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How would this executory cost affect the initial measurement

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Question - Assume that on December 31, 2019, Kimberly-Clark Corp. signs a 10-year, non-cancelable lease agreement to lease a storage building from Sheffield Storage Company. The following information pertains to this lease agreement.

1. The agreement requires equal rental payments of $68,499 beginning on December 31, 2019.

2. The fair value of the building on December 31, 2019 is $501,036.

3. The building has an estimated economic life of 12 years, a guaranteed residual value of $10,000, and an expected residual value of $5,600. 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 incremental borrowing rate is 8% per year. The lessor's implicit rate is not known by Kimberly-Clark.

Suppose that in addition to the $68,499 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?

Reference no: EM133088638

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