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Suppose that in addition to the $66,799 annual rental payments, Kimberly-Clark 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?

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jepessoa

Answer:

The question is incomplete, since we are missing the rest of the information. I looked for a similar question and found that the lease agreement lasts 10 years.

The annual insurance payment will increase the right of use asset and lease liability by:

PV annuity due = payment + {payment x [1 - (1 + r)⁻⁽ⁿ⁻¹⁾]/r}

PV = $5,000 + {$5,000 x [1 - (1 + 0.08)⁻⁹]/0.08} = $36,234

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