Pommery Limited is a large producer of apples, with apple orchards in a number of different locations in southern Ontario and British Columbia. The company had the following transactions on one of its new orchards:
■ Beginning of Year 1: Purchased and planted 40,000 young apple trees that will mature (i.e., begin bearing fruit) in 10 years, at a cost of 53,000,000.
■ Years I to 10: Spent 550,000 on water, 5100,000 on fertilizer, and 5300,000 on labour cultivating the orchard each year for 10 years.
■ Years 11 and on: At maturity, each apple tree produces about 100 kilograms of apples on average. Apple trees are productive for about 40 years. Harvested apples can be sold immediately or put into cold storage for up to six months without significant deterioration in quality'. In addition to water, fertilizer, and labour costs as previously incurred, harvesting also requires an additional cost of 5500,000 per year.
Other information about the orchard: The market price for apples is about S0.50/kg at the farm gate (wholesale and retail prices are considerably higher). Once apple trees have been planted, they are not movable without significant damage to their root system, so there is no market price for planted apple trees. However, based on an analysis of apple production volume, prices, and costs, the company estimates that each mature apple tree is worth about 5500.
Required:
a. Record the journal entries for Years 1, 2, and 11 relating to the above information assuming Pommery uses the cost method for the immature apple trees because the company believes that their fair value is not measurable with reasonable accuracy.
b. Record the journal entries for Years 1,2, and 11 relating to the above information assuming Pommery uses the fair value method for biological assets. Prior to maturity, the company estimates the trees’ value by discounting the mature trees’ value at an annual discount rate of 20%. You may round dollar amounts to the nearest thousand.