Case study: MacCloud Winery

Write a paper in APA style that answers all the questions on the instructions provided. Maximum length is 8 pages so please don’t go beyond that. Use Times New Roman, 12pt, and double spaced. Include APA citations and references.

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REV: SEPTEMBER 1, 2005
DAVID F. HAWKINS
ROBERT S. KAPLAN
GREGORY S. MILLER
Accounting at MacCloud Winery
Mike MacCloud had worked in the operations side of a winery for several years. Having built a
strong knowledge of the art of making wine, he had decided to create his own wine label (i.e., brand).
For his label, he planned to grow all of his own grapes. He had identified an ideal plot of five acres of
land in northern California that had most recently been used to grow soybeans. His initial plans were
to lease a nearby building to use as a winery (i.e., a place for processing grapes and fermenting and
aging his wine). However, Mike hoped someday to build his own winery and thus would only plant
on four acres of land. Mike agreed to lease the building for 10 years at $5,000 per year. It was
estimated that the building was worth $32,000 and had a 30-year economic life. The lease contract
Mike signed did not mention any bargain purchase option or that Mike might assume ownership of
the leased building. The interest rate Mike received on his personal bank account was 5%. When
Mike started the business, he opened a checking and savings account for MacCloud Wines Inc. that
paid 6% annual interest. The annual interest rate the bank charged was 10%.
Mike purchased the five acres of land for $250,000. To finance the transaction, Mike borrowed
$180,000 from the bank to be repaid $10,000 annually and a lump sum at the end of three years. In
addition, Mike bought from Australia special grapevines at a cost of $10,000 per acre. The
transportation costs totaled $2,500. Once Mike had the grapevines, he hired extra help to plant the
vines at a cost of $2,000 per acre.
While vines might produce a limited amount of grapes during the first five growing seasons, the
“young vine” grapes could not be used for wine (or any other commercial purpose). Although Mike
would not use these grapes, he would need to spend $1,000 per acre per each of the five years to
fertilize and water the vines. If this were not done, the vines would not produce high-quality grapes
in the future.
Beginning in the sixth growing season the vines would bear a full crop of high-quality grapes.
Some vines continued to produce at this level until their 100th growing season. However, generally
production began to decline after the 75th growing season. Once production declined, the land would
be replanted with a new set of vines. Interestingly, many experts believed that grapes from “old
growth” vines (for the type of vines Mike was planting, a vine was “old growth” after it had been
planted 50 or more growing seasons) made a higher-quality wine. Once the vines began to produce
high-quality grapes, Mike would need to spend $1,500 per acre per year for fertilizing and water. If
he did not provide these nutrients, the grapes produced that year would not be of high enough
________________________________________________________________________________________________________________
Professors David F. Hawkins, Robert S. Kaplan, and Gregory S. Miller prepared this case. HBS cases are developed solely as the basis for class
discussion. The company mentioned in this case is fictional. Cases are not intended to serve as endorsements, sources of primary data, or
illustrations of effective or ineffective management.
Copyright © 2005 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685,
write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be
reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical,
photocopying, recording, or otherwise—without the permission of Harvard Business School.
This document is authorized for use only in ASUNCION GALVEZ’s PER 11919-MBA EN-S1 at Universidad International De la Rioja SA from Sep 2024 to Mar 2025.
105-081
Accounting at MacCloud Winery
quality to produce wine. However, this would not affect the ability of the vines to produce highquality grapes in the future.
Beginning with the first harvest, Mike planned to mature his wine in expensive oak barrels
imported from France, which he believed were required for the production of above-average quality
wine. Each barrel would be used for a period of up to five years to mature the better-quality wine.
Thereafter, the barrel would be used on a one-year-cycle basis to mature the vineyard’s lower-quality
wines. At the end of 15 years, the barrel would be sold as raw material to a manufacturer of charcoal
chips for outdoor grills. Cheaper locally procured barrels with an average expected useful life of 10
years would be used to mature lower-quality wines. At the end of their useful life these barrels
would also be sold to a charcoal-chip manufacturer.
Questions
1.
Should the leased building be accounted for as an asset? Should the agreement to pay lease
rentals be recorded as a liability? Justify your answers. Do not refer to any FASB rules on this
issue.
2.
Record the journal entries to account for the bank loan for all three years. Assume the loan
was made at the beginning of year one and repaid at the end of year three. Assume all interest
payments are made on an annual basis. The $10,000 per year payment is to reduce the loan’s
principal.
3.
Applying the principles of accrual accounting, how should Mike treat the expenditures for the
land, vines, vine planting, fertilizing, and water? Be specific regarding the treatment over
time, including amounts, and the rationale for the treatments.
4.
Without changing your answers to the above questions, consider the following facts:
Mike’s greatest concern is that his vines will contract Phylloxera disease, “Black Goo”
syndrome, or Pierce’s disease. While these conditions do not kill the vines immediately, they
reduce production of quality grapes by approximately 50%. Further, the vines generally die
approximately 10 years after contracting the condition. While Mike will probably be able to
avoid Phylloxera by planting genetically treated vines, incidents of Black Goo and Pierce
disease have been increasing over the last several years and are most dangerous to vines that
are less than three years old.
How should the potential for vine disease be reflected in the financial statements if the
vines have not been diagnosed with any of the diseases? Does this change if the vines are
diagnosed with one of the diseases? Be specific regarding any amounts and the rationale for
these treatments.
5.
How should Mike account for the oak barrels?
6.
How would the transactions in Question 3 and the bank loan be recorded in the winery’s
indirect statement of cash flows?
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This document is authorized for use only in ASUNCION GALVEZ’s PER 11919-MBA EN-S1 at Universidad International De la Rioja SA from Sep 2024 to Mar 2025.
Managerial Accounting (code MBA520)
Student information
Name and surname
Student’s name and surname
Delivery date
01/01/2022
Case study: MacCloud Winery
Main objectives
With this activity you will come to understand the importance of accounting in the
creation and development of a business.
You will learn to understand concepts such as assets, loans, expenses, double entry,
amongst others. The case-study is designed so that the student can make reasoned
decisions based on the information provided in a newly created company dedicated
to winemaking.
Description of the activity and instructions
Scenario:
Mike MacCloud is a young businessman who has decided to start his own wine
business. After years of working in the industry as head of operations he has gained
© MIU City University Miami
deep experience in the business and wants to create his own brand. After doing a
market study, he has identified the ideal location of the land, the building where he
will make the wine, the financing he will need, the transport costs, the necessary
labor and the costs of fertilizer and irrigation of the vines.
The activity will be carried out in four steps: the first is the individual reading of the
activity where the questions to be solved are specified, the second, to follow the
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Managerial Accounting (code MBA520)
teacher’s explanations for a good understanding of them; finally, the presentation of
the conclusions.
You have to answer the following questions:
▸ Do you see the decision by Mike to rent the building compared to the option to
buy as being correct? What accounting and business implications does one option
or the other have?
▸ How should Mike deal with expenditure on land, vineyards, vine planting,
fertilizers, and water? Be specific in the treatment over time, including the
reasoning for a conclusion.
▸ Do you see Mike’s decision to apply for a loan from the bank as being correct?
Does the way to amortize the loan seem correct? What alternatives could be
considered?
Consider the following factors:
Mike’s greatest concern is that his vines could contract Phylloxera disease, “Black
Goo” syndrome, or Pierce’s disease. While these conditions do not kill the vines
immediately, they reduce production of quality grapes by approximately 50 %.
Furthermore, the vines generally die approximately 10 years after contracting the
condition. While Mike will probably be able to avoid Phylloxera by planting
genetically treated vines, incidents of ‘Black Goo’ and Pierce’s disease have been
increasing over the last few years and are most dangerous to vines that are less than
© MIU City University Miami
three years old.
▸ How should these potential threats be reflected in the financial statements if the
vines have not been diagnosed with any disease?
▸ How do they change if the vines are diagnosed with some disease? Explain the
reasoning to justify your answer.
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Managerial Accounting (code MBA520)
▸ Once the business start-up has been analyzed, what problems would you say the
company may have in the future from a business viability and cash flow point of
view?
Maximum length and format
The maximum extension is 1 slide per question. Everyone must enter the document
with the solution of the case into the control sheet (it must be done in PowerPoint).
Assessment criteria
The criteria the case-study solution report will be graded on are:
▸ Reasoning and explanation of the decisions and the objectives of the decisions.
▸ Explanation of the management tools.
▸ Argumentation of key aspects of improvement provided by them.
▸ Description of implementation and evolution over time.
▸ Justification of the choice of these tools and their competitive and strategic
advantages.
Bibliography
The work must include a bibliography, in APA format, that is, with the details of all
the bibliographic references referred to in the case-study solution report. Plagiarism
© MIU City University Miami
should be avoided. Therefore, any quotes must be correctly referenced. If plagiarism
is detected in more than one question, the Coordination of the degree will be notified
as this is considered a serious offense.
Academic criteria should be followed when citing references:
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Managerial Accounting (code MBA520)
▸ All the studies referenced in the text that answer the questions must appear in the
bibliography.
▸ All examples in the bibliography must appear referenced in your text.
You can include an additional bibliography section, where more interesting related
works are contributed as additional reading.
The bibliography should focus on references cited in the text that are used to answer
the questions of the case-study.
© MIU City University Miami
The statement of the case-study is available in the virtual classroom
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