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 WI’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 WI’s wine in the store at the winery, at the LCBO, or starting in

2020 through WI’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 company’s web domain.

5.

A customer can become a member of WI’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, WI’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.