Case Study

Blue Wave Fish Traders

Case Study

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Prepared by Lee-Ann Pitts 1. The rented building should not be considered an asset as the lease does not constitute ownership or confer rights of realisable value. The lease therefore constitutes a liability to Mr Smith, irrespective of the fact that the value of the lease will not appear in the company’s financial statements, as it places an ongoing legal obligation on him to pay rent.

2. Bank loan journal entries as follows:

Details | Dr | Cr |

Current account | 180,000 | |

Bank loan | | 180,000 |

Loan advanced | | |

| | |

Interest paid | 18,000 | |

Bank loan | | 18,000 |

Interest on loan raised @ 10% (YR1) | | |

| | |

Bank loan | 28,000 | |

Current account | | 28,000 |

Payment on loan | | |

| | |

Interest paid | 17,000 | |

Bank loan | | 17,000 |

Interest on loan raised @ 10% (YR2) | | |

| | |

Bank Loan | 27,000 | |

Current account | | 27,000 |

Payment on loan | | |

| | |

Interest paid | 16,000 | |

Bank loan | | 16,000 |

Interest on loan raised @ 10% (YR3) | | |

| | |

Bank loan | 26,000 | |

Current account | | 26,000 |

Payment on loan | | |

| | |

Bank loan | 150,000 | |

Current account | | 150,000 |

Bank loan settled | | |

3. The cost of the land, vines, transport costs and labour for planting should be capitalised as an asset as they represent the future production capacity which will yield returns over a long period and have a realisable value. I would capitalise the cost of water and fertiliser during the first 5 years as expenditure necessary to bring the vineyard to it’s highest productive capacity and will yield increased returns over the life of the vineyard. From year 6 onwards however these costs should be expensed as normal as they will become current operational expenditure.

4. The ongoing risks of agriculture cannot be addressed...