Question

Sonya's Christmas Tree Company began operations on April 1, 2016, when Sonya bought a parcel of land on which she intended to grow Christmas trees. The normal growth time for a Christmas tree is approximately six years, so she divided her land into seven plots. In 2016, she planted the first plot with trees and watered, cultivated, and fertilized her trees all summer. In 2017, she planted her second plot with trees and watered, cultivated, and fertilized both planted plots. She continued with her plantings and cultivation every year through 2022, when she planted the last plot. In November 2022, she harvested the first plot of trees that she had planted in 2016. In 2023, she replanted the first plot.

Required:

a.  

Explain when the company should be recognizing revenue. Why is this the case?

b.  

Using your recommended revenue recognition policy, how would Sonya account for all her costs for growing the trees?

c.

Why Sonya split her land into 7 plots, and planted only one plot each year. Why didn’t she plant ALL of the land in 2016?

Answer 1

a) The company should recognize the revenue after the year 2022, This is the time period the revenue could be generated from the investment.

Growing trees revenue is measured, at the point of harvest, at fair value less estimated point-of-sale costs. The point of harvest represents the transition between accounting for agricultural produce assets under IAS 41 and IAS 2. Fair value less estimated point-of-sale costs at the point of harvest forms ‘cost’ for the purposes of IAS 2.

Point-of-sale costs include commissions to brokers and dealers, levies by regulatory agencies and commodity exchanges, and transfer taxes and duties. Point-of-sale costs exclude transport and other costs necessary to get assets to a market (these are taken into account in arriving at fair value.

b)The growing trees cost to be capitalized each year in the balance sheet like a work in progress in construction projects.

c)There could be several reasons for planting each year from 2016-2022

1. Cash flow problems
2. Difficulty in managing all the work if it is carried out in the same year
3. May be expected price increase after year 2022
4. The revenue from one harvesting can be used for future plantation
5. Tax related concern on profit
6. Fear of major loss