Viewing a thread - I need a banksplination

Forums | Classifieds (149) | Skins | Language

You are logged in as a guest. ( logon | register )

I need a banksplination	View previous thread :: View next thread
Forums List -> AgTalk Cafe	Message format

Orfarmer

Posted 1/4/2019 17:17 (#7220296)
Subject: I need a banksplination

Roanoke, IN

I'm putting together my balance sheet. How come if I owe $200/acre for renting a farm it is just an expense, but if I have a $200/acre land payment it is a liability and goes against my working capital?

How come I must list my full land payment due this year in December as a liability, but I can't list the crop value harvested 2-5 months prior to it due as an asset, again eating away at WC? It would be different if land payment was due in March and all the crop came off in November.

If you've had a stable operation for 30 years I can see how this doesn't really amount to a hill of beans. But if you're newer and in expansion mode, it can really work against you and create aperception of problems that don't exist.

8230

Posted 1/4/2019 17:41 (#7220351 - in reply to #7220296)
Subject: RE: I need a banksplination

Principal due within 12 months is considered short term debt, balance of principal would be listed as Long term liability. In a yearly cash flow, your income is included. As margins are tighter the bankers are really looking at the real working capital. Same is true for equipment loans.

bbbinls

Posted 1/4/2019 17:58 (#7220391 - in reply to #7220296)
Subject: RE: I need a banksplination

S Central MN

The $200 per acre rent is just an expense, it doesn't have an asset listed that it is owed against. The land payment is what determines your net worth in the land you own. The land payment should be split into current liability for the principal owed in the next 12 months and a long term liability for the balance owed.

Thud

Posted 1/4/2019 18:45 (#7220483 - in reply to #7220391)
Subject: RE: I need a banksplination

Near-north Ontario, French River

Early on in a mortgage the vast majority of a land payment tends to be principle , which while a liability is not an expense. Because its a liability it goes against your WC. BOTH the land rent and the mortgage payment have the same effect on your cash flow statement, but a much different effect on your P/L statement.

K-WEST FARMS

Posted 1/4/2019 18:55 (#7220508 - in reply to #7220483)
Subject: RE: I need a banksplination

Clark Co. Wis

Disagree Thud....early on land payment is mostly interest and deductable as expense on your taxes......at least "here "

oldbones

Posted 1/4/2019 19:31 (#7220617 - in reply to #7220508)
Subject: RE: I need a banksplination

Floyd County, Iowa

K-WEST FARMS - 1/4/2019 18:55

Disagree Thud....early on land payment is mostly interest and deductable as expense on your taxes......at least "here "

Same "here".

Thud

Posted 1/4/2019 19:40 (#7220638 - in reply to #7220508)
Subject: RE: I need a banksplination

Near-north Ontario, French River

WHOOOPs... you are 100% correct LOL.. I got that backwards. The basic idea applies to the principle portion of the loan though.

sand85

Posted 1/4/2019 19:26 (#7220604 - in reply to #7220296)
Subject: RE: I need a banksplination

C IL

I guess your expense in your first paragraph isn’t really on a balance sheet. On the balance sheet your total mortgage on your land (liability) would be listed against the value of the land (mortgage). You can split the liabilities up as many ways as you want (terms).

I have never had someone explain the working capital thing to me in terms I understand on a P&L. I understand the underlying income statement but I agree with WC thing makes no sense. It’s like the payment is due in the absence of any common sense economic activity (like deriving a crop and income off of the underlying asset).

Grhog

Posted 1/4/2019 19:38 (#7220630 - in reply to #7220604)
Subject: RE: I need a banksplination

Se wisc.

Only the principle portion of land payment goes into current liabilities. Interest on land is an expense.
Thing about working capital is it can be any number you want it to be. Talk a loan against an asset and call it working capital. Or you can have no liabilities, net worth of a million, and no working capital. So to me in can be a lenders fulcrum to put you where he wants you.

Edited by Grhog 1/4/2019 19:43

sand85

Posted 1/4/2019 20:09 (#7220720 - in reply to #7220630)
Subject: RE: I need a banksplination

C IL

Accrued unpaid interest goes on my balance sheet as a liability.

Interest paid over the last year goes on my income statement as an expense, of course.

The remaining complete mortgage principal balance is on my balance sheet as a liability.

Edited by sand85 1/4/2019 20:11

chadlit

Posted 1/4/2019 20:10 (#7220726 - in reply to #7220296)
Subject: RE: I need a banksplination

Think of rental ground as a lease on equipment. Its a straight deduction and usually easy to get out of the short term lease. A purchase on the other hand has the interest and balance on the loan to contend with. Only the interest can be deducted. The final value of the asset (land or equipment) is not fully known until it is sold. Usually equipment depreciates and land appreciates, but that is not always the case.

SteigerSt320

Posted 1/4/2019 20:22 (#7220759 - in reply to #7220726)
Subject: RE: I need a banksplination

Northeast Louisiana

I know quite a few guys here that own land will rent land to themselves. Say 25 percent go to John Doe. 75 percent goes to John Doe. Or farm in a LLC and rent to your personal name or vice versa.

Also social security is taxed differently on land rental income.

Big Ben

Posted 1/4/2019 21:15 (#7220921 - in reply to #7220759)
Subject: RE: I need a banksplination

Columbia Basin, Ephrata, WA

SteigerSt320 - 1/4/2019 18:22

I know quite a few guys here that own land will rent land to themselves. Say 25 percent go to John Doe. 75 percent goes to John Doe. Or farm in a LLC and rent to your personal name or vice versa.

Also social security is taxed differently on land rental income.

Did you mean to say Jane Doe as one of those named above? Otherwise I don’t get the 75/25 split.

Having a farm operating entity rent all land can be a nice way to manage things, and eliminates a lot of the questions the OP asked. Over time one balance sheet shows how your operation is performing, one balance sheet shows how your investing is performing.

KevinM

Posted 1/4/2019 20:30 (#7220775 - in reply to #7220296)
Subject: RE: I need a banksplination

SE IL

Short answer that's the way it is. Long answer is you have to make the land payment but you could choose not to pay the rent. Of course you could also choose not to make the land payment but that has different consequences. I assume you are working on an operating loan. In that scenario the rent is an expense that is (hopefully) covered by the sale of the crop just like seed, fertilizer etc. Whatever is left after direct expenses is available to cover loan payments, taxes and family living. Any above that would be available for capital expenditures.

prairieguy

Posted 1/5/2019 06:16 (#7221271 - in reply to #7220296)
Subject: RE: I need a banksplination

The eastern part of the more tropical Dakota

This is where you need a banker that understands your operation. The borrower that owns land or does their statement before a bunch of cows calve can function with less working capital and still be fine.

mafrif

Posted 1/5/2019 07:50 (#7221440 - in reply to #7220296)
Subject: RE: I need a banksplination

NC Iowa

There should be a column for growing crops and prepaid expenses. That would at least cover all your expenses you have Into the growing crops, however it doesn't allow you to claim that you will have any income from the crop.

pknoeber

Posted 1/5/2019 08:46 (#7221572 - in reply to #7221440)
Subject: RE: I need a banksplination

SW KS, near Dodge City

Prepaid expenses and investment in a growing crop is a current asset, which is definitely part of the balance sheet.

My guess is that the OP wants to claim full expected revenue as an asset. The only asset would be the purchased seed, chemical, fertilizer, land rent etc... which eventually are converted to income through the growing crop. Once harvested that value then translates back from the income statement to the balance sheet as either inventory or cash if it’s sild right away.

tkoppel

Posted 1/5/2019 09:53 (#7221728 - in reply to #7221572)
Subject: RE: I need a banksplination

Sanilac Co. Michigan

Well, rent can be a legitimate liability. If its on a long term agreement, then its a current liability since you're bound by the terms of the lease.

Even a year to year lease should be considered a current liability if a portion of the growing crop identified in your current assets include that which is growing on the rented ground or which have received improvements that will be realized in the next 12 months. Basically, if any of that year to year ground contributes to current assets then it ought to be included as an off setting liability.

Think wheat, or any other annual crop as of the date of the balance sheet.

oldbones

Posted 1/5/2019 16:09 (#7222517 - in reply to #7221572)
Subject: RE: I need a banksplination

Floyd County, Iowa

pknoeber - 1/5/2019 08:46

Prepaid expenses and investment in a growing crop is a current asset, which is definitely part of the balance sheet.

My guess is that the OP wants to claim full expected revenue as an asset. The only asset would be the purchased seed, chemical, fertilizer, land rent etc... which eventually are converted to income through the growing crop. Once harvested that value then translates back from the income statement to the balance sheet as either inventory or cash if it’s sild right away.

Not an accountant or banker, but are you sure you can count rent as an asset? To me, that's an expense to (hopefully) plant a crop.
Again, to me, the seed, chems, fert, ets is an asset, until taken out of the shed and planted. Anything between planting and harvest is speculation.

tkoppel

Posted 1/5/2019 21:15 (#7223291 - in reply to #7222517)
Subject: RE: I need a banksplination

Sanilac Co. Michigan

oldbones - 1/5/2019 16:09

No , not an asset unless it's in the form of a pre paid expense. The point is rents can or should be treated as a liability.

frytownfarmer

Posted 1/5/2019 12:52 (#7222131 - in reply to #7220296)
Subject: RE: I need a banksplination

Frytown, Iowa

I just always put “Grandmas super secret sugar cookie recipie” on the asset side at a $500,000 value to allow the expansion I need.

Or get yourself a super slick willy Wells Fargo banker... they are the ones that allowed Stamp, IFF and boresons to expand so rapidly

paul the original

Posted 1/5/2019 16:19 (#7222550 - in reply to #7222131)
Subject: RE: I need a banksplination

southern MN

I’m a Cenex Harvest States coop member, so I’m good until the first $150,000,000 are used up, then I’ll first start worrying about these piddling things.

Paul

sand85

Posted 1/5/2019 20:44 (#7223208 - in reply to #7222550)
Subject: RE: I need a banksplination

C IL

Mwaa ha ha. That was clever.

Orfarmer

Posted 1/5/2019 18:04 (#7222815 - in reply to #7222131)
Subject: RE: I need a banksplination

Roanoke, IN

frytownfarmer - 1/5/2019 13:52

Or get yourself a super slick willy Wells Fargo banker... they are the ones that allowed Stamp, IFF and boresons to expand so rapidly

I'd have to sell my crop 4 times, join a cult, and change my accounting software before they'd even let me in the door.

coup

Posted 1/5/2019 18:36 (#7222891 - in reply to #7222131)
Subject: RE: I need a banksplination

USA

frytownfarmer - 1/5/2019 11:52

I just always put “Grandmas super secret sugar cookie recipie” on the asset side at a $500,000 value to allow the expansion I need.

Or get yourself a super slick willy Wells Fargo banker... they are the ones that allowed Stamp, IFF and boresons to expand so rapidly

ILFF money machine wasn't Wells Fargo it was local hometown bank, that ended up saddling ADM with ILFF's debt. So in the end ADM took it in the shorts instead of the bank.

Orfarmer

Posted 1/5/2019 20:24 (#7223156 - in reply to #7220296)
Subject: Another ???

Roanoke, IN

Thanks for the above replies.

Does your banker recognize long term investments such as lime, build rates of fertilizer, or tile on long term rented ground?

For instance, if you spend $100/ac on lime last year and expect a 3 year payback, do they count $33 as a current asset and $33 as intermediate or is the whole $100 up in smoke as crop expense like herbicide, N fertilizer, etc?

tkoppel

Posted 1/5/2019 21:25 (#7223319 - in reply to #7223156)
Subject: RE: Another ???

Sanilac Co. Michigan

Orfarmer - 1/5/2019 20:24

Thanks for the above replies.

Does your banker recognize long term investments such as lime, build rates of fertilizer, or tile on long term rented ground?

For instance, if you spend $100/ac on lime last year and expect a 3 year payback, do they count $33 as a current asset and $33 as intermediate or is the whole $100 up in smoke as crop expense like herbicide, N fertilizer, etc?

Well, a lot of that would depend on the legal language included in the rental agreement. For instance, the proration of tile expense should there be a change in ownership prior to the end of the lease.

Again, it's going to depend on the specific language in the lease.

Search this forum
Printer friendly version
E-mail a link to this thread

(Delete cookies)