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)

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

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.