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1: The building

Worth $32,000
Leased for 10 years for $5,000 per year
How do we account for it?

Accounting for a lease


Capital lease
Treated as an acquisition of the asset financed
by a loan
Operating lease
Treated as a rental agreement
A leas is a capital lease if
There exists a bargain purchase option at the
end of the lease
The lease covers more than 75% of the
economic life of the asset
The PV of future lease payments is at least 90%
of the market value of the asset
Only one condition is sufficient
In this case condition 3. tells that that it should
be treated as a capital lease (see related excel
file)

2: The bank loan

$180,000
3 years maturity
$ 10,000 annual repayment
10% interest rate

Accounting for the loan


See the related excel file

3: The land and the grapevines


The vineyard is certainly an asset
Cost of this asset?
Depreciation?

Cost (initial value) of an assets


You can include in the cost (initial value) of an assets all the
costs necessary to put the asset into its productive use
So, in this case, it can be argued that all the expenses
incurred in the first 5 years are part of the initial cost of the
asset
Also the transportation cost can be included in the initial cost
of the asset

4: Vines diseases
Highly damaging event
Possible, but not certain
How do we account for this?

Provisions
Provisions are accounting funds that are set aside in the
liabilities side of the balance sheet in order to be used in the
future to cover for possible future costs
A provision can be created if
1. The future event is sufficiently likely
2. The future damage can be reasonably estimated
Both conditions are necessary
It is open to discussion whether in this case the two
conditions are met

5: The oak barrels


Two types
High quality (5 + 10 years of economic life)
Low quality (10 years of economic life)
Is it an asset?
Depreciation?

Depreciation

Depreciation is the accounting way to spread the


cost of an investment in a fixed asset throughout the
economic life of the asset
The depreciation method should reflect the usage
and the loss in productive value of the asset
It is open to discussion, which is the best way to
depreciate the oak barrels
General questions that we have tackled today
1. What do we mean by accounting decisions?
2. Why is it necessary to make accounting
decisions?
3. What are the consequences of these
decisions?

1-What do we mean by accounting decisions?


In every of the issues analyzed in the case the
management of the vinery has to make an
accounting decision
Accounting decision = the choice of one among the
various possible accrual representations of the cash
flow of the transaction

2. Why is it necessary to make accounting

decisions?
Because in the real world we have uncertainty
Better explained by the Accounting for a
business project case
3. What are the consequences of accounting
decisions?
By choosing a certain accrual representation of the
cash flow of the transaction we choose one
Income statement
Balance sheet
These two financial statements depend crucially on the
accounting decisions taken by the management