Accounting at MacCloud Winery
Midterm Exam
Accounting at MacCloud Winery 1. The leased building will be accounted as an asset and the agreement to pay lease rentals be recorded as a lease liability. Accordingly, the depreciation expense attributable to space used in manufacturing/processing wines will be accounted as inventory cost as it is a cost incurred in bringing the goods (wine) to its present location and condition. The leased building can be capitalized on the premise that the significant risks and rewards of ownership of the property are transferred to MacCloud. Considering the total rental cost amounting to $50,000 over a period of 10 years exceeds the estimated value of the building ($32,000), the present value (assuming an interest rate of 10%) of the lease payments for a period of 10 years amounts to substantially all of the estimated value of the leased asset. It means that MacCloud can put up a new building now at a cost even higher than the value of the leased building if he wants to; hence in substance, MacCloud bought a new building at a value substantially equal to the estimated value of the leased building.
2. First year: Cash
180,000
Accounting at MacCloud Winery 1. The leased building will be accounted as an asset and the agreement to pay lease rentals be recorded as a lease liability. Accordingly, the depreciation expense attributable to space used in manufacturing/processing wines will be accounted as inventory cost as it is a cost incurred in bringing the goods (wine) to its present location and condition. The leased building can be capitalized on the premise that the significant risks and rewards of ownership of the property are transferred to MacCloud. Considering the total rental cost amounting to $50,000 over a period of 10 years exceeds the estimated value of the building ($32,000), the present value (assuming an interest rate of 10%) of the lease payments for a period of 10 years amounts to substantially all of the estimated value of the leased asset. It means that MacCloud can put up a new building now at a cost even higher than the value of the leased building if he wants to; hence in substance, MacCloud bought a new building at a value substantially equal to the estimated value of the leased building.
2. First year: Cash
180,000