(Hint: If there are issues here that are new, use the conceptual framework to help you support your analysis with solid reasoning.) IC8.1 Grappa Grapes Inc. (GGI)grows grapes and produces sparkling wines. The company is located in a very old area of town with easy access to fertile farmland that is excellent for growing grapes. It is owned by the Grappa family. The company has been in operation for 100 years and a large part of its success lies in the excellent vineyards and unique process for producing vintage wines. About every three years, new farmland is purchased from landowners adjacent to the original farm. New vines are planted on the newly purchased land. Generally, it takes about another three years for the vines to produce quality grapes for wine-making. The winery sits at the edge of a range of hills that are composed of chalk. GGI has dug "caves into the side of the hills at a significant cost and the chalk caves provide the perfect temperature and humidity ple come from all over the country to visit the "caves." As a matter of fact, 25% of the company's revenues are from winery tours The company has had three years where it has managed to produce vintage wines. Vintage wines are of higher quality and sell for a higher price. In addition, they contribute to the prestige of the winnes Because of this success, GGI has started to sell wine "futures." Under the terms of the contract, large whole predetermined future price. A market for trading these contracts now exists for the buyers of the futures salers pay GGI up front and agree to take delivery of a certain number of bottles in two years at 20% off During the year, in anticipation of increasing costs, the company placed a purchase order for a sin nificant number of oak barrels from France. The barrels are used to age the wines. Because of the declin ing value of the dollar during a current economic recession and the demand for wines in general over the past year , the value of the barrels has actually declined to below the price locked into under the purchase commitments. The supplier is confident that this is only a temporary decline in value and that the price of the barrels will increase within the next couple of months. GGI may get out of the purchase commitment either by taking delivery of the barrels at the agreed-upon price or by settling net in cash for the difference between the agreed-upon price and the market price (times the number of barrels ordered). The year has been a very rainy one and some of the very old chalk caves have begun to leak and Deteriorate. One of the caves holding a large number of vintage wines collapsed. It is unclear whether the evine is salvageable. The company's insurance will not cover the expected loss, although GGI has hired its =wyers to challenge this, as it feels that the insurance company should cover the loss. GGI has decided to follow GAAP for the current year's financial statements, as it is planning to go to e bank for a loan. The company's bookkeeper has prepared the draft comparative financial statements or the years ended March 2020 and 2019, but has not dealt with the special issues identified above. GGI's mparative draft financial statements are presented below. Grappa Grapes Inc. Balance Sheet March 31, 2020 (in thousands of Canadian dollars) Assets March 31, 2020 Cash $ 87 Accounts and notes receivable 3,900 Inventory 17,453 Prepaid expense 137 Property, plant, and equipment (net) 15,890 $37,467 Liabilities and Shareholders' Equity Accounts payable and accrued liabilities Unearned revenue $ 5,009 Income taxes payable 3 Current portion of long-term debt Long-term debt 490 Common shares 4,520 Retained earnings 100 March 31, 2019 $ 44 3,256 16,112 124 14,389 $33.925 3.208 $ 4,678 3,320 2 490 5,010 100 20,325 $33,925 24,137 $37,467 Grappa Grapes Inc. Income Statement For the Years Ended March 31 (in thousands of Canadian dollars) 2020 2019 $43,303 26,329 $41,039 24,956 754 686 16,220 10,143 15,397 9,461 Sales Cost of goods sold Depreciation of plant and equipment used in production Gross profit Selling and administration Depreciation of plant and equipment used in selling and administration Interest Operating earnings Other expenses Earnings before income taxes Income taxes Net earnings for the year 410 385 441 352 5,284 21 5,263 1,412 $ 3,851 5,141 15 5,126 1,314 $ 3,812 Instructions Assume the role of the controller and analyze the financial reporting issues