ACCOUNTING FOR AGRICULTURE
(TOTAL: 13 MARKS)
Eryn Ltd is a forestry company that owns a plantation forest of silver fir trees. Typically, silver fir trees take 20-50 years until they are mature enough to harvest. The trees were planted in 2010. At the start of the 2021 financial year, there were 1,520 silver fir trees on the plantation, each valued at $170. At the end of the financial year, due to growth and new plantings, there were 1,800 silver fir trees on the plantation, each valued at $140. The company also purchased new equipment for $150,000, which was valued at a book value of $130,000 ($26,000 accumulated depreciation) as at the end of 2021. This equipment was revalued to $140,000. In addition, Eryn Ltd paid $20,000 in pruning expenses in 2021.
Required:
a) Record the appropriate journal entries and show your workings. (6 marks)
Accounts
Debit ($) Credit ($)
--------------------------------
Plantation Forest 34,000
Accumulated Depreciation 34,000
(To record the increase in value of silver fir trees)
Equipment 10,000
Accumulated Depreciation 10,000
(To record the revaluation of equipment)
Pruning Expenses 20,000
Cash 20,000
(To record the payment of pruning expenses)
b) Based on your answers in (a), calculate the Earnings Before Interest and Tax (EBIT) and Net Cash Flow from Operations for Eryn Ltd for 2021 and show your workings. (4 marks)
Earnings Before Interest and Tax (EBIT):
EBIT = Revenue - Expenses
Revenue = Value of silver fir trees at the end of the financial year - Value of silver fir trees at the start of the financial year
= (1,800 trees * $140) - (1,520 trees * $170)
= $252,000 - $258,400
= -$6,400
Expenses = Pruning expenses + Depreciation expense
Pruning expenses = $20,000
Depreciation expense = Accumulated depreciation at the end of 2021 - Accumulated depreciation at the start of 2021
= $34,000 - $26,000
= $8,000
Expenses = $20,000 + $8,000
= $28,000
EBIT = -$6,400 - $28,000
= -$34,400
Net Cash Flow from Operations:
Net Cash Flow from Operations = Cash inflows - Cash outflows
Cash inflows = Revenue
= $252,000
Cash outflows = Pruning expenses
= $20,000
Net Cash Flow from Operations = $252,000 - $20,000
= $232,000