Accounting at MacCloud Winery

Accounting decisions
Case: Accounting at
MacCloud winery

Methodological note
We want to distinguish between
 Economic “facts/data”
– No need to discuss them
– Taken for granted

 Accounting “issues”
– The topic of our discussion
– We will follow the order of the case questions

Accounting at McCloud Winery

The MacCloud winery
 5 acres of land
 One building

Accounting at McCloud Winery

1: The building
 Worth $32,000
 Leased for 10 years for $5,000 per year
 How do we account for it?

Accounting at McCloud Winery

Accounting for a lease
 Capital lease
– Treated as an acquisition of the asset financed by a loan

 Operating lease
– Treated as a rental agreement

 A leas is a capital lease if
1.
2.
3.
–
–

There exists a bargain purchase option at the end of the lease
The lease covers more than 75% of the economic life of the asset
The PV of future lease payments is at least 90% of the market value of the asset
Only one condition is sufficient
In this case condition 3. tells that that it should be treated as a capital lease (see related excel file)
Accounting at McCloud Winery

2: The bank loan





$180,000
3 years maturity
$ 10,000 annual repayment
10% interest rate

Accounting at McCloud Winery

Accounting for the loan
 See the related excel file

Accounting at McCloud Winery

3: The land and the grapevines
 The vineyard is certainly an asset
 Cost of this asset?
 Depreciation?

Accounting at McCloud Winery

Cost (initial value) of an assets
 You can include in the cost (initial value) of an assets all the costs necessary to put the asset into its productive use
 So, in this case, it can be argued that all the expenses incurred in the first 5 years are part of the initial cost of the asset
 Also the transportation cost can be included in the initial cost of the asset
Accounting at McCloud Winery

4: Vines’ diseases
 Highly damaging event
