MacCloud Winery Case Study
1. Should the leased building be accounted for as an asset?
No, the lease should be considered an operating lease. The building is the asset. The expense should be accrued on the building. The length of the lease should be less than 75% of the life of the asset leased. The lease is a ten year lease and the building has a 30-year economic life. Therefore this is an operating lease. The rental payments should be expensed as they are paid and offset by the cash used to make them. Should the agreement to pay lease rentals be recorded as a liability?
No liabilities should be recorded because the future payments on the lease should be noted in the footnotes of the company’s financial…show more content… Labor should be capitalized over five years. It is a cost that can be inventoried and Mike needed to hire extra employees to plant the vines he bought from Australia at $2,000 per acre over 5 acres for a labor expense of $10,000. The special grapevines he brought from Australia are also a cost that can be inventoried at of $50,000 ($10,000 x five acres). Mike should capitalize the special vines over the amount of time it will take for the vines to produce, which is five years. The total cost of the vines is $50,000, over five years equals $10,000. The purchase of the vineyard land ($250,000) should be depreciated over its service life.
4. 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?
The potential vine disease would be considered a liability (loss contingency) involving the risk of possible loss and damaged of property, depending on the occurrence of one or more future events (vine disease). It is not something that should be accrued. However, it should be noted in the footnotes of the company’s financial statements. Since there is a greater chance of Mike’s vines suffering from Black Goo and Pierce disease during the first three years after planting, Mike should take out insurance to protect him in the event his vines are affected by either of these more damaging and costly diseases.
Does this change if the