University of Saskatchewan

Edwards School of Business

Department of Accounting

Case Project – Winter 2018

Comm 433 – Section 02

Scenic View Winery Case

 

You have just come back from your meeting with Hector and Sophia Perez, owners of Scenic View Winery, and are organizing your notes. As the new accountant for the winery, the meeting was to bring you up to speed with the company’s history, organization structure and upcoming events/challenges.

 

Scenic View Winery is a family owned and run winery that has been in operation since the 1950’s when Hector’s parents moved into the Okanogan Valley and purchased their first grape orchard. Over the years, the winery has been successful in developing its special brands of chardonnay and ice wines which are marketed in Canada and around the world.

 

In the past number of years, the demand for wine has grown as young adult consumers have begun to discover the health benefits of moderate wine consumption. As a result of this, Scenic View Winery made the choice in January 2014 to expand its operations by purchasing a 75% controlling interest in another family run winery called Setting Sun Vineyards. Setting Sun Vineyards is located in the Niagara region and is known for its premium merlot. Scenic View makes annual purchases of this wine to sell it in its own winery that each year sees thousands of visitors from around the world as they vacation in the picturesque Okanogan Valley.

 

With the political situation changing in the United States and the speculation of increased cross border tariffs, Scenic View wanted to find an American winery that could be used as a distribution center for its wines to the American consumer. It was important to Hector and Sophia to find a winery that shared the same family values and commitment to high quality wine as they possessed. After some searching, Hector found another family run winery located in the Willamette Valley of Oregon state called Redford Family Vineyards. Although a small operation, the Redford Family Vineyard had a reputation of excellence and had an elite pinot noir wine that had won a national award. Bruce and Alice Redford were the sole owners of Redford Family Vineyard and were at the stage of life where they wanted to retire, but none of their children were interested in carrying on the winery. They were open to selling, but still wanted to keep an interest in the winery as a means to supplement their retirement savings. After several meetings to discuss specifics, an arrangement was agreed to that would be beneficial to both parties and subsequently, Scenic View acquired a 90% interest in Redford Family Vineyards as of January 1, 2017.

 

Hector is so happy to have you on board, as this is the first year that they will need to consolidate a foreign owned business and they were impressed with your expertise in handling foreign currency translation. Furthermore, there is potential for another foreign acquisition. During February 2017, Hector and Sophia visited relatives in Argentina. While there, they toured other wineries in the Uco Valley which is known for its premium white wines. The Perez’s were especially impressed with Casa de Lopez Estates and are considering acquiring an interest in that family owned winery sometime in 2018.

 

With all of this history in mind, you have organized your notes and information in the following exhibits:

 

Exhibit 1 – contains the financial statements for Scenic View Winery for the year ended December 31, 2017.

 

Exhibit 2 – contains information and the financial statements for Setting Sun Vineyards for the year ending December 31, 2017.

 

Exhibit 3 – contains information and the financial statements for Redford Family Vineyards for the year ending December 31, 2017.

 

 

General Notes: All companies have a 30% tax rate.

 

Required:

 

Your Submission:

 

Part One: Translation of Redford Family Vineyards (RFV) financial statements for the year ended, December 31, 2017 provided in Exhibit 3. This portion of the case is due on

 

Thursday, February 1, 2018 at 8am.

 

1. Calculate the foreign exchange gain and loss assuming:
   1. The company is integrated and the functional currency is the Canadian dollar.
   2. The company is self-sustaining and the functional currency is the US dollar.

 

2. Prepare an analysis of Redford Family Vineyards functional currency. Your analysis should include a discussion of all the factors you considered to enable you to conclude on the functional currency of RFV and which translation method to use.

 

3. Based on your conclusion above, translate RFV’s financial statements, including the Statement of Financial Position and Statement of Comprehensive Income. Please show all your calculation in Excel.
   1. Where applicable, your worksheet should show three columns: (1) the account value in foreign currency, (2) the exchange rate used, and (3) the translated balance.
   2. For accounts that require a more involved calculation to translate, the supporting calculation for the translated value should be shown in a supporting footnote.

 

Part Two: Based on the Translated financial statements provided, prepare the consolidated financial statements. Consolidated statements will include the Consolidated Statements of Comprehensive Income, Financial Position and Retained Earnings. This portion of the case is due on Thursday, March 29, 2018 at 8am.

 

In Excel:

 

1. Prepare the consolidating journal entries for December 31, 2017. The entries should include an explanation as to their purpose and all needed calculations should be provided.

 

2. Prepare a consolidation worksheet using a multiple column format. The worksheet should include one column for each company reflecting the original statements (in Cdn $), at least two columns (DR/CR) for the consolidation entries and a final column for the consolidated totals.

 

3. Prepare supporting calculations for:

1. consolidated net income attributable to the parent and non-controlling interest,
2. consolidated retained earnings and
3. non-controlling interest on the statement of financial position.

 

Exhibit One– Scenic View Winery

 

Scenic View Winery
Statement of Income and Retained Earnings
12/31/2017
Sales Revenue	33,426,300
Cost of Sales	21,727,095
Gross profit	11,699,205
Expense
Advertising	680,100
Amortization	606,900
Bad debts	240,760
Commissions	1,671,315
Insurance	190,700
Interest and bank charges	215,040
Office expenses	943,120
Professional fees	120,000
Management fee	–
Property taxes	235,200
Repairs and maintenance	873,865
Salaries and wages	2,506,980
Travel and entertainment	312,400
Utilities	581,600
Total Expenses		9,177,980
Net Income before taxes and other income	2,521,225
Foreign Exchange Loss	(40,000)
Dividend Income	348,225
Mgmt Fee revenue	348,500
Interest Revenue	19,500
Income taxes	971,235
Net Income			2,226,215
Retained Earnings – Beginning of year	14,384,700
dividends	800,000
Retained Earnings – End of year	15,810,915

 

 

Scenic View Winery
Statement of Financial Position
12/31/2017
Assets
Current Assets
Cash	–
Accounts Receivable	2,521,300
Inventory	6,386,200
Other Assets	178,275
	9,085,775
Non-current Assets
Equipment
Cost	20,230,200
Accumulated Amortization	(9,818,900)
	10,411,300
Land	881,500
Investment in Setting Sun Vineyard	825,000
Investment in Redford Family Vineyard	3,350,000
Note Receivable Redford Family Vineyard	756,000
	16,223,800
Total Assets	25,309,575
Liabilities
Current Liabilities:
Bank Indebtedness	1,170,100
Accounts Payable	2,771,360
Dividend Payable	400,000
Current Portion LTD	410,600
	4,752,060
Long Term Debt	4,684,200
Total Liabilities	9,436,260
Share Capital	62,400
Retained Earnings	15,810,915
	25,309,575

 

Exhibit Two – Setting Sun Vineyards

 

 

 

1. Scenic View purchased 75% of Setting Sun Vineyard’s common shares on January 1, 2014 for $825,000 cash. Common Stock at acquisition was $157,500 and retained earnings was $740,600. On that date, the FV of the assets equal to NBV with the exception of the following:
   • Equipment had a FV of $2,270,000 and a corresponding NBV of $2,235,000. The estimated life was 6 years on the date of acquisition.
   • A Patent had a FV of $370,000 and a corresponding NBV of $250,000. The estimated life of the patent was 5 years on the date of acquisition.
   • Land has a FV of $1,250,000 and a corresponding NBV of $1,262,500. This land is still owned by Setting Sun. The decrease in fair value was not considered to be an indication of a permanent decline in the value of the land.

 

2. The 2017 ending inventory of Scenic View contains a profit of $180,000 on merchandise purchased from SSV. Scenic View purchased a total of $925,000 from SSV in 2017. The 2017 beginning inventory of Scenic View contained a profit of $130,000 on merchandise purchased from SSV.

 

3. On July 1, 2015, Scenic View sold a piece of equipment to SSV for $760,000. The net book value at the time of the sale was $700,000 (Original cost of $1,050,000 less Accumulated Depreciation of $350,000). The equipment had a remaining useful life of six years at the time of the sale.

 

4. Goodwill is tested for impairment each year. In the years prior to 2017, there was no impairment of goodwill. In 2017, Setting Sun’s goodwill was determined to have a fair market value of $54,400.

 

5. Hector visits Setting Sun Vineyards twice a year to assess business operations, financial position, future strategy which includes setting of sales prices for the upcoming year, etc. Consequently, Scenic View charges Setting Sun Vineyards a management fee. The management fee for 2017 was $95,000.

 

 

Setting Sun Vineyards

 

Statement of Income and Retained Earnings

 

12/31/2017

 

	2016
Sales Revenue	8,925,000
Cost of Sales	5,324,500
Gross profit	3,600,500
Expense
Advertising	417,375
Amortization	147,020
Bad debts	44,625
Commissions	146,370
Insurance	98,730
Interest and bank charges	235,200
Office	316,780
Professional fees	131,250
Management fee	95,000
Property taxes	257,250
Repairs and maintenance	82,030
Salaries and wages	667,080
Travel and entertainment	15,640
Utilities	89,250
Total Expenses	2,743,600
Net Income before taxes and other income	856,900
Income taxes	257,070
Net Income	599,830
Retained Earnings – Beginning of year	964,540
dividends	350,000
Retained Earnings – End of year	1,214,370

 

 

Setting Sun Vineyards
Statement of Financial Position
12/31/2017
Current Assets
Cash						71,400
Accounts Receivable						918,500
Inventory						1,958,190
Other Assets						40,640
						2,988,730
Non-current Assets
PPE
cost						3,675,000
Accumulated Amortization						(1,967,000)
						1,708,000
Land						1,262,500
Patent						250,000
						3,220,500
Total Assets						6,209,230
Liabilities
Current Liabilities:
Accounts Payable						719,350
Current Portion LTD						380,010
						1,099,360
Long Term Debt							3,738,000
Total Liabilities						4,837,360
Share Capital						157,500
Retained Earnings						1,214,370
						6,209,230

 

Exhibit Three – Redford Family Wines

 

1. Redford Family Vineyards (RFV) became a 90% owned subsidiary of Scenic View Winery (Scenic View) as of January 1, 2017. The other 10% is held by the Bruce and Alice Redford to assist in their retirement. Purchase price was US$2,500,000.

 

2. At the time of purchase, all of the assets had a fair value equal to their book values with the exception of the following:

 

Asset		Fair Value
PPE	US$	350,000
Land	US$	1,250,000
Patent	US$	500,000

 

3. Property, Plant and Equipment for RFV had a remaining useful life of 8 years as of January 1, 2017. The Patent’s useful life is expected to be 10 years. RFV uses straight-line depreciation for its PPE, and takes a full year’s depreciation in the year of acquisition.

 

4. During 2017, Hector made frequent trips to Oregon to transition the winery operation from Bruce Redford to Scenic View. Hector first started by hiring an operations manager. Time was then spent training the manager, and existing RFV staff, in Scenic View’s product line and processes. As a result, Scenic View charged RFV US$195,000 in the way of a management fee to compensate for his time. RFV still owes US$25,000 to Scenic View at year end.

 

5. When Hector was considering purchasing RFV, he was aware that much of the equipment would need to be upgraded. Thus, on April 1, 2017, Scenic View loaned US$600,000 to RSV to purchase new equipment, and retire RFV’s long term debt. Interest expense on RFV’s income statement contains US$15,000 of interest paid to Scenic View on the loan.

 

6. RFV purchased new equipment on April 30, 2017 with an estimated useful life of 12 years for US$930,000.

 

7. In early summer, RFV found a buyer for some of the old equipment. The actual sale took place on June 1, where RFV received US$60,000 for equipment that had a cost of US$436,000, and a net book value of US$87,200.

 

8. Scenic View was anxious to get their product to the American consumer. During 2017, Scenic View sold US$2,200,000 of their wine to RFV to sell in the United States. Of this, US$425,000 is still being held in RFV’s inventory at the year end. Scenic View sells to RFV at a 30% gross profit percentage. The inventory was purchase evenly throughout the year. RFV’s ending inventory was purchased when the exchange rate was US1=1.28

 

9. RFV is staffed with employees who live in the Willamette Valley, consequently, with the exception of the management fee paid to Scenic View, the labour is paid for in US dollars.

 

 

10. Due to the strength of the US currency, it was cheaper to buy winery supplies from Canada. Thus, early in 2017, Hector switched RFV’s supplier of wine bottles for its local wine production from an American supplier to the same Canadian supplier used by Scenic View.

 

11. RFV’s sales market primarily includes the United States, with some sales to Europe and Australia. The selling prices for Scenic View’s brand of wines is set by Scenic View. Selling prices for the RFV brands are now jointly determined by Hector and RFV’s operations manager.

 

12. By November 2017, Hector was satisfied with how the transition had gone. The RFV winery was running smoothly and sales had increased significantly from the prior year. Consequently, RFV declared a modest dividend of US$75,000 on December 1, 2017.

 

13. Relevant exchange rates are as follows:

 

 

 

Date

 

Exchange Rate

 

 

January 1, 2017

 

April 30, 2017

 

June 1, 2017

 

Dec 1, 2017

 

Dec. 31, 2017

 

Average Rate

 

Ending Inventory

US$1 = $1.34

 

US$1 = $1.37

 

US$1 = $1.35

 

US$1 = $1.27

 

US$1 = $1.26

 

US$1 = $1.30

 

US$1 = $1.28

 

 

Redford Family Vineyards
Statement of Income and Retained Earnings
12/31/2017
US Dollars		2017	2016
Sales Revenue		6,811,460	4,147,280
Cost of Sales		3,557,006	2,168,540
Gross profit		3,254,454	1,978,740
Expense
Advertising		414,372	207,226
Amortization		151,294	95,473
Bad debts		44,624	54,756
Commissions		306,293	207,864
Insurance		36,587	34,943
Interest and bank charges		19,027	28,170
Office expenses		136,957	133,228
Professional fees		18,314	15,436
Management fee		195,000	–
Property taxes		8,745	8,367
Repairs and maintenance		41,972	38,162
Salaries and wages		953,275	545,392
Travel and entertainment		52,440	41,070
Utilities		81,643	75,671
Total Expenses		2,460,543	1,485,758
Net Income before taxes and other income		793,911	492,982
Foreign Exchange Loss		0
Loss on Sale of Equipment		(27,200)
Income taxes		230,013	147,895
Net Income		536,698	345,087
Retained Earnings – Beginning of year		1,366,481	1,021,394
dividends		75,000	–
Retained Earnings – End of year		1,828,179	1,366,481

 

 

Redford Family Vineyards
Statement of Financial Position
12/31/2017
US Dollars				2017	2016
Assets
Current Assets
Cash				208,525	266,068
Accounts Receivable				78,664	76,443
Inventory				495,937	442,932
Other Assets				10,460	10,460
				793,586	795,903
Non-current Assets
Equipment
Cost				2,021,620	1,527,620
Accumulated Amortization				(739,762)	(937,268)
				1,281,858	590,352
Land				845,000	845,000
				2,126,858	1,435,352
Total Assets				2,920,444	2,231,255
Liabilities
Current Liabilities:
Accounts Payable				139,620	351,954
Dividend Payable				75,000
Current Portion LTD				–	25,948
				214,620	377,902
Due to Scenic View Winery				600,000
Long Term Debt				–	209,227
Total Liabilities				814,620	587,129
Share Capital				277,645	277,645
Retained Earnings				1,828,179	1,366,481
				2,920,444	2,231,255

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