Property Taxes related 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 2008 and 2009. Kimberly-Clark's corporate year end is December 31. (List multiple debit/credit entries in order of magnitude. Enter your answers rounded to the nearest cent.) Date Description Debit Credit 1/1/07 Leased Machine Under Capital Leases 37004 Lease Liability 37004 Lease Liability 8728 Cash 8728 (To record first lease payment) 12/31/07 Depreciation Expense 7401 Accumulated Depreciation-Capital Leases 7401 (To record depreciation) Interest Expense 2545 Interest Payable 2545 1/1/08 Lease Liability 6183 Interest Payable 2545 Cash 8728 Date Description Debit Credit 1/1/08 Leased Building Under Capital Leases 440000 Lease Liability 440000 (To record the lease) 1/1/08 Lease Liability 69529.49 Executory Costs-Property Taxes 2470.51 Cash 72000 12/31/08 Depreciation Expense 44000 Accumulated Depreciation-Capital Leases 44000 (To record depreciation) 12/31/08 Interest Expense 44456.46 Interest Payable 44456.46 1/1/09 Interest Payable 44456.46 Lease Liability 25073.03 Executory Costs-Property Taxes 2470.51 Cash 72000 12/31/09 Depreciation Expense 44000 Accumulated Depreciation-Capital Leases 44000 (To record depreciation) 12/31/09 Interest Expense 41447.70 Interest Payable 41447.70
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