intermediate accounting 1

Case

WINERY INC.

Winery Inc. (WI) is a private corporation formed in 2018. Prior to 2018, 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 returns 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 2018, 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 WIs 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 2018.

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 license during 2018 from the Ministry. This license allows WI to distribute wine in Western Canada. The license 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 customer can purchase WIs wine in the store at the winery, at the LCBO, or starting in 2018 through WIs 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 websiteconsulting fees to a website consultant, graphics design, and costs for training employees on the use of a website and for the companys web domain.

5. A customer can become a member of WIs 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 2018, WIs 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 2019, 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 employees for the next two years and produces a specified amount of organic fruit each season for use in its organic wines.

Required:

Prepare the report, assuming that WI prepares their financial statements in accordance with IFRS.