Background Abacus Cellars, Inc. ("Abacus") is a small boutique winery in Woodinville, Washington, which has produced hand-crafted red wines since 2006. Woodinville is home to over 100 small independent wineries, many of which have won accolades for the quality of wine they produce. In many popular wine production areas around the world, for example Napa Valley, California, and the Bordeaux region of France, the grapes are typically grown at the site of the winery with the resulting wine referred to as an "Estate" vintage. This is typically not the case in Washington State, where most wine production occurs in the western part of the state, while the grapes are grown by independent vineyards located in the eastern and more agricultural region of Washington state. After purchasing grapes from prominent vineyards in eastern Washington, and producing wine in Woodinville for about 10 years, Ron Bradford, the owner of Abacus Cellars, began to investigate the possibility of planting or purchasing his own vineyard in Eastern Washington. As a small producer, it was sometimes difficult for Ron to secure a steady supply of the specific varietal grapes desired for his red blends. Also, Ron thought there would be a marketing advantage to producing organic wine from grapes farmed with only natural fertilizer and nutrients. Ron had also done some viticulture research through a program at Washington State University and had developed some specific strategies for trellising, pruning and harvesting grapes. After giving some thought to developing his own vineyard, Ron quickly ruled this option out due to the long lead-time before the grapes would produce a positive cash flow. Instead, he found a small 60-acre vineyard for sale in Columbia valley which had an excellent reputation for the quality of its fruit. Ron negotiated a sales price of $3.5 million for the purchase of the vineyard. After talking to his bank about financing options available, Ron was surprised to learn that he would qualify for a lower interest rate if the new vineyard was isolated in a separate entity which was not comingled with the wine production operations of Abacus. By isolating the vineyard in a new entity, he could give the bank a clean first-position security interest in the land, which was independent of the claims any creditors might have on Abacus. Ron also thought about the benefits of keeping the financial results of the vineyard out of the Abacus financial statements. After all, he was just looking for a steady supply of grapes and the ability to control their growth and production. He didn't even really care if the vineyard made money, as long has his cost of grapes didn't increase dramatically from what he had paid in the past. The thought of confusing his current financial statements, which neatly presented the financial results of his winery, by adding both the debt, and the operating activities of the vineyard, was not very appealing to him. Ron's banker told him of an approach that might accomplish what he wanted. The banker explained that if he could find a business partner or someone else that could own the vineyard, then he might not have to consolidate the vineyard into the Abacus financial statements. Further, he could enter into contractual agreements that gave him control of the vineyard operations and access to the fruit that it produced. In return, he would guarantee a small but risk-free profit to the owner of the vineyard. Ron's friend, Kelly Langster, was a real estate investor that seemed familiar with this sort of transaction, and agreed to be the sole equity owner of the Vineyard. At the beginning of 2017 Kelly invested $10,000 in a new Limited Liability Corporation which incorporated under the name of Three Sisters Vineyards, LLC., ("Three Sisters") and registered in Washington State. Soon after incorporation, Three Sisters purchased the vineyard for $3.5 million, using the proceeds of a $2.5 million bank loan, and a separate $1 million loan from Abacus. The bank loan had a 4.5% interest rate, was secured by a first deed of trust on the vineyard real estate, and was guaranteed by Abacus. The Abacus loan had a 5.0% interest rate, and was not collateralized. Related Party Agreements Soon after purchasing the property, Abacus and Three Sisters entered into the following operating agreements: Management Agreement - The management agreement gave Abacus complete control regarding day to day management of the vineyard. Abacus would decide what grapes were planted, how they were trellised, how they were irrigated, and fertilized. Abacus could also dictate when the fruit would be picked, and how the vines would be pruned in the winter. The management agreement also gave Abacus the right to approve any capital expenditures made by Three Sisters. Grape Supply Agreement - The grape supply agreement provided that Abacus would have a first right of refusal to purchase all of the grapes produced by Three Sisters. In the event that Abacus declined to purchase any available grapes, then these could be sold to third parties at a market price. For the grapes purchased by Abacus, the purchase price would be determined pursuant to the terms of a cost-plus pricing agreement, which generally was intended to reimburse Three Sisters for all of their out of pocket costs, plus a small profit. Under the terms of this agreement, Abacus would still be liable to pay for all costs of grape production, even if the harvest was destroyed by fire, disease, or some other act of god. On the other hand, Abacus would enjoy the fruits (pun intended) of any bountiful harvest. Cost-Plus Pricing Agreement - The cost-plus pricing agreement outlined the price that Abacus would pay for grapes produced by Three Sisters. In general terms, this price was set to be equal to the actual out of pocket cost incurred by Three Sisters for grape production, plus a 5% profit. This 5% mark-up would be the profit earned by Kelly Langster as the sole investor in Three Sisters. 2017 Transactions 2017 was a good year for grape harvests, and the vineyard produced 180 tons of grapes as follows: Cabernet Sauvignon 90 tons Merlot 40 tons Malbec 30 tons Petit Verdot 10 tons Cabernet Franc 10 tons Total 180 tons Abacus exercised its right under the Grape Supply Agreement to purchase all of these grapes, at a price of approximately $3,800 per ton, or $1.90 per pound. The specifics of the calculation of this transfer price are included in Exhibit 1. This cost was roughly equal to the purchase price that Abacus had traditionally paid for grapes in the open market. All of the transfer price paid by Abacus to Three Sisters during 2017 was included in Abacus' ending inventory, as Abacus typically aged their red blends for well over one year before they were released, Other than the sale of grapes pursuant to the Grape Supply and Cost-Plus Pricing agreements, the only other intra-entity transactions between Abacus and Three Sisters during 2017 were the debt service payments related to the vineyard loan. During 2017, dividends were paid by Abacus, and Three Sisters, in the amounts of $50,000 and $5,000, respectively. Discussion Questions 1) Does Kelly, the sole investor in Three Sisters LLC, possess any of the following? a. The power to direct the activities of the entity that most significantly impact the entity's economic performance b. The obligation to absorb losses of the entity c. The right to receive expected residual returns of the entity? 2) How much equity does Three Sisters have? Is this amount sufficient for it to finance its activities without additional economic support? 3) Does Three Sisters meet the definition of a VIE pursuant to the language of ASC 810-10-25-38? 4) Who is the primary beneficiary of the activities of Three Sisters? 5) Assuming that Abacus will prepare consolidated financial statements with Three Sisters, how will the non-controlling interest be initially valued, and how will that value be adjusted during 2017? Financial Consolidation Attached are financial statements for Abacus Cellars, Inc. (Exhibit 2), and Three Sisters Vineyards, LLC (Exhibit 3) for the year ended December 31, 2017. Assuming that Three Sisters is identified as a Variable Interest Entity ("VIE"), and that Abacus is the primary beneficiary of this VIE, prepare a consolidated balance sheet and income statement for Abacus Cellars for 2017. The template included as Exhibit 4 maybe be useful for this purpose. Exhibit 1. Calculation of Sales Price of 2017 grapes under the terms of the Cost- Plus Pricing Agreement: Total Cost of Grapes Produced by Three Sisters Total General and Admin. Expense of Three Sisters Total Interest Expense of Three Sisters Total Expenses of Three Sisters Plus 5% Cost-Plus Premium Total Transfer Price for 2017 Grapes $461,818 $29,768 $161,340 $652,926 $32,646 $685,572 ET 2 12/04/18 Abacus Cellars Inc. Profit and Loss Standard January through December 2017 Jan - Dec '17 Ordinary Income/Expense Income Wine Sales - Direct Wine Sales - Wholesale 1,680,000.00 1,440,000.00 3,120,000.00 Total Income Cost of Goods Sold Cost of Wine Sold Total COGS 1,800,000.00 1,800,000.00 1,320,000.00 Gross Profit Expense General and Admin. Expense Sales & Marketing Expense Total Expense 312,000.00 624,000.00 936,000.00 384,000.00 Net Ordinary Income Other Income/Expense Other Income Interest Income - Three Sis... Total Other Income Other Expense Interest Expense -LOC Total Other Expense 49,665.00 49,665.00 50,000.00 50,000.00 Net Other Income -335.00 Net Income 383,665.00 Page 1 12/04/18 Abacus Cellars Inc. Balance Sheet Standard As of December 1, 2018 Dec 1, '18 ASSETS Current Assets Checking/Savings Cash in Bank Total Checking/Savings 333,392.00 333,392.00 Accounts Receivable Accounts Receivable 360,000.00 360,000.00 Total Accounts Receivable Other Current Assets Interest Rec. - Three Sisters Wine inventory - 2017 pro... Wine Inventory - 2016 Pro... Total Other Current Assets 4,111.00 1,800,000.00 900,000.00 2,704,111.00 3,397,503.00 Total Current Assets Fixed Assets Land Winery Building Production Equipment Accumulated Depreciation 400,000.00 2,600,000.00 1,750,000.00 -3,250,000.00 1,500,000.00 Total Fixed Assets Other Assets Loan to Three Sisters, LLC Total Other Assets 986,504.00 986,504.00 5,884,007.00 TOTAL ASSETS LIABILITIES & EQUITY Liabilities Current Liabilities Accounts Payable Trade Accounts Payable Total Accounts Payable Other Current Liabilities Working Capital Line of Cr... Total Other Current Liabiliti... 900,000.00 900,000.00 1,000,000.00 1,000,000.00 Total Current Liabilities 1,900,000.00 Page 1 12/04/18 Abacus Cellars Inc. Balance Sheet Standard As of December 1, 2018 Dec 1, '18 Total Liabilities 1,900,000.00 Equity Common Stock Retained Earnings Total Equity 3,000,000.00 984.007.00 3,984,007.00 TOTAL LIABILITIES & EQUITY 5,884,007.00 Page 2 3 02/28/20 Three Sisters Profit and Loss Standard January through December 2017 Jan - Dec '17 Ordinary Income/Expense Income Grape Sales - Abacus 685,572.00 685,572.00 Total Income Cost of Goods Sold Cost of Grapes Produced Vineyard Mrg. Payroll Property Taxes Day Labor - Picking Equipment Repair & Maint. Payroll Taxes & Benefits Small toos and supplies Organic Fert. & Nutrients Day Labor - Pruning Other Utilities Deprec. Expense - Land Im... Lease expense - vineyard e... Irrigation water Fuel 85,000.00 28,000.00 36,000.00 23,894.00 25,350.00 12,785.00 17,924.00 48,000.00 2,740.00 75,000.00 62,500.00 41,360.00 3,265.00 461,818.00 Total Cost of Grapes Produced Total COGS 461,818.00 Gross Profit 223,754.00 Expense General and Admin. Expense Bookkeeping and Tax service Office supplies & admin exp. Insurance 12,000.00 1,443.00 16.325.00 Total General and Admin. Exp... 29,768.00 Total Expense 29,768.00 193,986.00 Net Ordinary Income Other Income/Expense Other Expense Interest Expense - Mortgage Interest Expense - Abacus 111,675.00 49,665.00 161,340.00 Total Other Expense Net Other Income - 161.340.00 Page 1 02/28/20 Three Sisters Profit and Loss Standard January through December 2017 Jan - Dec '17 Net Income 32,646.00 Page 2 02/28/20 Three Sisters Balance Sheet Standard As of January 1, 2018 Jan 1, '18 ASSETS Current Assets Checking/Savings Cash 75,598.00 75,598.00 Total Checking/Savings 75.598.00 Total Current Assets Fixed Assets Columbia Valley Vineyard Land Land Improvements Trellising Irrigation System Accum. Dep'n - Land Imprs. 2.750,000.00 250,000.00 500,000.00 -75,000.00 Total Land Improvements 675,000.00 Total Columbia Valley Vineyard 3,425,000.00 Total Fixed Assets 3,425,000.00 3,500,598.00 TOTAL ASSETS LIABILITIES & EQUITY Llabilities Current Liabilities Other Current Liabilities Mortgage Interest Payable Interest Payable - Abacus 9,237.00 4,111.00 13,348.00 Total Other Current Liabilities 13,348.00 Total Current Liabilities Long Term Liabilities Mortgage Payable - Columbi... 2nd Mortgage - Abacus Cellars Total Long Term Liabilities 2,463,100.00 986,504.00 3,449,604.00 Total Llabilities 3,462,952.00 Equity Kelly Langster Equity Retained Earnings 10,000.00 27,646.00 Total Equity 37.646.00 Page 1 02/28/20 Three Sisters Balance Sheet Standard As of January 1, 2018 Jan 1, '18 TOTAL LIABILITIES & EQUITY 3,500,598.00 Page 2 EXHIBIT 4 Consolidating Entries: Debit Credit Non-Controlling Consolidated Interest Total Abacus Cellars, Inc; and Three Sisters, LLC Financial Consolidation 31-Dec-17 Abacus Three Cellars Sisters Revenues $ 3,120,000 $ 685,572 COGS $(1,800,000) $ (461,818) Sales & Marketing Expense $ (624,000) General & Admin Expense $ (312,000) $ (29,768) Interest Income $ 49,665 Interest Expense $ (50,000) $ (161,340) Net Income Total $ 383,665 $ 32,646 Allocated to Na Net Income - Controlling Interest Beginning Retained Earnings Plus Net Income Less Dividends Ending Retained Earings $ $ $ $ 650,342 $ 383,665 $ (50,000) $ 984,007 $ 32,646 (5,000) 27,646 Cash $ 75,598 Accounts Receivable 2017 Wine Inventory 2016 Wine Inventory Accrued Interest Receivable Total Current Assets $ 333,392 $ 360,000 $ 1,800,000 $ 900,000 $ 4,111 $ 3,397,503 $ 75,598 Land Land Improvements Building & Equipment Less Accumulated Depreciation Net Fixed Assets $ 400,000 $2,750,000 $ 750,000 $ 4,350,000 $13,250,000) $ (75,000) $ 1,500,000 $3,425,000 Loan Receivable Total Assets $ 986,504 $ 5,884,007 $3,500,598 $ 900,000 Accounts Payable Mortgage Interest Payable Interest Payable - Abacus Working Capital Line of Credit Total Current Liabilities $ $ 9,237 4,111 $ 1,000,000 $ 1,900,000 $ 13,348 Mortage Payable Loan Payable to Abacus $ 2,463,100 $ 986,504 Beginning NCI Ending Na Contributed Capital Retained Earnings Total Liabilities and Equity $ 3,000,000 $ 10,000 $ 984,007 $ 27,646 $ 5,884,007 $3,500,598 Consolidating Journal Entries: 1. To Eliminate Intercompany Sales 2. To Eliminate Intercompany Loan and related interest payable/receivable 3. To Eliminate Intercompany Interest Expense 4. To capitalize grape production cost as inventory Background Abacus Cellars, Inc. ("Abacus") is a small boutique winery in Woodinville, Washington, which has produced hand-crafted red wines since 2006. Woodinville is home to over 100 small independent wineries, many of which have won accolades for the quality of wine they produce. In many popular wine production areas around the world, for example Napa Valley, California, and the Bordeaux region of France, the grapes are typically grown at the site of the winery with the resulting wine referred to as an "Estate" vintage. This is typically not the case in Washington State, where most wine production occurs in the western part of the state, while the grapes are grown by independent vineyards located in the eastern and more agricultural region of Washington state. After purchasing grapes from prominent vineyards in eastern Washington, and producing wine in Woodinville for about 10 years, Ron Bradford, the owner of Abacus Cellars, began to investigate the possibility of planting or purchasing his own vineyard in Eastern Washington. As a small producer, it was sometimes difficult for Ron to secure a steady supply of the specific varietal grapes desired for his red blends. Also, Ron thought there would be a marketing advantage to producing organic wine from grapes farmed with only natural fertilizer and nutrients. Ron had also done some viticulture research through a program at Washington State University and had developed some specific strategies for trellising, pruning and harvesting grapes. After giving some thought to developing his own vineyard, Ron quickly ruled this option out due to the long lead-time before the grapes would produce a positive cash flow. Instead, he found a small 60-acre vineyard for sale in Columbia valley which had an excellent reputation for the quality of its fruit. Ron negotiated a sales price of $3.5 million for the purchase of the vineyard. After talking to his bank about financing options available, Ron was surprised to learn that he would qualify for a lower interest rate if the new vineyard was isolated in a separate entity which was not comingled with the wine production operations of Abacus. By isolating the vineyard in a new entity, he could give the bank a clean first-position security interest in the land, which was independent of the claims any creditors might have on Abacus. Ron also thought about the benefits of keeping the financial results of the vineyard out of the Abacus financial statements. After all, he was just looking for a steady supply of grapes and the ability to control their growth and production. He didn't even really care if the vineyard made money, as long has his cost of grapes didn't increase dramatically from what he had paid in the past. The thought of confusing his current financial statements, which neatly presented the financial results of his winery, by adding both the debt, and the operating activities of the vineyard, was not very appealing to him. Ron's banker told him of an approach that might accomplish what he wanted. The banker explained that if he could find a business partner or someone else that could own the vineyard, then he might not have to consolidate the vineyard into the Abacus financial statements. Further, he could enter into contractual agreements that gave him control of the vineyard operations and access to the fruit that it produced. In return, he would guarantee a small but risk-free profit to the owner of the vineyard. Ron's friend, Kelly Langster, was a real estate investor that seemed familiar with this sort of transaction, and agreed to be the sole equity owner of the Vineyard. At the beginning of 2017 Kelly invested $10,000 in a new Limited Liability Corporation which incorporated under the name of Three Sisters Vineyards, LLC., ("Three Sisters") and registered in Washington State. Soon after incorporation, Three Sisters purchased the vineyard for $3.5 million, using the proceeds of a $2.5 million bank loan, and a separate $1 million loan from Abacus. The bank loan had a 4.5% interest rate, was secured by a first deed of trust on the vineyard real estate, and was guaranteed by Abacus. The Abacus loan had a 5.0% interest rate, and was not collateralized. Related Party Agreements Soon after purchasing the property, Abacus and Three Sisters entered into the following operating agreements: Management Agreement - The management agreement gave Abacus complete control regarding day to day management of the vineyard. Abacus would decide what grapes were planted, how they were trellised, how they were irrigated, and fertilized. Abacus could also dictate when the fruit would be picked, and how the vines would be pruned in the winter. The management agreement also gave Abacus the right to approve any capital expenditures made by Three Sisters. Grape Supply Agreement - The grape supply agreement provided that Abacus would have a first right of refusal to purchase all of the grapes produced by Three Sisters. In the event that Abacus declined to purchase any available grapes, then these could be sold to third parties at a market price. For the grapes purchased by Abacus, the purchase price would be determined pursuant to the terms of a cost-plus pricing agreement, which generally was intended to reimburse Three Sisters for all of their out of pocket costs, plus a small profit. Under the terms of this agreement, Abacus would still be liable to pay for all costs of grape production, even if the harvest was destroyed by fire, disease, or some other act of god. On the other hand, Abacus would enjoy the fruits (pun intended) of any bountiful harvest. Cost-Plus Pricing Agreement - The cost-plus pricing agreement outlined the price that Abacus would pay for grapes produced by Three Sisters. In general terms, this price was set to be equal to the actual out of pocket cost incurred by Three Sisters for grape production, plus a 5% profit. This 5% mark-up would be the profit earned by Kelly Langster as the sole investor in Three Sisters. 2017 Transactions 2017 was a good year for grape harvests, and the vineyard produced 180 tons of grapes as follows: Cabernet Sauvignon 90 tons Merlot 40 tons Malbec 30 tons Petit Verdot 10 tons Cabernet Franc 10 tons Total 180 tons Abacus exercised its right under the Grape Supply Agreement to purchase all of these grapes, at a price of approximately $3,800 per ton, or $1.90 per pound. The specifics of the calculation of this transfer price are included in Exhibit 1. This cost was roughly equal to the purchase price that Abacus had traditionally paid for grapes in the open market. All of the transfer price paid by Abacus to Three Sisters during 2017 was included in Abacus' ending inventory, as Abacus typically aged their red blends for well over one year before they were released, Other than the sale of grapes pursuant to the Grape Supply and Cost-Plus Pricing agreements, the only other intra-entity transactions between Abacus and Three Sisters during 2017 were the debt service payments related to the vineyard loan. During 2017, dividends were paid by Abacus, and Three Sisters, in the amounts of $50,000 and $5,000, respectively. Discussion Questions 1) Does Kelly, the sole investor in Three Sisters LLC, possess any of the following? a. The power to direct the activities of the entity that most significantly impact the entity's economic performance b. The obligation to absorb losses of the entity c. The right to receive expected residual returns of the entity? 2) How much equity does Three Sisters have? Is this amount sufficient for it to finance its activities without additional economic support? 3) Does Three Sisters meet the definition of a VIE pursuant to the language of ASC 810-10-25-38? 4) Who is the primary beneficiary of the activities of Three Sisters? 5) Assuming that Abacus will prepare consolidated financial statements with Three Sisters, how will the non-controlling interest be initially valued, and how will that value be adjusted during 2017? Financial Consolidation Attached are financial statements for Abacus Cellars, Inc. (Exhibit 2), and Three Sisters Vineyards, LLC (Exhibit 3) for the year ended December 31, 2017. Assuming that Three Sisters is identified as a Variable Interest Entity ("VIE"), and that Abacus is the primary beneficiary of this VIE, prepare a consolidated balance sheet and income statement for Abacus Cellars for 2017. The template included as Exhibit 4 maybe be useful for this purpose. Exhibit 1. Calculation of Sales Price of 2017 grapes under the terms of the Cost- Plus Pricing Agreement: Total Cost of Grapes Produced by Three Sisters Total General and Admin. Expense of Three Sisters Total Interest Expense of Three Sisters Total Expenses of Three Sisters Plus 5% Cost-Plus Premium Total Transfer Price for 2017 Grapes $461,818 $29,768 $161,340 $652,926 $32,646 $685,572 ET 2 12/04/18 Abacus Cellars Inc. Profit and Loss Standard January through December 2017 Jan - Dec '17 Ordinary Income/Expense Income Wine Sales - Direct Wine Sales - Wholesale 1,680,000.00 1,440,000.00 3,120,000.00 Total Income Cost of Goods Sold Cost of Wine Sold Total COGS 1,800,000.00 1,800,000.00 1,320,000.00 Gross Profit Expense General and Admin. Expense Sales & Marketing Expense Total Expense 312,000.00 624,000.00 936,000.00 384,000.00 Net Ordinary Income Other Income/Expense Other Income Interest Income - Three Sis... Total Other Income Other Expense Interest Expense -LOC Total Other Expense 49,665.00 49,665.00 50,000.00 50,000.00 Net Other Income -335.00 Net Income 383,665.00 Page 1 12/04/18 Abacus Cellars Inc. Balance Sheet Standard As of December 1, 2018 Dec 1, '18 ASSETS Current Assets Checking/Savings Cash in Bank Total Checking/Savings 333,392.00 333,392.00 Accounts Receivable Accounts Receivable 360,000.00 360,000.00 Total Accounts Receivable Other Current Assets Interest Rec. - Three Sisters Wine inventory - 2017 pro... Wine Inventory - 2016 Pro... Total Other Current Assets 4,111.00 1,800,000.00 900,000.00 2,704,111.00 3,397,503.00 Total Current Assets Fixed Assets Land Winery Building Production Equipment Accumulated Depreciation 400,000.00 2,600,000.00 1,750,000.00 -3,250,000.00 1,500,000.00 Total Fixed Assets Other Assets Loan to Three Sisters, LLC Total Other Assets 986,504.00 986,504.00 5,884,007.00 TOTAL ASSETS LIABILITIES & EQUITY Liabilities Current Liabilities Accounts Payable Trade Accounts Payable Total Accounts Payable Other Current Liabilities Working Capital Line of Cr... Total Other Current Liabiliti... 900,000.00 900,000.00 1,000,000.00 1,000,000.00 Total Current Liabilities 1,900,000.00 Page 1 12/04/18 Abacus Cellars Inc. Balance Sheet Standard As of December 1, 2018 Dec 1, '18 Total Liabilities 1,900,000.00 Equity Common Stock Retained Earnings Total Equity 3,000,000.00 984.007.00 3,984,007.00 TOTAL LIABILITIES & EQUITY 5,884,007.00 Page 2 3 02/28/20 Three Sisters Profit and Loss Standard January through December 2017 Jan - Dec '17 Ordinary Income/Expense Income Grape Sales - Abacus 685,572.00 685,572.00 Total Income Cost of Goods Sold Cost of Grapes Produced Vineyard Mrg. Payroll Property Taxes Day Labor - Picking Equipment Repair & Maint. Payroll Taxes & Benefits Small toos and supplies Organic Fert. & Nutrients Day Labor - Pruning Other Utilities Deprec. Expense - Land Im... Lease expense - vineyard e... Irrigation water Fuel 85,000.00 28,000.00 36,000.00 23,894.00 25,350.00 12,785.00 17,924.00 48,000.00 2,740.00 75,000.00 62,500.00 41,360.00 3,265.00 461,818.00 Total Cost of Grapes Produced Total COGS 461,818.00 Gross Profit 223,754.00 Expense General and Admin. Expense Bookkeeping and Tax service Office supplies & admin exp. Insurance 12,000.00 1,443.00 16.325.00 Total General and Admin. Exp... 29,768.00 Total Expense 29,768.00 193,986.00 Net Ordinary Income Other Income/Expense Other Expense Interest Expense - Mortgage Interest Expense - Abacus 111,675.00 49,665.00 161,340.00 Total Other Expense Net Other Income - 161.340.00 Page 1 02/28/20 Three Sisters Profit and Loss Standard January through December 2017 Jan - Dec '17 Net Income 32,646.00 Page 2 02/28/20 Three Sisters Balance Sheet Standard As of January 1, 2018 Jan 1, '18 ASSETS Current Assets Checking/Savings Cash 75,598.00 75,598.00 Total Checking/Savings 75.598.00 Total Current Assets Fixed Assets Columbia Valley Vineyard Land Land Improvements Trellising Irrigation System Accum. Dep'n - Land Imprs. 2.750,000.00 250,000.00 500,000.00 -75,000.00 Total Land Improvements 675,000.00 Total Columbia Valley Vineyard 3,425,000.00 Total Fixed Assets 3,425,000.00 3,500,598.00 TOTAL ASSETS LIABILITIES & EQUITY Llabilities Current Liabilities Other Current Liabilities Mortgage Interest Payable Interest Payable - Abacus 9,237.00 4,111.00 13,348.00 Total Other Current Liabilities 13,348.00 Total Current Liabilities Long Term Liabilities Mortgage Payable - Columbi... 2nd Mortgage - Abacus Cellars Total Long Term Liabilities 2,463,100.00 986,504.00 3,449,604.00 Total Llabilities 3,462,952.00 Equity Kelly Langster Equity Retained Earnings 10,000.00 27,646.00 Total Equity 37.646.00 Page 1 02/28/20 Three Sisters Balance Sheet Standard As of January 1, 2018 Jan 1, '18 TOTAL LIABILITIES & EQUITY 3,500,598.00 Page 2 EXHIBIT 4 Consolidating Entries: Debit Credit Non-Controlling Consolidated Interest Total Abacus Cellars, Inc; and Three Sisters, LLC Financial Consolidation 31-Dec-17 Abacus Three Cellars Sisters Revenues $ 3,120,000 $ 685,572 COGS $(1,800,000) $ (461,818) Sales & Marketing Expense $ (624,000) General & Admin Expense $ (312,000) $ (29,768) Interest Income $ 49,665 Interest Expense $ (50,000) $ (161,340) Net Income Total $ 383,665 $ 32,646 Allocated to Na Net Income - Controlling Interest Beginning Retained Earnings Plus Net Income Less Dividends Ending Retained Earings $ $ $ $ 650,342 $ 383,665 $ (50,000) $ 984,007 $ 32,646 (5,000) 27,646 Cash $ 75,598 Accounts Receivable 2017 Wine Inventory 2016 Wine Inventory Accrued Interest Receivable Total Current Assets $ 333,392 $ 360,000 $ 1,800,000 $ 900,000 $ 4,111 $ 3,397,503 $ 75,598 Land Land Improvements Building & Equipment Less Accumulated Depreciation Net Fixed Assets $ 400,000 $2,750,000 $ 750,000 $ 4,350,000 $13,250,000) $ (75,000) $ 1,500,000 $3,425,000 Loan Receivable Total Assets $ 986,504 $ 5,884,007 $3,500,598 $ 900,000 Accounts Payable Mortgage Interest Payable Interest Payable - Abacus Working Capital Line of Credit Total Current Liabilities $ $ 9,237 4,111 $ 1,000,000 $ 1,900,000 $ 13,348 Mortage Payable Loan Payable to Abacus $ 2,463,100 $ 986,504 Beginning NCI Ending Na Contributed Capital Retained Earnings Total Liabilities and Equity $ 3,000,000 $ 10,000 $ 984,007 $ 27,646 $ 5,884,007 $3,500,598 Consolidating Journal Entries: 1. To Eliminate Intercompany Sales 2. To Eliminate Intercompany Loan and related interest payable/receivable 3. To Eliminate Intercompany Interest Expense 4. To capitalize grape production cost as inventory