Assume that on December 31, 2021, Stora Enso (FIN) signs a 10-year, non-cancelable leaseagreement to lease a storage building from Sheffield Storage. The following information pertains to this lease agreement. 1. The agreement requires equal rental payments of €71,830 beginning on December 31, 2021. 2. The fair value of the building on December 31, 2021, is €525,176. 3. The building has an estimated economic life of 12 years, a guaranteed residual value of €10,000, and an expected residual value of €7,000. Stora Enso depreciates similar buildings using the straight-line method. 4. The lease is non-renewable. At the termination of the lease, the building reverts to the lessor. 5. Stora Enso’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not known by Stora Enso. 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 2021, 2022, and 2023. Stora Enso’s fiscal year-end is December 31. Extended question: use the knowledge you have learned to provide solutions to the following new situation not covered in the lecture. This question is optional. Now suppose that, at the end of the lease term, Stora Enso has taken good care of the asset and Sheffield agrees that the fair value of the asset is actually €10,000. When Stora Enso returns the storage building to Sheffield, how should it make the record (assuming the accrual of interest on the lease liability has already been made)? Give your opinions.
Assume that on December 31, 2021, Stora Enso (FIN) signs a 10-year, non-cancelable leaseagreement to lease a storage building from Sheffield Storage. The following information pertains to this lease agreement.
1. The agreement requires equal rental payments of €71,830 beginning on December 31, 2021.
2. The fair value of the building on December 31, 2021, is €525,176.
3. The building has an estimated economic life of 12 years, a guaranteed residual value of €10,000, and an expected residual value of €7,000. Stora Enso
4. The lease is non-renewable. At the termination of the lease, the building reverts to the lessor.
5. Stora Enso’s incremental borrowing rate is 8% per year. The lessor’s implicit rate is not known by Stora Enso.
Instructions
Prepare the
Extended question: use the knowledge you have learned to provide solutions to the following new situation not covered in the lecture. This question is optional.
Now suppose that, at the end of the lease term, Stora Enso has taken good care of the asset and Sheffield agrees that the fair value of the asset is actually €10,000. When Stora Enso returns the storage building to Sheffield, how should it make the record (assuming the accrual of interest on the lease liability has already been made)? Give your opinions.
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