Course Title: ACT201 (Introduction to Financial Accounting)

Topic: Case study on MacCloud Winery

Submitted To
Honourable faculty
Dr. FJ Mohaimen
Assistant Professor
Department of Accounting & Finance

Submitted by
Md Shahnewaz Ahmed Shemul
Student ID: 1410612630
Section: 9
1. Should the leased building be accounted for as an asset, depends on whether it is a capital
lease or an operating lease. A capital lease is a contract entitling a renter to the temporary use
of an asset and has the economic characteristics of asset ownership for accounting purposes
[ CITATION Hay21 \l 3081 ].
While considering the leased building, the total amount to be paid for the leased building will
be $5000*10= $50,000, which already exceeds the estimated value of the building, which is
$32,000. So the present value of the lease payments (assuming a 5% interest rate) for the
period of 10 years will be higher than the estimated value of the leased asset. However, it was
specified in the case that Mike MacCloud would not assume the ownership of the building, or
there was no mention of any bargain purchase option.
So if Mike does not get to own the building at the end of the lease period and the amount of
the present value of the building is higher than the actual value of the building, the leased
building can be considered both as an operating or a capital lease. The reason is the life of the
lease is less than 75% which makes it a capital lease [ CITATION Hay21 \l 3081 ]. On the
other hand, the present value of the leased payments is greater than 90% of the leased
buildings market value, which qualifies it for capital lease [ CITATION Hay21 \l 3081 ].
Hence, it really depends on the company if they want to consider it operating lease or capital
lease. If they consider it operating lease it will be accounted as a liability or if they consider it
a capital asset it will be accounted as an asset. Yes, the lease rentals will be recorded as lease
liability because the building rent qualifies for finance lease.

2. We assume that the bank loan was contracted on January 1st, 2012, that interest payments
and capital principle has to be paid on June 30 of every year for the next three years and that
the remaining principal is paid on December 31, 2014.

MacCloud Winery
Journal

Date Accounts and Explanation Ref. Debit Credit

January 1, Cash 180,000
2012 Bank loan payable 180,000
(Took bank loan to finance a land)
June 30, Interest payable 18,000
2012 Cash 18,000
(Interest payment on bank loan for
year 1)
June 30, Bank loan payable 10,000
2012 Cash 10,000
(Payment of bank loan to reduce the
principle)
June 30, Interest payable 17,000
2013 Cash 17,000
(Interest payment on bank loan for
year 2)
June 30, Bank loan payable 10,000
2013 Cash 10,000
(Payment of bank loan to reduce the
principle)
June 30, Interest payable 16,000
2014 Cash 16,000
(Interest payment on bank loan for
year 3)
June 30, Bank loan payable 10,000
2014 Cash 10,000
(Payment of bank loan to reduce the
principle)
December Bank loan payable 150,000
31, 2014 Cash 150,000
(Paid lump sum/full payment of the
bank loan)
3. In accrual basis accounting is an accounting method where revenue or expenses are
recorded when a transaction occurs rather than when payment is received or made [ CITATION
Ada21 \l 3081 ]. So while considering those events it does not matter if there was any cash
received or not. As long as there is a revenues and expenses are recognised they need to
accounted for.

Land, vines, vine planting, fertilizing and water should be treated as follows –
 Land: Land (250,000) is a fixed asset which we record under property plant and
equipment. Although it’s a plant asset we cannot depreciate it because it has an
unlimited useful life.
 Vines and vines planting: Vines (50,000) has to be accounted as an asset including
the cost of planting of the vines (10,000) and the transport cost (2500) should be
accounted as an asset of total 62,500. The cost of planting and the transportation has
to be included in the cost of vines because those costs were necessary to make the
vines ready for its intended use. Furthermore, we can depreciate them when they
begin their productive life.
 Fertilizers and water: Fertilizers and water (1000 per acre*5 acres = $5000*5years
= $25,000) are operating expenses as they incurred. For the first 6 seasons it will be a
recurring cost and after that we can include them in the cost of goods sold since the
winery will be selling wines which were made from the vines and fertilizers and water
was the operating expense of those vines.
4. If the vines get sick and loses value which will affect financial and income statement. To
account for that a contingency liability can be created. Contingency liabilities that depend on
the outcome of an uncertain event must pass two thresholds before they can be reported
in financial statements. First, it must be possible to estimate the value of the contingent
liability. If the value can be estimated, the liability must have greater than a 50% chance of
being realized. Qualifying contingent liabilities are recorded as an expense on the income
statement and a liability on the balance sheet [ CITATION Sea21 \l 3081 ].
Since the winery might lose about approximately 50% of the quality vines, it cannot be
recorded as a contingency liability, because the value has to be more than 50%.
However, the winery will still lose about 50% value of the vines and the productive life will
be considerably shortened with no salvage value at the end of useful life. So, to account for
that amount, an impaired asset account can be placed on the balance sheet. An impaired asset
is an asset that has a market value less than the value listed on the company's balance
sheet[ CITATION Ali20 \l 3081 ]. When an asset is deemed to be impaired, it will need to be
written down on the company's balance sheet to its current market value [ CITATION Ali20 \l
3081 ]. They can also use double declining method for the depreciation with no salvage value
at the end of 10 years which will help them to recover some cost.

5. The oak barrels are fixed asset which should be accounted as part of the property, plant and
equipment. It has an estimated useful life of 15 years. So they can be depreciated over the
period. The straight-line depreciation method can be used to calculate the amount over the 15
years. The depreciation will be account as “accumulated depreciation” as a contra account.
While depreciating they need to account for the salvage value because after the useful life,
the barrels will be sold to charcoal chip manufacturer which will bring some cash into the
winery.

Bibliography
Hayes, A. (2021, August 31). Accrual Accounting . Investopedia .

Hayes, A. (2021, August 25). WHAT IS ACCRUAL ACCOUNTING AND WHO USES IT? Investopedia .

Ross, S. (2021, April 30). What Are the Reporting Requirements of Contingent Liabilities?
Investopedia .

Tuovila, A. (2020, June 22). What is an Impaired Asset? Investopedia .