Grappa Grapes Inc. (GGI) grows grapes and produces fine champagne. The company is located in a very old area of town with easy access to fertile farmland that is excellent for growing grapes. It is owned by the Grappa family.
The company has been in operation for 100 years and a large part of its success lies in the excellent vineyards and unique process for producing vintage wines. The winery sits at the edge of a range of hills that are composed of chalk.
GGI has dug "caves" into the side of the hills at a significant cost and the chalk caves provide the perfect temperature and humidity for the maturing wines. All of the vintage wines are produced, aged, and stored in these chalk caves.
People come from all over the country to visit the "caves." As a matter of fact, 25% of the company's revenues are from winery tours.
The company has had three years where it has managed to produce vintage wines. Vintage wines are of higher quality and sell for a higher price. In addition, they contribute to the prestige of the winery. Because of this success,
GGI has started to sell wine "futures." Under the terms of the contract, large wholesalers pay GGI upfront and agree to take delivery of a certain number of bottles in two years at 20% off the pre-determined future price. A market for trading these contracts now exists for the buyers of the futures.
During the year, in anticipation of increasing costs, the entity placed a purchase order for a significant number of oak barrels from France. The barrels are used to age the wines. Due to the declining value of the dollar during a current economic recession and the demand for wines in general over the past year, the value of the barrels has actually declined below the price locked in under the purchase commitments. The supplier is confident that this is only a temporary decline in value and that the price of the barrels will increase within the next couple of months. GGI may get out of the purchase commitment either by taking delivery of the barrels at the agreed-upon price or by settling net in cash for the difference between the agreed-upon price and the market price (times the nun1ber of barrels ordered).
The year has been a very rainy one and some of the very old chalk caves have begun to leak and deteriorate. One of the caves holding a large nun1ber of vintage wines collapsed. It is unclear whether the wine is salvageable. The company's insurance will not cover the expected Joss, although GGI has hired its lawyers to challenge this as it feels that the insurance company should cover the loss. GGI has decided to follow GAAP for the current year's financial statements as it is planning to go to the bank for a Joan.
Assun1e the role of the controller and analyze the financial reporting issues.