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Case 14-4 Accounting at MacCloud Winery
Mike McCloud worked in the Winery industries for many years and after achieving the
specialization in this field he opted for starting his own winery production business and
launching his own brand At the beginning of his business he planned to lease a building for
conducting the production processes of the wine and also purchased a land for growing the
grapes !he lease agreement of the building was for 1" years at an annual payment of #$"""
Mike used all his business knowledge and work e%perience to make his winery business
successful &e also imported an oak barrel that would enable him to make his product 'uality
above the average 'uality (n order to keep a record in the books of accounts of McCloud
Winery proper classification of assets) liabilities) e%penses and revenues need to be done so
that proper financial statements can be developed !he basic purpose of the research is to
have a look at the Mike McCloud Winery business*s books of accounts !he purpose of this
research is also to find out the classification of a leased building) either the rent paid on the
leased building considered as an asset or liability) what will be the impact of decrease in
production on the financial statements and how oak barrels will be treated either assets)
liabilities or will come under any other account
1 +hould the leased building be accounted for as an asset,
!he leased building will be accounted as an asset and the agreement to lease rentals be
recorded as a lease liability Accordingly) the depreciation e%pense attributable to space used
in manufacturing wines will be accounted as inventory cost as it is a cost incurred in bringing
the goods -wine. to its present location !he leased building can be capitalized on the premise
that the significant risks and rewards of ownership of the property are transferred to
+hould the agreement to pay lease rentals be recorded as a liability,
!he agreement to pay future lease rental payments on the operating lease would be disclosed
in the footnotes of the financial statements /o liabilities should be recorded 0 1ecord the
2ournal entries to account for the bank loan for all 3 years Assume the loan was made at the
beginning of the year and repaid at the end of year
3 Applying the principles of accrual accounting) how should Mike treat the e%penditures for
the land) vines) vine planting) fertilizing and water,
4and will be accounted as a noncurrent asset under property) plant and e'uipment amounting
to #0$")""" 4and will not be sub2ect to depreciation but may be sub2ect to impairment if
there is an indication that the land has decreased in economic value 5enerally speaking) the
direct costs of vines as well as the labour and indirect costs to plant should be capitalized
amounting to # 40)$"" -# 1")""" per acre of planted vine -4 acres. plus transportation costs of
# 0)$"" Cost of fertilizing and water will be capitalized amounting to #4)""" annually during
the first five years and # 6)""" annually after five years !he 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) which is the wine
4 &ow should the potential for vine disease be reflected in the financial statements if the
vines have not been diagnosed with any of the diseases, 7oes this change if the vines are
diagnosed with one of the diseases, 8e specific regarding any amounts and the rationale for
these treatments
!he estimated cost of the reduced production due to vine diseases should be accounted for
and reflected in the financial information as e%pense of the winery if the vines have been
diagnosed with any of the mentioned diseases !he 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 disease &owever) any cost of treatment to prevent the
diseases will be capitalized and depreciated accordingly +uch treatment is under the accrual
concept of accounting based of generally accepted accounting principle
$ &ow should Mike account for oak barrels,
!he oak barrels should be accounted as noncurrent assets under property) plant and
e'uipment to be depreciated over its economic useful life 7epreciation e%pense 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 &ow would the transactions in 'uestion 3 and the bank loan be recorded in the winery*s
indirect statements of cash flows,
a) 4and- 9resented as an ac'uisition of property) plant and e'uipment classified as cash
flows from investing activities
b) :ines) cost of planting) fertilizing and water are presented as an increase in
inventories under changes in operating assets and liabilities classified as cash flows
from operating activities
c) 8ank loans including interest- proceeds from loans to be presented as proceeds from
loans while payments -(ncluding interest paid. will be presented as payments of loans
and another line item of interest paid) all classified as cash flows from financing