Assume that on December 31, 2018, Stora Enso (FIN) signs a 10-year, non-cancelable lease agreement to lease
1. The agreement requires equal rental payments of €71,830 beginning on December 31, 2018.
2. The fair value of the building on December 31, 2018, 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.
a. 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 2018, 2019, and 2020. Stora Enso's fiscal year-end is December 31.
b. Suppose the same facts as above, except that Stora Enso incurred legal fees resulting from the execution of the lease of €5,000, and received a lease incentive from Sheffield to enter the lease of €1,000. How would the initial measurement of the lease liability and right-of-use asset be affected under this situation?
c. Suppose that in addition to the €71,830 annual rental payments, Stora Enso is also required to pay €5,000 for insurance costs each year on the building directly to the lessor, Sheffield Storage. How would this executory cost affect the initial measurement of the lease liability and right-of-use asset?
d. Return to the original facts in the problem. Now suppose that, at the end of the lease term, Stora Enso took good care of the asset and Sheffield agrees that the fair value of the asset is actually €10,000. Record the entry for Stora Enso at the end of the lease to return control of the storage building to Sheffield (assuming the accrual of interest on the lease liability has already been made).
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