WELLINGTON NURSERIES LTD. Sophia Farrell and Adam Chadwick established Wellington Nurseries Ltd. (WNL) in 2010.

Sophia and Adam became best friends at university from which they both graduated with Masters degrees in Landscape Architecture and Agriculture respectively. They had discussed starting a business that would include landscape design and implementation and greenhouse, nursery, and turfgrass sod production operations. After working in their fields as employees for three years, the opportunity to start their hoped-for business became available, and they purchased an existing greenhouse operation. It is early January 2014, and you have just started as the new accounting manager for WNL. Graham Maher, WNLs controller was able to cope in the early days of the business, but with the growth in companys complexity and volume, he cannot keep up and has been asking Adam & Sophia to hire a qualified accountant. Your first task is to make sure that the financial statements for the year ended December 31, 2013 are in order as the auditors are due to arrive next week. Graham tells you that he has the routine issues under control, but simply doesnt have time to deal with a couple of issues that are new this year: With the ongoing increase in demand for WNLs products and services, Sophie and Adam have been looking for opportunities to expand operations. Noel Pearson, a friend of the Chadwick family, owns land that is suitable for both turfgrass sod production and for nursery production. Noel leased some of his land to WNL (Exhibit I). Nothing related to the lease is recorded in the accounts as yet. WNL entered the commercial market this year. Graham has been too busy to do anything more than account for the costs and revenues as they come in. He wants you to verify that the accounting is correct. Information on the contracts is included in Exhibit II. WNL has made little use of the Pearson property thus far. In order to fully utilize it for production, WNL will need to access additional funding from the bank. The 2013 audited financial statements will be submitted with the additional loan request in March. Youve gathered some basic information on these issues and sit down to write a memo addressing the appropriate accounting.

Copyright The Institute of Chartered Accountants of Ontario (used with permission) as adapted

EXHIBIT I EXCERPTS FROM THE LAND LEASE AGREEMENT Noel Pearson agreed to lease 270 acres of land to WNL for a term of fifteen years. The lease agreement restricts use of the land to setting up and operating a nursery and for turfgrass sod production. At the end of the lease term, Pearson, or his heirs, will either grant a renewal to WNL or will sell the land. If the land is to be sold, WNL has first right to purchase the land at its fair value at that time. The terms of the lease are as follows: Date of the lease: July 1, 2013 Rent for July 1, 2013 through June 30, 2016: $ nil Rent from July 1, 2016 through June 30, 2028: $270,000 annually due on July 1 for twelve years The fair value of the land leased to WNL was $2,052,000 as at July 1, 2013. Costs to restore the land to its current condition as at the inception of the lease if the land is to be sold to a party other than WNL are the responsibility of WNL upon termination of the lease agreement.

Copyright The Institute of Chartered Accountants of Ontario (used with permission) as adapted

EXHIBIT II INFORMATION ON NEW COMMERCIAL CONTRACTS In 2013, WNL entered the commercial market for the first time, successfully bidding on contracts to do the landscaping design and site development for three real estate developments. Each of these contracts requires WNL to design and plant the grounds and to provide two years of maintenance, including replacement of plants and trees as necessary. Sophias bids for these three contracts, which have a total contract revenue value of $280,000, were developed as follows: landscape design fees totaling $40,000 estimated costs totaling $170,000 (external material purchases of $34,000, $61,000 for WNLproduced plants and $75,000 for labour) All of the landscape design fees and most of the materials and labour costs were incurred in the first season. However there are ongoing labour costs for maintenance (weeding, watering, pruning), and some ongoing materials costs for spring annuals and tree/shrub replacement in the second year. All three contracts run from April 1, 2013 through March 31, 2015. So far, Graham has expensed design costs of $40,000, materials costs of $80,000 and labour costs of $67,000. He indicated that materials costs were roughly in line with budget, while labour was running higher than expected. An additional $15,000 of labour is expected to be incurred before the contracts are complete. WNL bills the contracts in equal quarterly amounts. All three clients have promptly paid their bills within 30 days. Sophia is not planning to bid on additional contracts this year because of the losses (totaling $82,000) incurred to date.

Copyright The Institute of Chartered Accountants of Ontario (used with permission) as adapted