Case 3 - Case 9-2
Student Number: 212222576
Bearer Plants
Grapes and grape vines are biological assets, necessitating the fair value model if they can be accurately valued (as this is WI’s business, this is the case).
Grape vines are bearer plants, and are exempt from fair-value accounting. Thus, the grapes and grape vines must be recorded separately. Thus, grape vines would be recorded at cost, and depreciated during their useful life.
While growing, any increases/decreases in the fair value of the grapes would affect earnings, resulting in gains/losses to NI. Vines are long-term assets as well, and their depreciation would not affect the current ratio. However, depreciation would be recorded as an expense, which wouldn’t normally be under …show more content…
Thus, revenue can only be recognized when the bottles of wine and magazine subscription have been sent and received by the customer. Revenue can either be recognized in its entirety when both deliverables have occurred, or over time as each deliverable is received. In the latter case, revenue must be apportioned between each item and recognized as they are delivered. In either case, an unearned revenue account must be established when a subscription is made (which is a current liability), likely on a yearly basis , and recognized gradually. During the time the unearned revenue has been unrecognized, it will negatively affect the current ratio. Tax liability is based on an accrual method for business income, and will mirror this …show more content…
This could (see below) result in a current liability, decreasing the current ratio but only for the current period and only by 500,000 (as half of the loan can be recognized for this year). Depending on the operating cycle, this latter 500k will probably be a current liability, a wine company is likely to have a longer than average operating cycle (evidenced by wine taking up to two years to mature) so a liability due next year is still a current liability.
It is worth noting that forgivable loans from government must be included in income, barring exceptions (such as if it is used to acquire capital property), at which point an election could be made to offset the inducement payment against the capital cost of the property. I would strongly suggest doing this to prevent being taxed in a higher tax bracket (as a 1 million dollar grant is guaranteed to be taxed at the highest tax
Student Number: 212222576
Bearer Plants
Grapes and grape vines are biological assets, necessitating the fair value model if they can be accurately valued (as this is WI’s business, this is the case).
Grape vines are bearer plants, and are exempt from fair-value accounting. Thus, the grapes and grape vines must be recorded separately. Thus, grape vines would be recorded at cost, and depreciated during their useful life.
While growing, any increases/decreases in the fair value of the grapes would affect earnings, resulting in gains/losses to NI. Vines are long-term assets as well, and their depreciation would not affect the current ratio. However, depreciation would be recorded as an expense, which wouldn’t normally be under …show more content…
Thus, revenue can only be recognized when the bottles of wine and magazine subscription have been sent and received by the customer. Revenue can either be recognized in its entirety when both deliverables have occurred, or over time as each deliverable is received. In the latter case, revenue must be apportioned between each item and recognized as they are delivered. In either case, an unearned revenue account must be established when a subscription is made (which is a current liability), likely on a yearly basis , and recognized gradually. During the time the unearned revenue has been unrecognized, it will negatively affect the current ratio. Tax liability is based on an accrual method for business income, and will mirror this …show more content…
This could (see below) result in a current liability, decreasing the current ratio but only for the current period and only by 500,000 (as half of the loan can be recognized for this year). Depending on the operating cycle, this latter 500k will probably be a current liability, a wine company is likely to have a longer than average operating cycle (evidenced by wine taking up to two years to mature) so a liability due next year is still a current liability.
It is worth noting that forgivable loans from government must be included in income, barring exceptions (such as if it is used to acquire capital property), at which point an election could be made to offset the inducement payment against the capital cost of the property. I would strongly suggest doing this to prevent being taxed in a higher tax bracket (as a 1 million dollar grant is guaranteed to be taxed at the highest tax