...MacCloud Winery 1). (A) Ok so the first question is asking about whether the building being leased on the 5 acres piece of piece of property. And doing some further research I found that it can be treated one of two ways. Capital Lease: which is a lease treated as an acquisition of the assets financed by a loan OR Operating Lease: which is a lease treated as a rental agreement so there for would not be an asset. BUT a capital lease has to meet one of three criteria and in this case it does. The criteria it meets States: The present value of the minimum lease payments is equal to or greater than 90% of the fair market value of leased property. And if you were to calculate the lease payments out (10,000*5= 50,000) it would equal $50,000 which far exceeds the value of the building being at only $32,000. (B) yes all the payments made towards the lease should be recorded as an expense 2). BANK LOAN: $180,000 3 years $10,000 annual payment (until 3rd when you pay lump sum) 10% Interest rate Journal entry on the day of the loan: Cash 180,000 Notes payable 180,000 Journal entries for the next three annual payments. Note Payable 10,000 Interest Expense 1,000 Cash 11,000 Journal entry on the lump sum pays out at the end of the loan contract Note Payable 150,000 Interest Expense 15,000 Cash 165,000 3). Land: Mike should treat the land as acquiring an asset transaction would be like...
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...MacCloud Winery Case Study Due 11/17/13 1. Should the leased building be accounted for as an asset? No, the lease should be considered an operating lease. The building is the asset. The expense should be accrued on the building. The length of the lease should be less than 75% of the life of the asset leased. The lease is a ten year lease and the building has a 30-year economic life. Therefore this is an operating lease. The rental payments should be expensed as they are paid and offset by the cash used to make them. Should the agreement to pay lease rentals be recorded as a liability? No liabilities should be recorded because the future payments on the lease should be noted in the footnotes of the company’s financial statements. 2. Record the journal entries to account for the bank loan for all 3 years. Assume the loan was made at the beginning of the year and repaid at the end of year. Assume all interest payments are made on an annual basis. The $10,000 per year payment is to reduce the loan’s principal. Loan Issuance: DR Cash $180,000 CR Notes Payable $180,000 Year One Loan Repayment: DR Notes Payable $10,000 CR Cash $10,000 Year Two Loan Repayment: DR Notes Payable $10,000 CR Cash $10,000 Year Three Loan Repayment: DR Notes Payable $160,000 CR Cash $160,000 To record the interest payments annually (10% interest rate on $180,000 principal): DR Interest Payable $18,000 CR Cash $18,000 3. Applying the principals of accrual accounting, how...
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...Accounting at MacCloud Winery Write Up The leased building should be accounted for as an asset. Specifically a capital lease. A capital lease is a long-term lease that transfers the lessee most rights and obligations concerning the asset leased. To calculate out the lease payments on the building (10 years x $5,000 per year = $50,000) $50,000 exceeds the value of the building being at only $32,000. While a capital lease usually transfers ownerships at the end of the lease that won't be the case for Mike. This is because the lease contract mike signed did not mention any bargain purchase option or that Mike might assume ownership of the lease building. The agreement to pay the lease rentals is a liability and is recorded as an expense. This is because Mike is making $5,000 payments each year for the next 10 years to lease the building. Journal entry on day of loan: Debit Cash $180,000 and Credit Notes Payable $180,000. For the next 3 years journal entries: Debit Notes Payable $10,000, debit Interest Expense $1,000 (10,000 x .10 = 1,000) and finally credit cash $11,000. Journal entry on the lump sum after 3 years: Debit Notes Payable $150,000 ( 3 years x $10,000 =30,000) (180,000 - 30,000 = 150,000), debit interest expense $15,000 ($150,000 x .10 = $15,000), and credit cash 165,000 (180,000 - 15,000 = $165,000). Mike should treat the land as an asset. Mike would debit land 250,000 and credit notes payable 180,000 and credit cash 70,000. The vines that Mike...
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