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 loan’s principal.

ANSWER:Issuance of debt/loan

Cash $180,000Notes Payable $180,000.00

Year OneRepayment 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 rateInterest Expense $1,500.00

Interest Payable $1,500.00

To record interest payment annuallyInterest 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 Rationale1 Building Lease

$5,000/yearExpense, 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:

Mike’s greatest concern is that his vines will contract Phylloxera disease, “Black Goo” syndrome, or Pierce’s 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 winery’s 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