Roatcap Cattle Company

Roatcap Cattle Company, Ltd. (RCC) faces changing the focus of its cattle operations. The options are (1) to maintain the cattle operations at the current level, (2) to expand to 100 cows, (3) to expand to 200 cows, or (4) to get out of the cattle business altogether. RCC currently uses a cash or tax based method to account for its cattle operations, RCC has employed our accounting firm to modify, based on RCC’s approval, its accounting methods for the following four objectives: financial, cost/systems, audit, and tax.

RCC recognizes that the company may require audited GAAP basis financial statements to secure financing for future operations. The following analysis contains our recommendation regarding how to set up GAAP based financial statements, the cost accounting system to support these financials, and the audit issues related to the financials. Additionally, RCC has requested our analysis of tax issues related to the company’s options for its cattle operations.
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RCC has requested the financial experts of our firm to create GAAP based financial statements for 1996. Our primary concern is how to account for the cattle as assets. We have researched the AICPA\'s Audit and Accounting Guide for Audits of Agricultural Producers and Cooperatives (cited as AAG-APC) and developed these recommendations.

Balance Sheet Disclosure
RCC maintains two types of cattle operations—breeding and disposition. Bulls and mature cows produce calves. Female calves are held through maturity, at which point they are also used for breeding. All cattle intended for breeding should be classified as fixed assets. Male calves are sold at six months of age. The male calves held for disposition should be classified as inventory (AAG-APC 26, 29).
RCC would expend too much time accounting for each cattle unit individually. RCC should record the cattle assets in four major asset categories: bulls, breeding cows, immature breeding cows, and male calves. Bulls should be recorded separately from the cows because (1) the market value of each bull is substantially greater than that of each cow, and (2) costs associated with bulls are different than costs associated with cows (AAG-APC). Because there are only three bulls, we suggest that each bull be accounted for individually. However, breeding cows, immature female cows, and male calves should be recorded in three asset pools, rather than each animal recorded as an individual asset.

Cattle Valuation
Total costs of cattle operations should be allocated on a rational basis to establish valuation amounts for young animals. Total costs of cattle operations include costs of feed, veterinary care, medicines, labor, land and pasture rent, and depreciation of the herd and facilities (AAG-APC). The costs of immature breeding cows prior to maturation should be accumulated and capitalized (AAG-APC). The capitalization of these costs parallel the capitalization of self-constructed assets as outlined in FAS 7. Capitalization periods should be determined as outlined in FAS 34 for capitalization of interest. These capitalized costs can be allocated on a per unit basis. Part of the total cattle costs should be allocated to inventory for the male calves. This allocation is subject to the lower of cost or market (AAG-APC).

Income Statement Disclosure
The cost of males calves sold is expensed as cost of goods sold once per reporting period. However, not all calves survive to maturity or disposition. Costs of maintenance and repairs that do not improve or extend asset lives should be expensed in the period incurred and reported on the income statement. These costs can be determined using a rational allocation of total cattle costs. Normal losses may be provided for in an allowance account or included in annual cattle maintenance costs, but abnormal losses of calves should be written off in the period in which the losses occur (AAG-APC).
The breeding animals, bulls and cows, are fixed assets and thus depreciated over their useful lives. Developing female calves are not considered to be in service until they reach maturity, at which time their accumulated costs become subject to depreciation. RCC should depreciate the bulls and mature cows using the straight line method (AAG-APC 82). Depreciation expense, cost of goods sold, and revenue from calf sales should be reported on the income statement.

Other Issues / Concerns
Discrepancy exists for breeding cow and immature breeding cows\' valuation and depreciation. Each developing female calf and her mother is considered to be one