MCCLOUD’S WINERY

MANAGERIAL ACCOUNTING

SHERELL GAMBOA
DO YOU SEE THE DECISION BY MIKE TO RENT THE BUILDING
COMPARED TO THE OPTION TO BUY AS BEING CORRECT?
WHAT ACCOUNTING AND BUSINESS IMPLICATIONS DOES ONE
OPTION OR THE OTHER HAVE?
• In my opinion No, he should have bought the building and have it as an asset.
• Unless there was an agreement for Mike to rent until he owns the building, and in the future have it as an asset.
• Renting the building is a liability
• Engaged in an operational lease
• Reflected as a rent expense (rent payable) on the balance sheet (Debit to rent expense)
• Reduces Company’s Cash (Capital) (Credit Cash)
• Reduces Owner’s equity
• Short term debt
HOW SHOULD MIKE DEAL WITH EXPENDITURE ON LAND,
VINEYARDS, VINE PLANTING, FERTILIZERS, AND WATER?
BE SPECIFIC IN THE TREATMENT OVER TIME, INCLUDING
THE REASONING FOR A CONCLUSION.

• The land will be treated as a noncurrent asset under property plant and equipment in the balance sheet.
• Land will face depreciation each year and will incur an impairment loss over time due to grape cultivation.
• Grapevines, water, fertilizer are needed and should also be capitalized as they are expected to produce an
economic benefit for the first 5 years the least eventhough they are considered expenses.
• Once the vines start to produce grapes, depreciation will the reflect as inventory cost
 DO YOU SEE MIKE’S DECISION TO APPLY FOR A LOAN FROM
THE BANK AS BEING CORRECT? DOES THE WAY TO AMORTIZE
THE LOAN SEEM CORRECT? WHAT ALTERNATIVES COULD BE
CONSIDERED?
• Yes, Mike’s decision to apply for the loan is correct because he did not have enough capital to start up the
business
• Yes, the amortization of the loan is right according to (Fiorillo, 2020) Amortization, in the context of repaying
loans, is when the principal and interest are combined into a fixed amount to be paid at a consistent rate (often
monthly) for a predetermined amount of time, in this case it is annually
• Interest on reducing principal, $10,000 as principal payment
• His timeframe to repay the loan was for a short period of time, he should have extended the repayment time,
what if his returns is not as much as he thinks it would be
• He should form a partnership with someone else, or get investors for capital purpose.
 HOW SHOULD THESE POTENTIAL THREATS BE REFLECTED IN
THE FINANCIAL STATEMENTS IF THE VINES HAVE NOT BEEN
DIAGNOSED WITH ANY DISEASE?

• Potential threat is called liability contingency (Agarwal, 2021)

• Reflected as a loss (expense) in the income statement.
• Liability in the balance sheet
• Amount will be estimated depending on the amount of vines to be replaced or treatment needed
• Invest in prevention treatment and include depreciation of vines
• Invest in insurance which will create an insurance expense and credit in cash, returns if any damage incurs will
be debit to cash, credit insurance benefit
 HOW DO THEY CHANGE IF THE VINES ARE
DIAGNOSED WITH SOME DISEASE? EXPLAIN THE
REASONING TO JUSTIFY YOUR ANSWER.

• The estimated figures can now be amended to actual figures in order to have correct
statements.
• Will not be a contingency but an actual loss
 HOW SHOULD MIKE ACCOUNT
FOR THE OAK BARRELS?
• Noncurrent asset under property, plant and equipment
• Depreciated over the years due to its useful life
• Depreciation expense
• When bought credit cash, debit oak barrel (inventory)
• When sold debit cash, credit inventory
• If not paid cash accounts receivable will be debited until cash is received
 ONCE THE BUSINESS START-UP HAS BEEN ANALYZED, WHAT
PROBLEMS WOULD YOU SAY THE COMPANY MAY HAVE IN THE
FUTURE FROM A BUSINESS VIABILITY AND CASH FLOW POINT
OF VIEW?

• Financial risk, market risk, operational risk, liquidity risk, legal risk
• Land on the cash flow statement falls under investing activities (property, plant & equipment, depreciation of
land due to cultivation.
• Vines, cost of planting, fertilizing and water, classified as cash flows from operating activities. Expensive
overhead
• Bank loans classified as cash flows from financing activities, Mike may not be able to pay agreed amount due
low to no profit, need for refinance.
• Negative cash flow from, over-investing, too many customers credited, expensive overhead cost, poor financial
planning
 REFERENCES
• A. (2022, January 20). What are the biggest financial risks that companies face? Soldo.
https://www.soldo.com/en-gb/blog/what-are-the-biggest-financial-risks-that-companies-face/
• Accounting Information in Decision Making | How it Helps Your Business. (2021, August 20). Patriot Software.
https://www.patriotsoftware.com/blog/accounting/accounting-information-decision-making/
• Agarwal, T. (2021, August 23). Contingent Liability Journal Entry. WallStreetMojo.
https://www.wallstreetmojo.com/contingent-liability-journal-entry/
• Averkamp, H. (n.d.). How does the accounting equation stay in balance when the monthly rent is paid? |
AccountingCoach. AccountingCoach.Com. https://www.accountingcoach.com/blog/accounting-equation-expenses
• Bragg, S. (2022, February 17). Journal entries for inventory transactions. AccountingTools.
https://www.accountingtools.com/articles/journal-entries-for-inventory-transactions
• Corporate Finance Institute. (2022, January 27). Capital Lease vs Operating Lease.
https://corporatefinanceinstitute.com/resources/knowledge/accounting/capital-lease-vs-operating-lease/
• Fiorillo, S. (2020, November 17). How to Calculate Interest on a Loan. TheStreet.
https://www.thestreet.com/how-to/calculate-interest-on-loan-14830887
• What Is Business Viability? (2020, November 15). The Balance Small Business. https://www.thebalancesmb.com/what-
is-business-viability-3884327