Case Question:
Winery Inc.
Winery Inc. (WI) is a private corporation formed in 2020. Prior to 2020, WI had been operating
as a partnership by the Verity family. Due to their success and desire to expand, they have made
the decision to incorporate so that they will have additional sources of financing. They are just
establishing their accounting policies for their first year
-end as a corporation. Their previous
financial statements as a partnership were used for filing their tax retur
ns and management
purposes. They were not audited or reviewed. WI is considering adopting GAAP for public
companies to be comparable with its competitors.
WI grows grapes and produces wines in Ontario. The company also produces beer, spirits, and
juices.
It has a small store on the property where staff operate winery tours and sell wine. WI
incorporated to raise additional capital to expand the operations by planting additional vines and
expanding operations to produce organic wines.
In 2020, WI obtained a
bank loan with Big Bank. Previously, when WI operated as a partnership,
the bank had provided a line of credit, and the owners had provided personal guarantees. The
loan now has the personal guarantees removed, and instead the bank requires annual audited
financial statements and has a financial covenant that stipulates a minimum current ratio.
You have recently been hired to develop new accounting policies for WIâ€
s 31 December year
–
end. Previously, the partnership used the cash basis of accounting. The owners know this will no
longer be suitable for their corporation. You have been asked by the owners to discuss
alternatives and provide recommendations on the appropriate accounting policies for events
below that have occurred during 2020.
1.
WI spent $500,000 expanding its operations by planting new vines that were purchased in
France. These vines are certified as being organic and will produce a red wine. The vines
will produce grapes indefinitely as long as they are properly taken care of during the
year.
2.
WI obtained a winery licence during 2020
from the Ministry. This licence allows WI to
distribute wine in Western Canada. The licence does not have an expiry date.
3.
Wine can take over two years to mature. Premium wine is stored in oak casks to age.
4.
A c
ustomer can purchase WIâ€s wine in the store at the winery, at the LCBO, or starting in
2020 through WIâ€s new website. WI invested $70,000 in acquiring software for its
computer system. WI spent an additional $10,000 on the following costs to develop the
we
bsite
—consulting fees to a website consultant, graphics design, and costs for training
employees on the use of a website and for the companyâ€s web domain.
5.
A customer can become a member of WIâ€s new wine club. To join the club, a $200
annual fee is paid. In return, the member is shipped one bottle of red wine and one bottle
of white wine a month. If a member likes the wine, it can be ordered by the case through
the website at a 10% discount. As part of the annual fee members receive a free
subscription to
Wine Digest
, which could be purchased on its own.
6.
Early in 2020, WIâ€s winemaker in error added too much yeast to the wine in the vats
(large containers that the juice ferments in to make the wine). Initial tasting of samples
from those vats indicates that the wine is spoiled. WI fired the winemaker, since the wine
had a market value of $1 million. The winemaker has sued WI for wrongful dismissal.
7.
Until the new vines are producing crops in 2021, WI entered into an agreement to
purchase grapes from Chile for production. To protect itself from foreign exchange
fluctuations, WI entered into a hedge. If hedge accounting was elected, this would be a
cash flow hedge.
8.
WI received a forgivable loan of $1 million. This loan is forgiven if WI hires five
additional empl
oyees for the next two years and produces a specified amount of organic
fruit each season for use in its organic wines.
Required:
Prepare the requested report.
Assume that WI will adopt accounting standards for public
enterprises
Note:
1. Each case should be typed, double-
spaced on letter
-size paper using one-
inch
margins.
2. Maximum
length is 5 pages or approximately 1,000 words, exclusive of tables,
appendices (3 page max) and references and 12-
point Arial font or equivalent.
A maximum of 8 pages must be submitted in Quercus.
3. Please ensure you use the
CPA Way
of case analysis by quoting the specific CPA
handbook section and tied to case facts. Bonus marks will be awarded if you properly
quot
e specific sections.
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