1. Should the leased building be accounted for as an asset?

Should the agreement to

pay lease rentals be recorded as a liability? Justify your answers. Do not refer to
any FASB rules on this issue.
ANSWER:
http://www.studymode.com/essays/Maccloud-Winery-Finance-Case-Solution-
1032361.html - jan ung link ab, diko lam ayusin. I trying to answer it in
paragraph na lng

2. Record the journal entries to account for the bank loan for all three years. Assume
the loan was made at the beginning of year one and repaid at the end of year three.
Assume all interest payments are made on an annual basis. The $10,000 per year
payment is to reduce the loans principal.
ANSWER:
Issuance of debt/loan
Cash $180,000
Notes Payable $180,000.00

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
Cash $160,000.00

To record the interest payments on existing loan/monthly 10% interest rate
Interest Expense $1,500.00
Interest Payable $1,500.00

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


3. Applying the principles of accrual accounting, how should Mike treat the
expenditures for the land, vines, vine planting, fertilizing, and water? Be specific
regarding the treatment over time, including amounts, and the rationale for the
treatments.
ANSWER:

Item No. Item Description Treatment over Time Rationale
1 Building Lease
$5,000/year
Expense, be amortized
by $5,000/year
Mike cannot control the
property as the lease
contract did not mention
about Mike might
assume ownership of
the leased building.
2 Purchase of land
$250,000
Asset, be depreciated
according to its lease
term year
Mike owns the land
after purchase.
3 Bank loan $180,000 for
land purchase
Loan payable in liability It is a source for the
land.
4 Interest for land purchase Be capitalized as part of
land asset
It is an amount related
to borrowing made to
finance the land and it is
identifiable.
5 Vines$10,000*5=$50,000 Asset, be depreciated
until it is replanted
75years later
It is a kind of equipment
producing grapes.

6 Vines Transportation cost
$2,500
It is an asset and could
be computed into vines
asset
It is cost that is
necessary to make the
vines ready for its
intended use.
7 Vine planting
$2,000*5=$10,000
It is an asset computed
into vines. When vines
are brewed and sold, it
becomes as cost of
goods sold
Same as above, it is
necessary to make the
vine ready for its use.
8 Fertilizing and water fee:
$1,000*5=$5,000
Outright expense These works are to keep
the asset (land and vine)
in good operating
conditions and they did
not add capitalized cost
of the asset (land and
vine).

4. Without changing your answers to the above questions, consider the following
facts:
Mikes greatest concern is that his vines will contract Phylloxera disease,
Black Goo syndrome, or Pierces disease. While these conditions do not kill the
vines immediately, they reduce production of quality grapes by approximately
50%. Further, the vines generally die approximately 10 years after contracting the
condition. While Mike will probably be able to avoid Phylloxera by planting
genetically treated vines, incidents of Black Goo and Pierce disease have been
increasing over the last several years and are most dangerous to vines that are less
than three years old.
How should the potential for vine disease be reflected in the financial statements
if the vines have not been diagnosed with any of the diseases? Does this change if
the vines are diagnosed with one of the diseases? Be specific regarding any
amounts and the rationale for these treatments.
ANSWER:
When vines have not been diagnosed with any of the disease, it is
in good conditions and still keeps its value. It could be keep as asset with
no change. However, the incidents of Black Goo and Pierce disease have
been increasing over the last several years and are the most dangerous to
vines younger than 3 years old. Based on conservatism concept, recognize
the expenses of vine lost as soon as they are reasonably possible. It is
better to use declining depreciation method for the possible vine loss due
to the diseases in the first 3 years.
If vines are diagnosed with one of the disease and it will lose half
of its annual value until they die 10 years after contracting the condition.
Thereafter their service life will be shortened and the residual value could
be written off as obsolete expense in 10years.

5. How should Mike account for the oak barrels?
ANSWER:
Oak barrels are equipments containing wines and therefore it is an
asset. It has 15 years of service life. It will lose most of its value in the
first 5 years so declining depreciation method is recommended. The value
of residual value for 10 years could be based on the purchase price for
cheaper local procured barrels that used to mature lower-quality life. The
revenue of recycling is only recognized when it is sold to make charcoal
chips after 15 years.

6. How would the transactions in Question 3 and the bank loan be recorded in the
winerys indirect statement of cash flows?
ANSWER:
http://www.studymode.com/essays/Maccloud-Winery-Finance-Case-Solution-
1032361.html - diko pa din naayos, will try to answer in paragraph