Grenell Farm

FINANCIAL ACCOUNTING S70

Albertine Cabanero

Elvira Castro

Janine de Chavez

Clara Mabbayad

Alexander John Sibal

Racquel Tantengco
 I. BACKGROUND

Early in 2010, Denise Grey was notified by a lawyer that her recently deceased uncle had
willed her the ownership of a 2000-acre wheat farm in Iowa. The lawyer asked whether Grey
wanted to keep the farm or sell it.

II. CASE ANALYSIS

A. INCOME STATEMENT & BALANCE SHEET AS OF 2009

There are three different methods of recognizing revenue for Grenell Farm:
1. Sales (Delivery Method) recognizes revenue once product is delivered
2. Collection Method recognizes revenue once payment is collected. Thus, accounts
receivable are zero.
3. Production Method recognizes revenue at time of production/harvest. Ending inventory is
zero.

Below are the income statement and balance sheet of Grenell Farm using the three
methods.

Grenell Farm
Income Statement
As of December 31, 2009

Methods
Sales Collection Production
Sales $522,000 $462,400 $614,100
Less: Cost Goods Sold
Beginning Inventory $0 $0 $0
Production
Seed $11,130 $11,130 $11,130
Fertilizer and Chemicals $61,950 $61,950 $61,950
Machinery costs, fuels & repairs $22,470 $22,470 $22,470
Part-time labor and other costs $12,180 $12,180 $12,180
Total Production Costs $107,730 $107,730 $107,730

Ending Inventory ($15,390) ($25,650) $0

Total Cost of Goods Sold $92,340 $82,080 $107,730
Gross Margin $429,660 $380,320 $506,370
Less: Expenses
Salaries and wages $72,500 $72,500 $72,500
Insurance $4,500 $4,500 $4,500
Taxes $32,500 $32,500 $32,500
Depreciation $28,500 $28,500 $28,500
Other expenses $45,000 $45,000 $45,000
 Total Expenses $183,000 $183,000 $183,000
Net Income $246,660 $197,320 $323,370

Grenell Farm
Balance Sheet
As of December
31, 2009

Methods
Sales Collection Production
Assets
Current Assets
Assets $30,900 $30,900 $30,900
Account Receivables $59,600 $0 $151,700
Inventory $15,390 $25,650 $0
Total Current Assets $105,890 $56,550 $182,600

Non Current Assets

Land $375,000 $375,000 $375,000
Building and Machinery $112,500 $112,500 $112,500
Total Non Current
Assets $487,500 $487,500 $487,500
Total Assets $593,390 $544,050 $670,100

Liabilities
Notes and Accounts Payable $33,000 $33,000 $33,000
Owner's Equity
Owner's Equity $7,500 $7,500 $7,500
Paid in Capital $450,000 $450,000 $450,000
Retained Earnings* $102,890 $53,550 $179,600
Total Liabilities and
Owner's Equities $593,390 $544,050 $670,100

*Assuming there was no

record of retained earnings
and it was known that
Jeremiah Grenell withdrew
all of the farm's earnings in
the last few years in order
to continue the lifestyle he
was accustomed to in
Florida.
 Methods
Sales Collection Production
Beginning Retained Earnings $0.00 $0.00 $0.00
Plus: Net Income $246,660.00 $197,320.00 $323,370.00
Less: Ending Retained Earnings ($102,890.00) ($53,550.00) ($179,600.00)
Withdrawals $143,770.00 $143,770.00 $143,770.00

Shows that withdrawals are equal for the three methods.

B. Based on cost principle, the value of asset should be at cost. However, since Grey is
considering the economic gain, we can consider the market value of land.
The original cost is $187.50 an acre (P375,000/2000). Economic value based on estate
tax purposes is $1,050/acre. Thus, value of land is S2,100,000.
If a buyer offers value of $225,000 for 100 acres of the farm. We assess how this will
affect the financial statements for the economic gain represented by the appreciation in
land values.

Value of 100 acres $225,000

Value of remaining 1900 acres $$1995,000

Total Value $2,220,000

Considering economic value, land is priced at $2.2million.

C. Grey wants to know if she retains ownership of the land. We will consider the
production methods to value the net income and its owners equity and at the same
time, consider the gain from the appreciation of the value of land. We used the
production method to recognize the value of the land which is $323,370 net income. The
value of its owners equity is at $637,100.

Net Income $323,370

Total Owners Equity 637,100

Markup value of Land $1,845,000

Note: Original Cost of Land/acre: S187.50
Value of 100 acre: $2,250/acre
($225,000/100)
Value of 900 acre: S1,050(based on
appraisal value)

Total $2,805,470

If she retains the land, she has relatively higher gains of $2,805,470.