Luann and Ella Fredricks are sisters who inherited 20 acres of land. Their neighbor offered to purchase it from them for $400,000, but they declined, deciding to turn it into an orchard, called Luella Orchards. They purchased and planted rootstock (grafted seedlings) for 5 edible apple varietals and expect to harvest their first fruits 3 years after planting the young seedlings. Because apple trees are not self-pollinating, they also planted ornamental crab apple trees as neighboring trees. They planted a total of 100 trees per acre, half to produce apples and half for pollination purposes. The cost of the trees was $20/tree for the first 100 trees and $15/tree for each additional tree. There was an additional $20,000 in transportation costs and they paid $50,000 in labor and machine rental costs for the initial planting. Newly planted trees require weekly watering. The cost of this is $10,000 for the entire orchard in years 1-3 and drops to $5,000 per year once the trees are well established. Additionally, the soil must be enriched with nutrients throughout the entire lives of the trees, at a cost of $10,000 for the orchard. Weed control is important, especially during early establishment. The cost of weed control in the first 3 years (prior to fruit production) will be $5,000 per acre; the costs once the trees begin flower will drop to $2,000 per acre. In the first 5 years of production (years 4-8), the trees are expected to produce 400 fruits per tree; after that, production is expected to increase to 800 fruits per tree. Apple trees may live for a total of 80 years, but rarely produce consumable fruit after their 50th year.

QUESTIONS

I. In years 1-3 (when the trees do not produce usable fruit), using the principles of accrual accounting, how should Luella Orchards (the entity) treat the inheritance of land, weed control costs, the expenditures for the rootstock fertilization (enrichment), Transportation costs, watering costs, planting costs . In addition to discussing AMOUNTS and accounts, provide rationale (a sentence or two) to explain the treatment you propose.

II. In years 4-50, what would Luella do to reflect the costs of watering, enrichment and weed control? How would Luella account for the costs of labor required to harvest the fruit?

III. How would you propose that Luella deplete (depreciate) its trees? Should it treat the fruit producing trees differently than pollination trees? Should it recognize an impairment in year 50? Provide details and rationale.