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Mccloud Whinery

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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 acquired should be treated as an asset exchange. Mike bought the grapevines at $10,000 per acre and he is planning on developing 4 acres. (10,000 x 4 = 40,000) The journal entry would be: debit to grapevines $40,000 and a credit to cash $40,000. Since the grapevines have a useful life of 75 years the grapevines are depreciating in value. (40,000 - 0/75 =$533) Each year the grapevines

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