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 should Mike treat the expenditures for the land, vines planting, fertilizing and water? Be specific regarding the treatment over time, including amounts and the rationale for the treatments.
Mike should treat the expenditures such as those costs related to producing the wine as capital expenses. When the wine is sold, the expenses should then be recorded as cost of goods sold. Fertilizer
