Case 14-4 Accounting at MacCloud Winery

5/21/2018 Case 14-4 Accounting at MacCloud Winery

1/4

GSM5301: ACCOUNTING FOR DECISION MAKING

LECTURER: PROF. MADYA. HASHANAH ISMAIL

CASE STUDY 1: ACCOUNTING AT MACCLOUD WINERY

GROUP 4 MEMBERS:

NAME MATRIC ID

NOOR ASRUL GM05304

NORSHAHIRA PBS121118NOR ZAKIAH MD SARWAN PBS 1311155

!I!EKSARATI A"L SANDRASIGARAN PBS1311014

LAU KAR WOH PBS1312188


2/4

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 inproduction 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

MacCloud

+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 ecord 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


3/4

3 Applying the principles of accrual accounting) how should Mike treat the e%penditures for

the land) vines) vine planting) fertilizing and water,

and will be accounted as a noncurrent asset under property) plant and e'uipment amounting

to #0$")""" and 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

itself

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 accrualconcept 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 ande'uipment to be depreciated over its economic useful life 7epreciation e%pense should beincluded as part of inventory cost because the barrels will be used in the production processwhich is vital in bringing the goods wine. to its present location and condition


4/4

6 &ow would the transactions in 'uestion 3 and the bank loan be recorded in the winery*sindirect statements of cash flows,

a) and- 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 ininventories under changes in operating assets and liabilities classified as cash flows

from operating activitiesc) 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

activities

Documents

Case 14-4 Accounting at MacCloud Winery