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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 Loans payable-noncurrent 180,000 To record set up of loan at the beginning of year 1 Loans payable 10,000 Interest expense 18,000 Cash 28,000 Interest (180k x 10% = 18,000) To record payment of principal and interest at end of year 1 Second year: Loans payable 10,000 Interest expense 17,000 Cash 27,000 Interest (170k x 10% = 17,000) To record payment of principal and interest at end of year 2 Third year: Loans payable 160,000 Interest expense 16,000 Cash 176,000 Interest (160k x 10% = 16,000) To record payment of principal and interest at end of year 3

3. Land will be accounted as a noncurrent asset under property, plant and equipment amounting to $250,000. Land will not be subject to depreciation but may be subject to impairment if there is an indication that the land has decreased in economic value. Generally speaking, the direct costs of the vines as well as the labor and indirect costs to plant should be capitalized and depreciated when the vines start producing grapes. Vines will be capitalized amounting to $42,500 ($10,000 per acre of planted vine - 4 acres to be planted - and the transportation cost amounting to $2,500). Cost incurred for planting vine will be capitalized amounting to $8,000 ($2,000 per acre - 4 acres to be planted). Cost of fertilizing and water will also be capitalized amounting to $4,000 annually during the first five years and $6,000 annually after five years. The cost of grapevine (including transportation cost) itself plus indirect costs (cost of planting, fertilizing and water) are capitalized because they provide economic benefit to the final product - wine. 4. The estimated cost of the reduced production due to vine diseases should be accounted for and reflected in the financial information as expense of the winery if the vines have been diagnosed with any of the disease. The amount will be estimated based on the cost of the reduced production including other costs to be incurred should there be replacements of the vineyards due to the disease. However, any cost of fumigation or treatment to prevent the diseases will be capitalized and depreciated accordingly. Such treatment is under the accrual concept of accounting based on generally accepted accounting principles. 5. The oak barrels should be accounted as noncurrent assets under property, plant and equipment to be depreciated over its economic useful life. Depreciation expense should be included as part of inventory cost because the barrels will be used in the production process which is vital in bringing the goods (wine) to its present location and condition. 6. A.) Land - presented as acquisition of property, plant and equipment classified as cash flows from investing activities B.) Vines, cost of planting, fertilizing and water - presented as an increase in inventories under changes in operating assets and liabilities classified as cash flows from operating activities C.) Bank loans including interest - proceeds from loan to be presented as proceeds from loans while payments (including interest paid) will be presented as payments of loans and another line item for interest paid, all classified as cash flows from financing activities

Financial Performance Reporting


1. a) b) c) d) e) f) g) h) i) j) 2. IASBs Statement aims to enhance the value of the financial performance statements, by improving the presentation of accounts, which will be more helpful to the readers of the financial performance of an entity, which in my opinion increases the value of the preparers of the financials. 3. Yes, FASBs goals are satisfied by the proposed changes in the Statements as the IASB Statements further streamline the financial information which will be more helpful to financial statement users with emphasis on the enhancement of the predictive value of the new Statement. 4. By simply looking at the other comprehensive income line item in the statement of financial performance or equity, equity investors would easily capture the information they need whether equity investments are fairly doing good or not in the market based on the changes in value in comparative years. 5. None. The changes have been researched and analyzed by experts in accounting with broad knowledge on the Standards. Operating under cost of sales or operating expenses income flows column Operating under revenue income flows column Operating under operating expenses income flows column Operating under revenue for sales and cost of sales for impairments income flows column Financing under fair value gains and losses valuation adjustment column Operating under other income for gains or other expenses for losses income flows column Operating under other income for gains or other expenses for losses income flows column Financing under interests income flows Operating under cost of sales of operating expenses income flows Operating under other income or expenses income flows