Mccloud Winery - Finance

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Managerial Accounting 07/03/2012 McCloud Winery – Questions

1. Should the leased building be accounted as an asset? No, the lease would be considered an operating lease, on which the expense would be accrued day by day as the asset (building) is used. To determine this is in fact an operating lease, the life of the lease should be less than 75% of the useful life of the asset being leased. For instance, this is a 10 year lease, which is less than the economic life of a 30 year asset. The rental payments would be expensed as incurred and offset by the asset used to make the rental payments (i.e. cash), the lessor would still hold the benefit of the ownership. Should the agreement to pay lease rentals be recorded as a liability? The agreement to pay future lease rental payments on the operating lease would be disclosed in the footnotes of the financial statements. No liabilities should be recorded. 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 3. Assume all interest payments are made on an annual basis. The $10,000 per year payment is to reduce the loan’s principal. 1. Issuance of debt/loan Cash Notes Payable 180,000.00 180,000.00 DR CR DR CR DR CR

Year One Repayment of Loan Notes Payable 10,000.00 Cash 10,000.00 Year Two Repayment of Loan Notes Payable 10,000.00 Cash 10,000.00

Year Three Repayment of Loan Notes Payable 160,000.00 DR Cash 160,000.00 CR To record the interest payments on existing loan/monthly

10% interest rate Interest Expense Interest Payable

Principal 180,000 1,500.00 1,500.00 DR CR DR CR

1,500.00

To record interest payment annually. Interest Payable 18,000.00 Cash 18,000.00

18,000.00 3. Applying the principles 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...
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