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November, 1997 A – 1 APPENDIX A: EXAMPLE FINANCIAL STATEMENTS This Appendix contains an example of financial statement formats that are intended to assist the reader in the interpretation of the Report. It is impossible for the FFSC to offer example financial statements that would be directly usable by many of the diverse enterprises and operations in American agriculture. Therefore, we have tried to illustrate in this set of statements one way in which the reporting standards included in this document can be implemented. The first set of financial statements included in this Appendix illustrates a business-only set of financial statements in which the preparer has chosen to reflect the business portion of current and deferred income taxes on the financial statements. The second, partial set of financial statements illustrates one format for a “combined” set of financial statements for the same entity. Since most of the balance sheet schedules as well as the income statement would not change, only those pages of the financial statements that are different are reproduced. While GAAP-based financial statements may be preferable, when such information is not available, alternative financial statement formats can be used. The FFSC expects numerous formats of financial statements will comply with the intent of the standards and, in practice, the exact appearance of any given format may be different from the statements here. For example, balance sheet presentation of cost basis values of capital assets can be disclosed in a supporting schedule (as shown here) or in a double column format or in parenthetical disclosure on the face of the financial statement. Certain preparers may choose to continue to utilize a three category balance sheet in the near term. The level of detail shown on the face of the financial statements may also vary based on the type of enterprise and overall complexity of the operation. However, we do feel that the attached statements represent, in most cases, an example of the amount of detail that would be acceptable. The FFSC has included supporting schedules for the balance sheet — expecting that users would also utilize this type of format in some cases to provide additional detail on the income statement. The absence of such schedules for the income statement in this example is not meant to imply that they are not appropriate. Finally, sample text for key notes to the financial statements have not been included. However, such notes are a critical component of the overall package and, at a minimum, should include: 1. Description of basic accounting policies, including practices for revenue and expense recognition procedures and depreciation/amortization methods. 2. Disclosure of the source for determination of market values for capital assets. 3. Disclosure of the terms of capital lease obligations. 4. Disclosure of commitments of the operation, including minimum payments due within the next twelve months and in total for all operating leases. 5. Disclosure of any contingent liabilities. November, 1997 A – 2 JOHN AND MARY FARMER (Farm Business Only) BALANCE SHEET AS OF 12/31/X1 AND 12/31/X2 12/31/X2 12/31/X1 12/31/X2 12/31/X1 ASSETS LIABILITIES Cash 101,743 $ 113,421 $ Accounts Payable 6,578 $ 0 $ Inventories (Schedule 1) 180,581 149,557 Notes Due Within One Year (Schedule 5) 102,488 113,934 Accounts Receivable 14,300 11,835 Current Portion of Term Debt (Schedule 5) 23,458 21,328 Prepaid Expenses 3,500 3,500 Accrued Interest (Schedule 5) 14,107 18,113 Cash Investment in Growing Crops 21,000 21,000 Income Taxes Payable 6,894 4,134 Other Current Assets 890 890 Current Portion - Deferred Taxes 93,187 68,408 (Schedule 6) Other Accrued Expenses 0 0 Other Current Liabilities 0 0 Total Current Assets 322,014 300,203 Total Current Liabilities 246,712 225,917 Breeding Livestock (at market) 16,000 14,000 Non-Current Portion -- Notes Payable 25,786 36,646 (Schedule 2) (Schedule 5) Machinery and Equipment (at market) 199,500 199,500 Non-Current Portion -- Real Estate Debt 166,180 178,779 (Schedule 3) (Schedule 5) Investments in Capital Leases 0 0 Non-Current Portion -- Deferred Taxes 157,657 149,980 Investments in Other Entities 0 0 (Schedule 6) Investments in Cooperatives 27,650 27,650 Other Non-Current Liabilities 0 0 Real Estate (at market) (Schedule 4) 517,750 517,750 Buildings and Improvements (at market) 5,000 5,000 (Schedule 4) Other Assets 0 0 Total Non-Current Assets 765,900 763,900 Total Non-Current Liabilities 349,623 365,405 Total Liabilities 596,335 $ 591,322 $ Retained Capital 194,330 $ 188,674 $ Valuation Equity 297,249 284,107 OWNER EQUITY 491,579 472,781 Total Assets 1,087,914 $ 1,064,103 $ Total Liabilities and Owner Equity 1,087,914 $ 1,064,103 $ November, 1997 A – 3 JOHN AND MARY FARMER (Farm Business Only) BALANCE SHEET SUPPLEMENTARY SCHEDULES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 1 — INVENTORIES 12/31/X2 12/31/X1 Commodity Units Number Price/Unit Total Number Price/Unit Total Corn for Sale Bushels 32,560.00 2.30 $ 74,888 $ 29,691.60 2.30 $ 68,291 $ Feed Supplement Tons 5.20 335.00 1,742 4.30 335.00 1,441 Mkt Cattle/Heifers/1000 lbs CWT 45.00 68.00 30,600 45.00 68.00 30,600 Mkt Cattle/Steers/1150 lbs CWT 57.00 70.00 45,885 35.00 70.53 28,389 Feeder Cattle/Steers/850 lbs CWT 40.00 78.00 26,520 30.00 78.00 19,890 Diesel Fuel Gallons 860.00 1.10 946 860.00 1.10 946 Total Inventories 180,581 $ 149,557 $ SCHEDULE 2 — BREEDING LIVESTOCK As of 12/31/X2 As of 12/31/X1 Base Value Total Total Book Mkt Value Total Base Value Total Total Book Mkt Value Total Type Number Per Head Cost/Base Acc Depr Value Per Head Market Number Per Head Cost/Base Acc Depr Value Per Head Market Purchased Breeding Stock Angus Bulls 3 N/A 7,400 $ 4,200 $ 3,200 $ 2,000 $ 6,000 $ 2 N/A 4,600 $ 2,600 $ 2,000 $ 2,000 $ 4,000 $ Raised Breeding Stock Stock Cows 25 500 12,500 N/A 12,500 400 10,000 20 500 10,000 N/A 10,000 500 10,000 Total Breeding Livestock 28 19,900 4,200 15,700 N/A 16,000 22 14,600 2,600 12,000 N/A 14,000 SCHEDULE 3 — MACHINERY AND EQUIPMENT As of 12/31/X2 As of 12/31/X1 Type Cost Acc Depr Net Book Mkt Value Cost Acc Depr Net Book Mkt Value Vehicles 32,500 $ 27,688 $ 4,812 $ 18,000 $ 32,500 $ 22,486 $ 10,014 $ 18,000 $ Machinery 248,759 206,577 42,182 175,000 229,969 180,245 49,724 175,000 Livestock Equipment 45,653 31,225 14,428 6,500 45,653 26,456 19,197 6,500 Total Machinery and Equipment 326,912 $ 265,490 $ 61,422 $ 199,500 $ 308,122 $ 229,187 $ 78,935 $ 199,500 $ SCHEDULE 4 — REAL ESTATE AND IMPROVEMENTS As of 12/31/X2 As of 12/31/X1 Mkt Value Total Mkt Value Total Type Acquired Cost Acc Depr Net Book Per Acre Market Cost Acc Depr Net Book Per Acre Market Land Johnson Farm -- 235 Acres 1975 152,750 $ 152,750 $ 1,250 $ 293,750 $ 152,750 $ 152,750 $ 1,250 $ 293,750 $ Section 18 Farm -- 160 Acres 1963 32,000 32,000 1,400 224,000 32,000 32,000 1,400 224,000 Improvements Feedlot 1981 78,000 52,000 26,000 5,000 78,000 47,900 30,100 5,000 Total Real Estate and Improvements 262,750 $ 52,000 $ 210,750 $ 522,750 $ 262,750 $ 47,900 $ 214,850 $ 522,750 $ November, 1997 A – 4 JOHN AND MARY FARMER (Farm Business Only) BALANCE SHEET SUPPLEMENTARY SCHEDULES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 5 — DEBT SCHEDULE – 19X2 During 19X2 As of 12/31/X2 Original Original Interest Principal Payment Interest Est. Amount of Current Principal Non-Current Total Accrued Creditor Purpose Term Inception Maturity Amount Paid(Cash) Paid Date Rate Next Payment (Within 12 Mo) Principal Principal Interest Notes Due Within One Year FNB of Anytown* Operating 1 Yr 3/1/19X2 3/1/19X3 * 8,458 $ 87,000 $ 2/28/90 12%V N/A 75,895 $ 0 $ 75,895 $ 3,549 $ CCC Inventory 9 Mo 10/15/19X2 5/1/19X3 26,593 $ 1,472 35,644 5/15/90 7.75%V N/A 26,593 0 26,593 562 Total Notes Due Within One Year 9,930 122,644 102,488 0 102,488 4,111 Non-Real Estate Debt FNB of Anytown Machinery 5 Yr 2/1/19X0 2/1/19X5 $55,000 5,561 9,697 15-Feb 12%V 15,258 $ 10,860 25,786 36,646 3,843 Total Non-Real Estate Debt 5,561 9,697 15,258 10,860 25,786 36,646 3,843 Real Estate Debt FLBA of CountySeat Home Farm 20 Yr 19W5 20Y5 $120,000 12,174 3,391 15-Nov 11.5%V 15,565 3,781 98,691 102,472 1,485 ABC Insurance Johnson Farm 20 Yr 19V9 20X9 $150,000 5,918 8,241 15-Feb 7.0%F 14,159 8,817 67,489 76,306 4,668 Total Real Estate Debt 18,092 11,632 29,724 12,598 166,180 178,778 6,153 Grand Total -- All Debt 33,583 $ 143,973 $ 44,982 $ 125,946 $ 191,966 $ 317,912 $ 14,107 $ * This note is a revolving line of credit, with a total available balance of $150,000 SCHEDULE 5 — DEBT SCHEDULE – 19X1 During 19X1 As of 12/31/X1 Original Original Interest Principal Current Principal Non-Current Total Accrued Creditor Purpose Term Inception Maturity Amount Paid(Cash) Paid (Within 12 Mo) Principal Principal Interest Notes Due Within One Year FNB of Anytown* Operating 1 Yr 3/1/19X2 3/1/19X3 * 8,458 $ 52,000 $ 78,290 $ 0 $ 78,290 $ 6,120 $ CCC Inventory 9 Mo 10/15/19X2 5/1/19X3 26,593 $ 0 0 35,644 0 35,644 427 Total Notes Due Within One Year 8,458 52,000 113,934 0 113,934 6,547 Non-Real Estate Debt FNB of Anytown Machinery 5 Yr 2/1/19X0 2/1/19X5 $55,000 6,600 8,658 9,696 36,646 46,342 4,860 Total Non-Real Estate Debt 6,600 8,658 9,696 36,646 46,342 4,860 Real Estate Debt FLBA of CountySeat Home Farm 20 Yr 19W5 20Y5 $120,000 12,524 3,041 3,391 102,472 105,863 1,534 ABC Insurance Johnson Farm 20 Yr 19V9 20X9 $150,000 6,457 7,702 8,241 76,307 84,548 5,172 Total Real Estate Debt 18,981 10,743 11,632 178,779 190,411 6,706 Grand Total -- All Debt 34,039 $ 71,401 $ 135,262 $ 215,425 $ 350,687 $ 18,113 $ * This note is a revolving line of credit, with a total available balance of $150,000 November, 1997 A – 5 JOHN AND MARY FARMER (Farm Business Only) BALANCE SHEET SUPPLEMENTARY SCHEDULES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 6 — DEFERRED TAXES Current Portion of Deferred Taxes 19X2 19X1 Deferred Income Items Market Value Tax Basis Difference Market Value Tax Basis Difference Inventories 180,581 $ 0 $ 180,581 $ 149,557 $ 0 $ 149,557 $ Accounts Receivable 14,300 0 14,300 11,835 0 11,835 Prepaid Expenses 3,500 0 3,500 3,500 0 3,500 Cash Investment in Growing Crops 21,000 0 21,000 21,000 0 21,000 Excess of Carrying Value over Tax Basis of Current Assets 219,381 185,892 Deferred Income Liability on Crop Insurance, Disaster Payments and Contracts 50,000 12,000 Total Deferred Income 269,381 197,892 Deferred Expense Items Accounts Payable 6,578 0 Accrued Interest 14,107 18,113 Income Taxes Payable (State and Local Only) 1,379 868 Other Accrued Expenses 0 0 Total Deferred Expenses 22,064 18,981 Net Deferred Income Subject to Income Tax 247,317 178,911 Estimated Federal and State Income Tax 79,623 56,676 Estimated Self-Employment Tax 13,564 11,732 (a) Total Deferred Tax Liability Related to Current Assets and Current Liabilities 93,187 $ 68,408 $ Non-Current Portion of Deferred Taxes Related to Base Value Treatment of Raised Breeding Livestock 19X2 19X1 Base Value Tax Basis Difference Base Value Tax Basis Difference Raised Breeding Livestock 12,500 $ 0 $ 12,500 $ 10,000 $ 0 $ 10,000 $ Net Deferred Income Subject to Income Tax 12,500 $ 10,000 $ Estimated Federal and State Income Tax 4,193 3,354 Estimated Self-Employment Tax 335 268 (b) Total Deferred Tax Liability Related to Base Value Treatment of Raised Breeding Livestock 4,528 3,622 Non-Current Portion of Deferred Taxes Related to Valuation Equity 19X2 19X1 Tax Basis/ Tax Basis/ Market Value Base Value Difference Market Value Base Value Difference Raised Breeding Livestock 10,000 $ 12,500 $ (2,500) $ 10,000 $ 10,000 $ 0 $ Purchased Breeding Livestock 6,000 3,200 $ 2,800 4,000 2,000 $ 2,000 Machinery and Equipment 199,500 61,422 138,078 199,500 78,935 120,565 Real Estate and Improvements 522,750 210,750 312,000 522,750 214,850 307,900 Deferred Taxable Income Related to Excess of Market Values Over Base Values or Tax Basis of Capital Assets Other than Raised Breeding Livestock 450,378 430,465 Estimated Tax Rate 34% 34% (c) Total Deferred Tax Liability Related to Valuation Equity 153,129 $ 146,358 $ Total Non-Current Portion of Deferred Taxes (b+c) 157,657 $ 149,980 $ Reconciliation of Total Change in Deferred Taxes 19X2 19X1 Change Current Portion of Deferred Tax Liability (a) $93,187 $68,408 $24,779 Non-Current Portion of Deferred Tax Liability Related to Base Value Treatment of Raised Breeding Livestock (b) 4,528 3,622 906 Total Increase (Decrease) in Deferred Tax Liability Used in calculating Total Income Tax Expense in 19X2 25,685 (see Income Statement) Non-Current Portion of Deferred Tax Liability Related to Valuation Equity (c) 153,129 146,358 6,771 (see Statement of Owner Equity) Total Increase (Decrease) in Deferred Tax Liability 32,456 $ November, 1997 A – 6 JOHN AND MARY FARMER (Farm Business Only) BALANCE SHEET SUPPLEMENTARY SCHEDULES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 7 — VALUATION EQUITY 19X2 19X1 Tax Basis/ Tax Basis/ Market Value Base Value Difference Market Value Base Value Difference Raised Breeding Livestock 10,000 $ 12,500 $ (2,500) $ 10,000 $ 10,000 $ 0 $ Purchased Breeding Livestock 6,000 3,200 $ 2,800 4,000 2,000 2,000 Machinery and Equipment 199,500 61,422 138,078 199,500 78,935 120,565 Real Estate and Improvements 522,750 210,750 312,000 522,750 214,850 307,900 Non - Current Portion -- Deferred Taxes (153,129) (153,129) (146,358) (146,358) Total Valuation Equity 297,249 $ 284,107 $ November, 1997 A – 7 JOHN AND MARY FARMER (Farm Business Only) FARM BUSINESS INCOME STATEMENT FOR THE PERIOD JANUARY 1,19X2 THOUGH DECEMBER 31, 19X2 VFP VERSION Crop Cash Sales* 149,644 $ +/-Change in Crop Inventories 6,597 Gross Revenues from Crops 156,241 $ Market Livestock/Poultry Cash Sales 49,624 +/- Change in Market Livestock/Poultry Inventories 24,126 Gross Revenues from Market Livestock/Poultry 73,750 Livestock Products 0 Government Programs 18,978 Gain/Loss From Sale of Culled Breeding Livestock (Purchased and Raised)** 0 +/-Change in Value Due to Change in Quantity of Raised Breeding Livestock** 2,500 Crop Insurance Proceeds 50,000 Change in Accounts Receivable 2,465 Other Farm Income 765 Gross Revenues 304,699 Less: Purchases of Feeder Livestock 6,505 Cost of Purchased Feed/Grain 1,694 Value of Farm Production 296,500 Cash Operating Expenses 164,776 $ +/- Accrual Adjustments 6,578 Depreciation/Amortization Expense 42,003 Total Operating Expenses 213,357 Cash Interest Paid 33,583 +/- Change in Interest Payable (4,006) Total Interest Expense 29,577 Total Expenses 242,934 Net Farm Income from Operations 53,566 Gain/Loss on Sale of Farm Capital Assets 0 Gain/Loss Due to Change in General Level Base Values of Breeding Livestock** 0 Net Farm Income, Accrual Adjusted 53,566 Miscellaneous Revenue 150 Miscellaneous Expense 0 Total Miscellaneous Revenue and Expense 150 Income Before Taxes and Extraordinary Items 53,716 Cash Income Tax Expense 6,495 +/- Change in Income Tax Accruals 2,760 +/- Change in Current Portion of Deferred Taxes (Schedule 6) 24,779 +/- Change in Non-Current Portion of Deferred Taxes (Schedule 6) 906 Total Income Tax Expense (Farm Business Only) 34,940 Income Before Extraordinary Items 18,776 Extraordinary Items (Net of Tax) 0 Net Income, Accrual Adjusted 18,776 $ * Note: CCC loans proceeds are not included ** See Appendix F for further discussion. November, 1997 A – 8 JOHN AND MARY FARMER (Farm Business Only) FARM BUSINESS INCOME STATEMENT FOR THE PERIOD JANUARY 1, 19X2 THROUGH DECEMBER 31, 19X2 GROSS REVENUE VERSION *Crop Cash Sales 149,644 $ +/-Change in Crop Inventories 6,597 Gross Revenues from Crops 156,241 $ Market Livestock/Poultry Cash Sales 49,624 +/- Change in Market Livestock/Poultry Inventories 24,126 Gross Revenues from Market Livestock/Poultry 73,750 Livestock Products 0 Government Programs 18,978 Gain/Loss From Sale of Culled Breeding Livestock (Purchased and Raised)** 0 +/-Change in Value Due to Change in Quantity of Raised Breeding Livestock** 2,500 Crop Insurance Proceeds 50,000 Change in Accounts Receivable 2,465 Other Farm Income 765 Gross Revenues 304,699 Purchased Feed/Grain 1,694 $ Purchased Market Livestock 6,505 Other Cash Operating Expenses 164,776 +/- Accrual Adjustments 6,578 Depreciation/Amortization Expense 42,003 Total Operating Expenses 221,556 Cash Interest Paid 33,583 +/- Change in Interest Payable (4,006) Total Interest Expense 29,577 Total Expenses 251,133 Net Farm Income from Operations 53,566 Gain/Loss on Sale of Farm Capital Assets 0 Gain/Loss Due to Change in General Base Values of Breeding Livestock** 0 Net Farm Income, Accrual Adjusted 53,566 Miscellaneous Revenue 150 Miscellaneous Expense 0 Total Miscellaneous Revenue and Expense 150 Income Before Taxes and Extraordinary Items 53,716 Cash Income Tax Expense 6,495 +/- Change in Income Tax Accruals 2,760 +/- Change in Current Portion of Deferred Taxes (Schedule 6) 24,779 +/- Change in Non-Current Portion of Deferred Taxes (Schedule 6) 906 Total Income Tax Expense (Farm Business Only) 34,940 Income Before Extraordinary Items 18,776 Extraordinary Items (Net of Tax) 0 Net Income, Accrual Adjusted 18,776 $ * Note: CCC loans proceeds are not included ** See Appendix F for further discussion. November, 1997 A – 9 JOHN AND MARY FARMER (Farm Business Only) STATEMENT OF CASH FLOWS FOR THE PERIOD JANUARY 1, 19X2 THROUGH DECEMBER 31, 19X2 Cash Received From Operations 268,246 $ Cash Paid for Feeder Livestock, Purchased Feed, and Other Items for Resale 8,500 Cash Paid for Operating Expenses 164,776 Cash Paid for Interest 33,583 Net Cash -- Income and Social Security Taxes 6,495 Net Cash -- Other Operating Activities 765 Net Cash -- Other Miscellaneous Revenue 150 Net Cash Provided by Operating Activities 55,807 $ Cash Received from Sale of Breeding Livestock (Other than normal culling) 0 Cash Received from Sale of Machinery and Equipment 0 Cash Received from Sale of Real Estate and Buildings 0 Cash Received from Sale of Marketable Securities 0 Cash Paid to Purchase Breeding Livestock 2,800 Cash Paid to Purchase Machinery and Equipment 18,790 Cash Paid to Purchase Real Estate and Buildings 0 Cash Paid to Purchase Marketable Securities 0 Net Cash Provided by Investing Activities (21,590) $ Proceeds from Operating Loans 111,198 Proceeds from Term Debt Financing 0 Cash Received -- Capital Contributions, Gifts, Inheritances 0 Scheduled Principal Payments -- Term Debt 21,329 Unscheduled Principal Payments -- Term Debt 0 Principal Paid on Capital Lease Obligations 0 Repayment of Operating and CCC Loans 122,644 Owner Withdrawals (net) 13,120 Dividends and Capital Distributions 0 Net Cash Provided by Financing Activities (45,895) $ Net Increase (Decrease) in Cash/Cash Equivalents (11,678) $ Cash/Equivalents at Beginning of Year 113,421 $ Cash/Equivalents at End of Year 101,743 $ November, 1997 A – 10 JOHN AND MARY FARMER (Farm Business Only) STATEMENT OF OWNER EQUITY FOR THE PERIOD JANUARY 1, 19X2 THROUGH DECEMBER 31, 19X2 Owner Equity, Beginning of Period 472,781 $ Net Income/Loss 18,776 $ Withdrawals for Unpaid Labor and Management (29,620) $ Non-Farm Income contributed to the farm business 16,500 Owner Withdrawals (Net) (13,120) Other Capital Contributions/Gifts/Inheritances 0 Other Capital Distributions/Gifts Made 0 Additions and Reductions in Retained Capital 5,656 Increase in Excess of Market Value over Cost/Tax Basis of Farm Capital Assets 19,913 Less: Increase in Non-Current Portion -- Deferred Taxes 6,771 Total Change in Valuation Equity 13,142 Owner Equity, End of Period 491,579 $ November, 1997 A – 11 JOHN AND MARY FARMER BALANCE SHEET BUSINESS AND PERSONAL ASSETS AND LIABILITIES AS OF 12/31/X1 AND 12/31/X2 12/31/X2 12/31/X1 12/31/X2 12/31/X1 ASSETS LIABILITIES Cash 101,743 $ 113,421 $ Accounts Payable 6,578 $ 0 $ Inventories (Schedule 1) 180,581 149,557 Notes Due Within One Year (Schedule 5) 102,488 113,934 Accounts Receivable 14,300 11,835 Current Portion of Term Debt (Schedule 5) 23,458 21,328 Prepaid Expenses 3,500 3,500 Accrued Interest (Schedule 5) 14,107 18,113 Cash Investment in Growing Crops 21,000 21,000 Income Taxes Payable 6,894 4,134 Other Current Assets 890 890 Current Portion -- Deferred Taxes 93,187 68,408 (Schedule 6) Other Accrued Expenses 0 0 Other Current Liabilities 0 0 Total Current Assets 322,014 300,203 Total Current Liabilities 246,712 225,917 Breeding Livestock (at market) 16,000 14,000 Non-Current Portion -- Notes Payable 25,786 36,646 (Schedule 2) (Schedule 5) Machinery and Equipment (at market) 199,500 199,500 Non-Current Portion -- Real Estate Debt 166,180 178,779 (Schedule 3) (Schedule 5) Investments in Capital Leases 0 0 Non-Current Portion -- Deferred Taxes 157,657 149,980 Investments in Other Entities 0 0 (Schedule 6) Investments in Cooperatives 27,650 27,650 Other Non-Current Liabilities 0 0 Real Estate (at market) (Schedule 4) 517,750 517,750 Buildings and Improvements (at market) 5,000 5,000 (Schedule 4) Other Assets 0 0 Total Non-Current Assets 765,900 763,900 Total Non-Current Liabilities 349,623 365,405 Total Liabilities 596,335 $ 591,322 $ Retained Capital 194,330 188,674 Valuation Equity 297,249 284,107 FARM BUSINESS EQUITY 491,579 472,781 Total Business Assets 1,087,914 $ 1,064,103 $ Total Business Liabilities and Owner Equity 1,087,914 $ 1,064,103 $ Personal Liabilities and Related Taxes Personal Assets (Shedule 8) 77,250 $ 73,500 $ (Schedule 8) 6,753 $ 5,818 $ Total Liabilities 603,088 597,140 Total Net Worth 562,076 540,463 Total Assets 1,165,164 $ 1,137,603 $ Total Liabilities and Net Worth 1,165,164 $ 1,137,603 $ NOTE: This Balance Sheet includes both personal and business assets and liabilities November, 1997 A – 12 JOHN AND MARY FARMER BALANCE SHEET SUPPLEMENTARY SCHEDULES BUSINESS AND PERSONAL ASSETS AND LIABILITIES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 1 — INVENTORIES 12/31/X2 12/31/X1 Commodity Units Number Price/Unit Total Number Price/Unit Total Corn for Sale Bushels 32,560.00 2.30 $ 74,888 $ 29,691.60 2.30 $ 68,291 $ Feed Supplement Tons 5.20 335.00 1,742 4.30 335.00 1,441 Mkt Cattle/Heifers/1000 lbs CWT 45.00 68.00 30,600 45.00 68.00 30,600 Mkt Cattle/Steers/1150 lbs CWT 57.00 70.00 45,885 35.00 70.53 28,389 Feeder Cattle/Steers/850 lbs CWT 40.00 78.00 26,520 30.00 78.00 19,890 Diesel Fuel Gallons 860.00 1.10 946 860.00 1.10 946 Total Inventories 180,581 $ 149,557 $ SCHEDULE 2 — BREEDING LIVESTOCK As of 12/31/X2 As of 12/31/X1 Base Value Total Total Book Mkt Value Total Base Value Total Total Book Mkt Value Total Type Number Per Head Cost/Base Acc Depr Value Per Head Market Number Per Head Cost/Base Acc Depr Value Per Head Market Purchased Breeding Stock Angus Bulls 3 N/A 7,400 $ 4,200 $ 3,200 $ 2,000 $ 6,000 $ 2 N/A 4,600 $ 2,600 $ 2,000 $ 2,000 $ 4,000 $ Raised Breeding Stock Stock Cows 25 500 12,500 N/A 12,500 400 10,000 20 500 10,000 N/A 10,000 500 10,000 Total Breeding Livestock 28 19,900 $ 4,200 $ 15,700 $ N/A 16,000 $ 22 14,600 $ 2,600 $ 12,000 $ N/A 14,000 $ SCHEDULE 3 — MACHINERY AND EQUIPMENT As of 12/31/X2 As of 12/31/X1 Type Cost Acc Depr Net Book Mkt Value Cost Acc Depr Net Book Mkt Value Vehicles 32,500 $ 27,688 $ 4,812 $ 18,000 $ 32,500 $ 22,486 $ 10,014 $ 18,000 $ Machinery 248,759 206,577 42,182 175,000 229,969 180,245 49,724 175,000 Livestock Equipment 45,653 31,225 14,428 6,500 45,653 26,456 19,197 6,500 Total Machinery and Equipment 326,912 $ 265,490 $ 61,422 $ 199,500 $ 308,122 $ 229,187 $ 78,935 $ 199,500 $ SCHEDULE 4 — REAL ESTATE AND IMPROVEMENTS As of 12/31/X2 As of 12/31/X1 Mkt Value Total Mkt Value Total Type Acquired Cost Acc Depr Net Book Per Acre Market Cost Acc Depr Net Book Per Acre Market Land Johnson Farm -- 235 Acres 1975 152,750 $ 152,750 $ 1,250 $ 293,750 $ 152,750 $ 152,750 $ 1,250 $ 293,750 $ Section 18 Farm -- 160 Acres 1963 32,000 32,000 1,400 224,000 32,000 32,000 1,400 224,000 Improvements Feedlot 1981 78,000 52,000 26,000 5,000 78,000 47,900 30,100 5,000 Total Real Estate and Improvements 262,750 $ 52,000 $ 210,750 $ 522,750 $ 262,750 $ 47,900 $ 214,850 $ 522,750 $ November, 1997 A – 13 JOHN AND MARY FARMER BALANCE SHEET BUSINESS AND PERSONAL ASSETS AND LIABILITIES SUPPLEMENTARY SCHEDULES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 5 — DEBT SCHEDULE – 19X2 During 19X2 As of 12/31/X2 Original Original Interest Principal Payment Interest Est. Amount of Current Principal Non-Current Total Accrued Creditor Purpose Term Inception Maturity Aount Paid(Cash) Paid Date Rate Next Payment (Within 12 Mo) Principal Principal Interest Notes Due Within One Year FNB of Anytown* Operating 1 Yr 3/1/19X2 3/1/19X3 * 8,458 $ 87,000 $ 2/28/90 12%V N/A 75,895 $ 0 $ 75,895 $ 3,549 $ CCC Inventory 9 Mo 10/15/19X2 5/1/19X3 26,593 $ 1,472 35,644 5/15/90 7.75%V N/A 26,593 0 26,593 562 Total Notes Due Within One Year 9,930 122,644 102,488 0 102,488 4,111 Non-Real Estate Debt FNB of Anytown Machinery 5 Yr 2/1/19X0 2/1/19X5 55,000 5,561 9,697 15-Feb 12%V 15,258 $ 10,860 25,786 36,646 3,843 Total Non-Real Estate Debt 5,561 9,697 15,258 10,860 25,786 36,646 3,843 Real Estate Debt FLBA of CountySeat Home Farm 20 Yr 19W5 20Y5 120,000 12,174 3,391 15-Nov 11.5%V 15,565 3,781 98,691 102,472 1,485 ABC Insurance Johnson Farm 20 Yr 19V9 20X9 150,000 5,918 8,241 15-Feb 7.0%F 14,159 8,817 67,489 76,306 4,668 Total Real Estate Debt 18,092 11,632 29,724 12,598 166,180 178,778 6,153 Grand Total -- All Debt 33,583 $ 143,973 $ 44,982 $ 125,946 $ 191,966 $ 317,912 $ 14,107 $ * This note is a revolving line of credit, with a total available balance of $150,000 SCHEDULE 5 — DEBT SCHEDULE – 19X1 During 19X1 As of 12/31/X1 Original Original Interest Principal Current Principal Non-Current Total Accrued Creditor Purpose Term Inception Maturity Aount Paid(Cash) Paid (Within 12 Mo) Principal Principal Interest Notes Due Within One Year FNB of Anytown* Operating 1 Yr 3/1/19X2 3/1/19X3 * 8,458 $ 52,000 $ 78,290 $ 0 $ 78,290 $ 6,120 $ CCC Inventory 9 Mo 10/15/19X2 5/1/19X3 26,593 $ 0 0 35,644 0 35,644 427 Total Notes Due Within One Year 8,458 52,000 113,934 0 113,934 6,547 Non-Real Estate Debt FNB of Anytown Machinery 5 Yr 2/1/19X0 2/1/19X5 55,000 6,600 8,658 9,696 36,646 46,342 4,860 Total Non-Real Estate Debt 6,600 8,658 9,696 36,646 46,342 4,860 Real Estate Debt FLBA of CountySeat Home Farm 20 Yr 19W5 20Y5 120,000 12,524 3,041 3,391 102,472 105,863 1,534 ABC Insurance Johnson Farm 20 Yr 19V9 20X9 150,000 6,457 7,702 8,241 76,307 84,548 5,172 Total Real Estate Debt 18,981 10,743 11,632 178,779 190,411 6,706 Grand Total -- All Debt 34,039 $ 71,401 $ 135,262 $ 215,425 $ 350,687 $ 18,113 $ * This note is a revolving line of credit, with a total available balance of $150,000 November, 1997 A – 14 JOHN AND MARY FARMER BALANCE SHEET BUSINESS AND PERSONAL ASSETS AND LIABILITIES SUPPLEMENTARY SCHEDULES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 6 — DEFERRED TAXES Current Portion of Deferred Taxes 19X2 19X1 Deferred Income Items Market Value Tax Basis Difference Market Value Tax Basis Difference Inventories 180,581 $ 0 $ 180,581 $ 149,557 $ 0 $ 149,557 $ Accounts Receivable 14,300 0 14,300 11,835 0 11,835 Prepaid Expenses 3,500 0 3,500 3,500 0 3,500 Cash Investment in Growing Crops 21,000 0 21,000 21,000 0 21,000 Excess of Carrying Value over Tax Basis of Current Assets 219,381 185,892 Deferred Income liability on Crop Insurance, Disaster Payments and Contracts 50,000 12,000 Total Deferred Income 269,381 197,892 Deferred Expense Items Accounts Payable 6,578 0 Accrued Interest 14,107 18,113 Income Taxes Payable (State and Local Only) 1,379 868 Other Accrued Expenses 0 0 Total Deferred Expenses 22,064 18,981 Net Deferred Income Subject to Income Tax 247,317 178,911 Estimated Federal and State Income Tax 79,623 56,676 Estimated Self-Employment Tax 13,564 11,732 (a) Total Deferred Tax Liability Related to Current Assets and Current Liabilities 93,187 $ 68,408 $ Non-Current Portion of Deferred Taxes Related to Base Value Treatment of Raised Breeding Livestock 19X2 19X1 Base Value Tax Basis Difference Base Value Tax Basis Difference Raised Breeding Livestock 12,500 $ 0 $ 12,500 $ 10,000 $ 0 $ 10,000 $ Net Deferred Income Subject to Income Tax 12,500 $ 10,000 $ Estimated Federal and State Income Tax 4,193 3,354 Estimated Self-Employment Tax 335 268 (b) Total Deferred Tax Liability Related to Base Value Treatment of Raised Breeding Livestock 4,528 3,622 Non-Current Portion of Deferred Taxes Related to Valuation Equity 19X2 19X1 Tax Basis/ Tax Basis/ Market Value Base Value Difference Market Value Base Value Difference Raised Breeding Livestock 10,000 $ 12,500 $ (2,500) $ 10,000 $ 10,000 $ 0 $ Purchased Breeding Livestock 6,000 3,200 $ 2,800 4,000 2,000 $ 2,000 Machinery and Equipment 199,500 61,422 138,078 199,500 78,935 120,565 Real Estate and Improvements 522,750 210,750 312,000 522,750 214,850 307,900 Deferred Taxable Income Related to Excess of Market Values Over Base Values or Tax Basis of Capital Assets Other than Raised Breeding Livestock 450,378 430,465 Estimated Tax Rate 34% 34% (c) Total Deferred Tax Liability Related to Valuation Equity 153,129 $ 146,358 $ Total Non-Current Portion of Deferred Taxes (b + c) 157,657 $ 149,980 $ Estimated Taxes on Personal Assets 19X2 19X1 Market Value Tax Basis Difference Personal Assets 77,250 $ 61,800 $ 15,450 $ 73,500 $ 60,800 $ 12,700 $ Estimated Taxable Income Related to Personal Assets/Liabilities 15,450 12,700 Estimated Tax Rate 34% 34% Total Estimated Tax Expense Related to Personal Assets/Liabilities 5,253 $ 4,318 $ Reconciliation of Total Change in Deferred Taxes 19X2 19X1 Change Current Portion of Deferred Tax Liability (a) 93,187 $ 68,408 $ $24,779 Non-Current Portion of Deferred Tax Liability Related to Base Value Treatment of Raised Breeding Livestock (b) 4,528 3,622 906 Total Increase (Decrease) in Deferred Tax Liability Used in calculating Total Income Tax Expense in 19X2 25,685 (see Income Statement) Non-Current Portion of Deferred Tax Liability Related to Valuation Equity (c) 153,129 146,358 6,771 (see Statement of Owner Equity) Total Increase (Decrease) in Deferred Tax Liability 32,456 $ November, 1997 A – 15 JOHN AND MARY FARMER BALANCE SHEET BUSINESS AND PERSONAL ASSETS AND LIABILITIES SUPPLEMENTARY SCHEDULES AS OF 12/31/X1 AND 12/31/X2 SCHEDULE 7 — VALUATION EQUITY 19X2 19X1 Tax Basis/ Tax Basis/ Market Value Base Value Difference Market Value Base Value Difference Raised Breeding Livestock 10,000 $ 12,500 $ (2,500) $ 10,000 $ 10,000 $ 0 $ Purchased Breeding Livestock 6,000 3,200 $ 2,800 4,000 2,000 2,000 Machinery and Equipment 199,500 61,422 138,078 199,500 78,935 120,565 Real Estate and Improvements 522,750 210,750 312,000 522,750 214,850 307,900 Non - Current Portion -- Deferred Taxes (153,129) (153,129) (146,358) (146,358) Total Valuation Equity 297,249 $ 284,107 $ SCHEDULE 8 — PERSONAL ASSETS/LIABILITIES Personal Assets 19X2 19X1 Market Estimated Market Estimated Description Value Cost* Value Cost* Savings Bonds 7,500 $ 7,500 $ 4,500 $ 4,500 $ Marketable Securities 24,750 18,300 23,000 18,300 Retirement Accounts 22,000 13,000 20,000 12,000 19X0 Oldsmobile 11,000 11,000 14,000 14,000 Household Goods 12,000 12,000 12,000 12,000 Total Personal Assets 77,250 $ 61,800 $ 73,500 $ 60,800 $ *This amount is used for calculation of estimated taxes only -- since losses on the sale of personal assets are not deductible, this amount is the lower of estimated cost or market value. Personal Liabilities Description 19X2 19X1 Credit Cards 750 $ 750 $ Estimated Taxes on Personal Assets (Schedule 8) 5,253 4,318 Accrued Income Tax Expense -- Non-Business Income 750 750 Total Personal Liabilities 6,753 $ 5,818 $ November, 1997 A – 16 JOHN AND MARY FARMER FARM BUSINESS INCOME STATEMENT FOR THE PERIOD OF JANUARY 1, 19X2 THROUGH DECEMBER 31, 19X2 VFP VERSION Crop Cash Sales* 149,644 $ +/-Change in Crop Inventories 6,597 Gross Revenues from Crops 156,241 $ Market Livestock/Poultry Cash Sales 49,624 +/- Change in Market Livestock/Poultry Inventories 24,126 Gross Revenues from Market Livestock/Poultry 73,750 Livestock Products 0 Government Programs 18,978 Gain/Loss From Sale of Culled Breeding Livestock (Purchased and Raised)** 0 +/-Change in Value Due to Change in Quantity of Raised Breeding Livestock** 2,500 Crop Insurance Proceeds 50,000 Change in Accounts Receivable 2,465 Other Farm Income 765 Gross Revenues 304,699 Less: Purchases of Feeder Livestock 6,505 Cost of Purchased Feed/Grain 1,694 Value of Farm Production 296,500 Cash Operating Expenses 164,776 $ +/- Accrual Adjustments 6,578 Depreciation/Amortization Expense 42,003 Total Operating Expenses 213,357 Cash Interest Paid 33,583 +/- Change in Interest Payable (4,006) Total Interest Expense 29,577 Total Expenses 242,934 Net Farm Income from Operations 53,566 Gain/Loss on Sale of Farm Capital Assets 0 Gain/Loss Due to Change in General Base Values of Breeding Livestock** 0 Net Farm Income, Accrual Adjusted 53,566 Miscellaneous Revenue 150 Miscellaneous Expense 0 Total Miscellaneous Revenue and Expense 150 Income Before Taxes and Extraordinary Items 53,716 Cash Income Tax Expense 6,495 +/- Change in Income Tax Accruals 2,760 +/- Change in Current Portion of Deferred Taxes (Schedule 6) 24,779 +/- Change in Non-Current Portion of Deferred Taxes (Schedule 6) 906 Total Income Tax Expense (Farm Business Only) 34,940 Income Before Extraordinary Items 18,776 Extraordinary Items (Net of Tax) 0 Net Income, Accrual Adjusted 18,776 $ * Note: CCC loans proceeds are not included ** See Appendix F for further discussion. November, 1997 A – 17 JOHN AND MARY FARMER FARM BUSINESS INCOME STATEMENT FOR THE PERIOD OF JANUARY 1, 19X2 THROUGH DECEMBER 31, 19X2 GROSS REVENUE VERSION Crop Cash Sales* 149,644 $ +/-Change in Crop Inventories 6,597 Gross Revenues from Crops 156,241 $ Market Livestock/Poultry Cash Sales 49,624 +/- Change in Market Livestock/Poultry Inventories 24,126 Gross Revenues from Market Livestock/Poultry 73,750 Livestock Products 0 Government Programs 18,978 Gain/Loss From Sale of Culled Breeding Livestock (Purchased and Raised)** 0 +/-Change in Value Due to Change in Quantity of Raised Breeding Livestock** 2,500 Crop Insurance Proceeds 50,000 Change in Accounts Receivable 2,465 Other Farm Income 765 Gross Revenues 304,699 Purchased Feed/Grain 1,694 $ Purchased Market Livestock 6,505 Other Cash Operating Expenses 164,776 +/- Accrual Adjustments 6,578 Depreciation/Amortization Expense 42,003 Total Operating Expenses 221,556 Cash Interest Paid 33,583 +/- Change in Interest Payable (4,006) Total Interest Expense 29,577 Total Expenses 251,133 Net Farm Income from Operations 53,566 Gain/Loss on Sale of Farm Capital Assets 0 Gain/Loss Due to Changes in General Base Value of Raised Breeding Livestock** 0 Net Farm Income, Accrual Adjusted 53,566 Miscellaneous Revenue 150 Miscellaneous Expense 0 Total Miscellaneous Revenue and Expense 150 Income Before Taxes and Extraordinary Items 53,716 Cash Income Tax Expense 6,495 +/- Change in Income Tax Accruals 2,760 +/- Change in Current Portion of Deferred Taxes (Schedule 6) 24,779 +/- Change in Non-Current Portion of Deferred Taxes (Schedule 6) 906 Total Income Tax Expense (Farm Business Only) 34,940 Income Before Extraordinary Items 18,776 Extraordinary Items (Net of Tax) 0 Net Income, Accrual Adjusted 18,776 $ * Note: CCC loans proceeds are not included ** See Appendix F for further discussion. November, 1997 A – 18 JOHN AND MARY FARMER STATEMENT OF FARM BUSINESS CASH FLOWS FOR THE PERIOD OF JANUARY 1, 19X2 THROUGH DECEMBER 31, 19X2 Cash Received From Operations 268,246 $ Cash Paid for Feeder Livestock, Purchased Feed, and Other Items for Resale 8,500 Cash Paid for Operating Expenses 164,776 Cash Paid for Interest 33,583 Net Cash -- Income and Social Security Taxes 6,495 Net Cash -- Other Operating Activities 765 Net Cash -- Other Miscellaneous Revenue 150 Net Cash Provided by Operating Activities 55,807 $ Cash Received from Sale of Breeding Livestock (Other than normal culling) 0 Cash Received from Sale of Machinery and Equipment 0 Cash Received from Sale of Real Estate and Buildings 0 Cash Received from Sale of Marketable Securities 0 Cash Paid to Purchase Breeding Livestock 2,800 Cash Paid to Purchase Machinery and Equipment 18,790 Cash Paid to Purchase Real Estate and Buildings 0 Cash Paid to Purchase Marketable Securities 0 Net Cash Provided by Investing Activities (21,590) $ Proceeds from Operating Loans 111,198 Proceeds from Term Debt Financing 0 Cash Received -- Capital Contributions, Gifts, Inheritances 0 Scheduled Principal Payments -- Term Debt 21,329 Unscheduled Principal Payments -- Term Debt 0 Principal Paid on Capital Lease Obligations 0 Repayment of Operating and CCC Loans 122,644 Owner Withdrawals (net) 13,120 Dividends and Capital Distributions 0 Net Cash Provided by Financing Activities (45,895) $ Net Increase (Decrease) in Cash/Cash Equivalents (11,678) $ Cash/Equivalents at Beginning of Year 113,421 $ Cash/Equivalents at End of Year 101,743 $ November, 1997 A – 19 JOHN AND MARY FARMER STATEMENT OF NET WORTH FOR THE PERIOD OF JANUARY 1, 19X2 THROUGH DECEMBER 31, 19X2 Net Worth, Beginning of Period 540,463 $ Net Income/Loss 18,776 $ Withdrawals for Unpaid Labor and Management (29,620) Non-Farm Income contibuted to the farm business 16,500 Owner Withdrawals (Net) (13,120) $ Other Capital Contributions/Gifts/Inheritances 0 $ Capital Distributions/Gifts Made 0 $ Additions and Reductions in Retained Capital (Farm Business) 5,656 $ Change in Excess of Market Value over Cost/Tax Basis of Farm Capital Assets 19,913 $ Change in Non-Current Portion -- Deferred Taxes 6,771 $ Total Change in Valuation Equity (Farm Business) 13,142 $ Total Change in Farm Business Owner Equity 18,798 Increase in Value of Personal Assets 3,750 $ Less: Increase in Personal Liabilities 935 $ Net Worth Change due to Changes in Amounts of Personal Assets and Liabilities 2,815 Net Worth, Ending of Period 562,076 $ November, 1997 B – 1 APPENDIX B: EXAMPLE OF ACCOUNTANT PREPARED FINANCIAL STATEMENTS This Appendix includes an example of a CPA prepared financial statement including an accountant’s review report. An accountant’s review provides limited assurance that the financial statements are fairly stated. A producer could request the accountant provide an audited report, however, this would be more expensive. Conversely an accountant could also provide a compilation report. A compilation involves using the producer’s information to compile a financial statement without audit or review. This would be the least expensive, but would provide no assurances with respect to the financial statements being fairly stated. Regardless of the level of assurance selected, the financial statements would be formatted in exactly the same manner. The only difference would be in the accountant’s report. The FFSC has drafted the illustrative report in this Appendix assuming that this financial statement conforms to Generally Accepted Accounting Principles (GAAP) except for the way feed inventory and raised dairy and breeding livestock are valued. These exceptions are discussed in Note 1. A farming operation with a sophisticated accounting system, or an operation which does not have livestock, may be able to produce a financial statement in accordance with GAAP without these exceptions. However, the FFSC believes a large percentage of agricultural producers would not have the accounting systems to keep the required records. Also, depending on the nature of the agricultural producer, other exceptions not covered in this example may need to be added to an accountant’s report. In order to provide an example for a large number of producers, the FFSC tried to include a number of different types of enterprises into this example. The second paragraph of Note 1 describes these activities. The FFSC regrets not being able to show examples of every type of farming enterprise, but believes many of the formats and principals can be applied to various types of operations. This financial statement has been prepared for a hypothetical farmer named Freddie Farmer and his wife Frieda. A number of years ago Freddie and Frieda’s farming operation was incorporated for income tax purposes. Freddie and Frieda own 100% of the stock in the corporation named F & F Farms, Inc. This corporation holds title to most of the current assets and the machinery and equipment, along with the related liabilities. Freddie and Frieda decided not to transfer their farmland into the corporation and therefore, have another entity titled Freddie Farmer’s Land Rental Proprietorship which holds title to all the farmland and the related liabilities. All of Freddie and Frieda’s farmland is rented to the corporation, F & F Farms, Inc. The corporation and the proprietorship each have their own separate checking account and double entry, cash basis accounting system. Freddie and Frieda also have a personal checking account. Freddie receives a weekly wage from the corporation which is deposited into the personal checking account. Freddie also withdraws a small amount from the proprietorship to pay the property taxes on the couple’s cottage, which is a personal asset. Freddie’s banker had become concerned about the large amount of debt Freddie had outstanding and was uncomfortable with the complex multiple entity structure. He asked Freddie and Frieda to have their accountant prepare a reviewed combined financial statement on the accrual basis, along with a market value balance sheet. Their accountant informed them that they had a couple of different formats they could use to prepare their statements. First, they could prepare a combined accrual basis business November, 1997 B – 2 only financial statement in accordance with GAAP, along with a personal financial statement, which would include all of the Farmer’s personal assets at estimated current values and the value of the farm business included as one line item. The second option included the combined accrual basis business only financial statements in accordance with GAAP along with, as supplementary information, a combining statement of Assets, Liabilities and Net Worth using the estimated current value and notes explaining how the values were determined. Freddie was concerned that his banker was accustomed to having all the assets and liabilities, both personal and business, included on one statement. Therefore, the Farmers chose the second option. Using the second option, pages 6 through 19 of this example include the combined business financial statements in accordance with GAAP. To better inform the user of these financial statements a comparative format has been used, therefore, the financial statements include amounts for the current year as well as the previous year. The fixed assets on the Combined Balance Sheets on pages 7 and 8 are valued at cost and adjusted annually for depreciation. Because the Farmers used many types of accelerated depreciation methods for tax purposes, they chose not to use the tax depreciation schedules for financial statement purposes. Instead they have used a straight line method for all depreciable assets. The depreciation periods used are discussed in Note 1. The Combined Statements of Income on pages 9 and 10 include Freddie Farmer’s weekly wage as an operating expense. This inclusion of the weekly wage as an operating expense should be noted in the event a comparison is made to a sole proprietorship which would not treat the owner withdrawals as an expense. The Combined Statements of Owner Equity on page 11 details the capital structure of both the corporation and proprietorship, including the breakdown of net income between the two. The Combined Statements of Cash Flows on pages 12 and 13 has been presented using the direct method. However, it may be more efficient to use the indirect method in practice. The schedules on pages 22 and 23 have been included to offer the users of the financial statements a better understanding of the treatment of the fixed assets and raised dairy and breeding livestock. These schedules are not a required part of the financial statements under GAAP, but the FFSC believes they could be useful information. To simplify the financial statements, these schedules could be included in the notes. The Combing Statement of Assets, Liabilities, and Net Worth included on pages 24 and 25 has been set up to show the total net worth, as well as the net worth for each individual entity. This segregation of net worth may be useful for bankers in determining to which entity they are actually loaning the money and where the equity is. The segregation of net worth may also be useful for estate planning. Since this statement is not in accordance with GAAP, it is the FFSC understanding that the term “Balance Sheet” cannot be used in a CPA prepared financial statement. However, it is currently the practice in agriculture to use the term “Balance Sheet” for a market value statement. The sample financial statements included in this appendix are intended to provide only a general example of CPA prepared statements for farm clients. The format would need to be modified to fit various types of farming enterprises throughout the country. This sample is presented as a general example and is not a substitute for the CPA’s professional judgment. November, 1997 B – 3 F & F FARMS COMBINED FINANCIAL INFORMATION DECEMBER 31, 19X1 November, 1997 B – 4 F & F FARMS TABLE OF CONTENTS PAGE NUMBER IN APPENDIX B Accountant’s Review Report........................................................................................................... 5 COMBINED FINANCIAL STATEMENTS ........................................................................... 6 Combined Balance Sheets ............................................................................................................... 7 - 8 Combined Statements of Income..................................................................................................... 9 - 10 Combined Statements of Owner Equity.......................................................................................... 11 Combined Statements of Cash Flows ............................................................................................. 12 - 13 Notes to the Combined Financial Statements.................................................................................. 14 - 19 SUPPLEMENTARY INFORMATION ................................................................................... 20 Schedule of Property, Equipment and Purchased Breeding Livestock.......................................... 21 Schedule of Raised Dairy and Breeding Livestock......................................................................... 22 - 23 Combining Statement of Assets, Liabilities and Net Worth – Estimated Current Value.............. 24 - 25 Notes to Combining Statement of Assets, Liabilities and Net Worth ............................................ 26 - 32 November, 1997 B – 5 F & F Farms Thumb Area, Michigan We have reviewed the accompanying combined balance sheets of F & F Farms as of December 31, 19X1 and 19X0 and the related combined statements of income and owner equity and cash flows for the years then ended, in accordance with Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants. All information included in these financial statements is the representation of the owners. A review consists principally of inquiries of Company personnel and analytical procedures applied to financial data. It is substantially less in scope than an audit in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, with the exception of the matter described in the following paragraph, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with generally accepted accounting principles. As disclosed in Note 1 to the financial statements, generally accepted accounting principles require that feed inventory be valued at the lower of cost or market and raised dairy and breeding stock be valued at cost less accumulated depreciation. Management has elected to value its feed inventory at market and raised dairy and breeding stock at a predetermined base value. The affect of this departure from generally accepted accounting principles on financial position, results of operations, and cash flows has not been determined. Our review was made for the purpose of expressing limited assurance that there are no material modifications that should be made to the financial statements in order for them to be in conformity with generally accepted accounting principles. The information included on pages 20 through 32 is presented only for supplementary analysis purposes. Such information has not been subjected to the inquiry and analytical procedures applied in the review of the basic financial statements, but was compiled from information that is the representation of the owners, without audit or review. Accordingly, we do not express an opinion or any other form of assurance on the supplementary information. SMITH & JONES, P.C. CERTIFIED PUBLIC ACCOUNTANTS January 20, 19X2 November, 1997 B – 6 [Page is intentionally left blank.] November, 1997 B – 7 COMBINED FINANCIAL STATEMENTS November, 1997 B – 8 F & F FARMS COMBINED BALANCE SHEETS DECEMBER 31, 19X1 19X0 ASSETS CURRENT ASSETS: Cash 1,125 $ 5,000 $ Hedging accounts 526 828 Commodity receivables 130,471 152,011 Inventory (Note 2) 252,714 300,342 Prepaid expenses 15,446 19,668 Current portion of other receivables 12,000 12,000 TOTAL CURRENT ASSETS 412,282 489,849 PROPERTY, EQUIPMENT, DAIRY AND BREEDING LIVESTOCK (NOTE 1): Land (At cost) 600,000 600,000 Buildings (At cost) 400,000 400,000 Machinery and equipment (At cost) 520,000 500,000 Tiling (At cost) 117,000 117,000 Purchased Breeding Livestock (At cost) 3,000 3,000 Raised Breeding Livestock (At base value) (Note 3) 79,885 80,040 TOTAL PROPERTY, EQUIPMENT, DAIRY AND BREEDING LIVESTOCK 1,719,885 1,700,040 Accumulated depreciation (465,000) (405,000) NET PROPERTY, EQUIPMENT, DAIRY AND BREEDING LIVESTOCK 1,254,885 1,295,040 OTHER ASSETS (NOTE 1): Investments in cooperatives 62,970 61,930 Other receivables 24,000 25,000 TOTAL OTHER ASSETS 86,970 86,930 TOTAL ASSETS 1,754,137 $ 1,871,819 $ See accompanying notes and Accountant’s review report. November, 1997 B – 9 F & F FARMS COMBINED BALANCE SHEETS (continued) DECEMBER 31, 19X1 19X0 LIABILITIES AND OWNER EQUITY CURRENT LIABILITIES: Bank overdraft 11,241 $ Current portion of long-term debt (Note 6) 108,000 $ 90,252 Short term notes payable (Note 5) 393,225 404,000 Accrued income tax payable 3,150 3,600 Accrued interest 31,000 50,880 Accounts payable 11,000 31,792 Other liabilties and accrued expenses 4,000 13,379 Current deferred tax liability (Note 4) 52,900 56,400 TOTAL CURRENT LIABILITIES 603,275 661,544 LONG-TERM DEBT (NOTE 6) 873,000 938,748 NONCURRENT DEFERRED TAX LIABILITY (NOTE 4) 13,130 13,010 TOTAL LIABILITIES 1,489,405 1,613,302 OWNER EQUITY 264,732 258,517 TOTAL LIABILITIES AND OWNER EQUITY 1,754,137 $ 1,871,819 $ November, 1997 B – 10 F & F FARMS COMBINED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 19X1 19X0 REVENUE FROM OPERATIONS: Agriculture program payments 23,000 $ 22,000 $ Cattle 589,420 619,800 Corn 24,000 20,060 Edible beans 120,000 75,000 Hogs 26,000 25,200 Milk 125,000 129,600 Oats 16,800 Raised dairy and breeding livestock (Note 3) 20,580 20,200 Soybeans 5,600 5,500 Sugar beets 128,000 132,615 Wheat 24,000 22,200 Farmland preservation tax credit 13,200 13,105 Patronage dividends 3,610 4,280 Custom machine work 1,500 1,200 Fuel tax refunds 2,100 2,200 TOTAL REVENUE FROM OPERATIONS 1,106,010 1,109,760 OPERATING COSTS AND EXPENSES: Cost of cattle sold 430,000 400,000 Accounting fees 2,250 250 Breeding fees 1,800 1,900 Chemicals 19,800 23,180 Custom hire 2,200 2,600 Depreciation/Amortization 80,000 81,000 Dues and subscriptions 200 180 Employee benefits 9,000 8,400 Feed 16,500 17,000 Fertilizers 65,000 70,000 Freight and trucking 7,000 6,500 Gas and oil 7,000 7,200 Insurance 8,800 8,300 Labor - General 65,000 62,000 Labor - Officer wages 31,200 30,000 Legal fees 1,000 2,100 Office expense and supplies 540 340 Pension expense 11,000 9,200 Rent 63,000 51,000 Repairs and maintenance 30,000 21,000 Seed 42,000 42,000 Storage 1,900 1,300 Supplies 7,665 6,400 Taxes 21,000 20,809 Truck expense 2,100 2,200 Utilites 6,400 6,300 Veterinary cost 2,300 2,200 TOTAL OPERATING COSTS AND EXPENSES 934,655 883,359 November, 1997 B – 11 F & F FARMS COMBINED STATEMENTS OF INCOME (continued) YEARS ENDED DECEMBER 31, 19X1 19X0 INTEREST EXPENSE 160,000 170,000 INCOME FROM OPERATIONS BEFORE OTHER INCOME AND INCOME TAX 11,355 56,401 OTHER INCOME: Interest income 730 850 Gain on sale of assets 2,000 TOTAL OTHER INCOME 730 2,850 INCOME BEFORE INCOME TAX (NET FARM INCOME) 12,085 59,251 INCOME TAX EXPENSE (BENEFIT) (NOTE 4): Current 6,750 3,600 Deferred (3,380) 26,400 TOTAL INCOME TAX EXPENSE 3,370 30,000 NET INCOME 8,715 $ 29,251 $ See accompanying notes and Accountant’s review report. November, 1997 B – 12 F & F FARMS COMBINED STATEMENTS OF OWNER EQUITY YEARS ENDED DECEMBER 31, 19X1 AND 19X0 FREDDIE FARMER'S LAND RENTAL TOTAL F & F FARMS, INC. PROPRIETORSHIP EQUITY Additional Common Paid in Retained Owner Stock* Capital Earnings Equity Balance 12-31-W9 5,000 $ 15,000 $ 38,202 $ 173,264 $ 231,466 $ Owner withdrawals (2,200) (2,200) Net income 23,887 5,364 29,251 Balance 12-31-X0 5,000 15,000 62,089 176,428 258,517 Owner withdrawals (2,500) (2,500) Net income 3,015 5,700 8,715 Balance 12-31-X1 5,000 $ 15,000 $ 65,104 $ 179,628 $ 264,732 $ * $1 par value, 50,000 shares authorized; 5,000 issued and outstanding See accompanying notes and Accountant’s review report. November, 1997 B – 13 F & F FARMS COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 19X1 19X0 CASH FLOWS FROM OPERATING ACTIVITIES: Cash received from operations 1,123,176 $ 1,092,449 $ Interest received 730 850 Cash paid for operating cost and expenses (799,111) (770,088) Officer wages paid (31,200) (30,000) Interest paid (179,880) (168,800) Corporate income tax paid (7,200) (1,200) NET CASH PROVIDED BY OPERATING ACTIVITIES: 106,515 123,211 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from revolvement of allocated patronage 1,126 220 Repayment of note receivable 1,000 1,000 Proceeds from sale of assets 2,000 Purchase of machinery and equipment (20,000) Purchase of land (80,000) Construction of building (30,000) NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 2,126 (126,780) CASH FLOWS FROM FINANCING ACTIVITIES: (Decrease) increase in bank overdraft (11,241) 11,241 Net increase (decrease) in short-term debt (10,775) 26,000 Proceeds from long-term debt 244,000 Repayment of long-term debt (88,000) (275,000) Owner Withdrawals (2,500) (2,200) NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (112,516) 4,041 NET INCREASE (DECREASE) IN CASH (3,875) 472 CASH AT BEGINNING OF YEAR 5,000 4,528 CASH AT END OF YEAR 1,125 $ 5,000 $ CASH AND CASH EQUIVALENTS INCLUDE THE FOLLOWING: Cash 1,125 $ 5,000 $ (CONTINUED) November, 1997 B – 14 F & F FARMS COMBINED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 19X1 19X0 RECONCILIATION OF NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: Net income 8,715 $ 29,251 $ Adjustments to reconcile net income to net cash provided by operating activities: Depreciation/Amortization 80,000 81,000 Noncash portion of patronage dividends (2,166) (3,000) Gain on sale of assets (2,000) Deferred income taxes (3,380) 26,400 (Increase) Decrease in dairy and breeding livestock 155 (8,000) (Increase) Decrease in current assets: PIK certificates 2,014 Hedging accounts 302 3,700 Commodity receivables 21,540 (12,025) Inventory 47,628 (2,177) Prepaid expenses 4,222 (2,998) Increase (Decrease) in current liabilities: Accounts payable (20,792) 2,000 Accrued interest (19,880) 1,200 Other liabilities and accrued expenses (9,379) 5,446 Accrued income taxes (450) 2,400 NET CASH PROVIDED BY OPERATING ACTIVITIES 106,515 $ 123,211 $ NONCASH INVESTING AND FINANCING TRANSACTIONS: Acquisition of machinery and equipment 40,000 $ 0 $ Amount financed 40,000 $ 0 $ See accompanying notes and Accountant’s review report. November, 1997 B – 15 F & F FARMS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 19X1 AND 19X0 NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Basis of Accounting — The accounting policies of F & F Farms’ combined financial statements conform to generally accepted accounting principles except for the way F & F Farms, Inc. (“Corporation”) values its feed inventory and raised breeding livestock. Generally accepted accounting principles require feed inventory to be valued at the lower of cost or market and raised breeding livestock to be valued at cost less accumulated depreciation. The Corporation values its grown feed inventory at market which may exceed cost and raised breeding livestock at a predetermined base value, which may exceed cost less accumulated depreciation. The effect of these departures from generally accepted accounting principles has not been determined. Business Activity — Freddie and Frieda Farmer operate a 1,400 acre cash crop farm along with milking 60 head of dairy cows, feeding out 800 feeder cattle, and farrowing and finishing 300 feeder pigs. Freddie and Frieda own 800 tillable acres and cash rent another 600 acres. Principal cash crops include sugar beets, soybeans, wheat, oats, corn, and all types of edible beans. Corn, oats, and hay are also grown for feed. Basis of Combination — The combined financial statements of F & F Farms include those accounts of the Corporation and those of Freddie Farmer’s Land Rental Proprietorship (“Proprietorship”). These combined business financial statements do not include any personal assets of Freddie and Frieda Farmer. Freddie and Frieda Farmer own 100% of the outstanding stock of the Corporation which holds title to most of the current assets and the machinery and equipment in these financial statements. The Proprietorship holds title to all the land, buildings, and improvements along with having the primary obligation for the related outstanding liabilities included in these financial statements. All material intercompany transactions have been eliminated. Property, Equipment and Livestock — The farm premises, equipment and purchased livestock are stated at cost. Depreciation is computed using the straight line method as follows: Livestock— Hogs 3 years Livestock— Dairy cows 5 years Machinery and equipment 10 years Buildings 20 years Tiling 30 years Depreciation for tax purposes is computed by using the straight line, declining balance, accelerated cost recovery system, and modified accelerated cost recovery system methods; therefore, temporary differences exist between the depreciation for tax purposes and that used in these financial statements. (CONTINUED) November, 1997 B – 16 F & F FARMS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 19X1 AND 19X0 NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED) Revenue Recognition — Revenue includes the cash sale of commodities and livestock. Revenue also includes the changes in commodities and livestock held for resale from the beginning of the year to the end of the year. These changes in commodities and livestock held for resale are included in income at the market prices that were in effect as of the balance sheet date. Income Taxes — The Corporation has adopted SFAS No. 109 “Accounting for Income taxes”. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due, plus deferred taxes. Deferred taxes are recognized for differences between the basis of assets and liabilities detailed in note 4. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. The Proprietorship’s income and expenses are combined with the income and expenses of Freddie and Frieda Farmer, individually, from other sources and reported in the individual federal and state income tax returns of the Farmers. The Proprietorship is not a taxpaying entity for purposes of federal and state income taxes, and thus, no income taxes have been recorded in the combined financial statements for the Proprietorship. Other Assets — The Corporation follows the practice of investing in cooperatives with which it does business. Such investments are valued at cost and adjusted annually for allocated patronage dividends net of cash distributions. The Corporation has established a reserve for possible uncollectible dividends in the amount of $6,334 for the years ended December 31, 19X1 and 19X0. NOTE 2 — INVENTORY: Inventory consists of the following: DECEMBER 31, 19X1 19X0 Livestock held for resale — At market $ 206,843 $ 255,100 Feed raised — At market 44,051 43,242 Feed purchased — At lower of cost or market 1,820 2,000 Total Inventory $ 252,714 $ 300,342 (CONTINUED) November, 1997 B – 17 F & F FARMS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 19X1 AND 19X0 NOTE 3 — RAISED DAIRY AND BREEDING LIVESTOCK: The Corporation utilizes a method that is commonly referred to as the “group base value” approach for valuing raised breeding livestock. Under this method, an arbitrary value deemed by management to be a conservative estimate of cost per animal is assigned to each category of raised dairy and breeding livestock. Revenue is recognized to the extent there is any change in the number of animals in each category by multiplying the change in quantity of animals times the base value amount, plus the cash sales amount received from animals sold. Expenses associated with these animals are not capitalized, but flow through the income statement. The base value amount is not depreciated. In the financial statements revenue has been recognized as follows: DECEMBER 31, 19X1 19X0 Cash sale of raised dairy and breeding livestock 20,735 $ 20,000 $ Base value of raised dairy and breeding livestock sold (22,885) (22,290) Gain (loss) on sale of culled breeding livestock (2,150) (2,290) Revenue due to change in quantity of raised dairy and breeding livestock 22,730 22,490 Total Revenue 20,580 $ 20,200 $ NOTE 4 — DEFERRED INCOME TAXES: The Corporation’s deductible temporary differences and taxable differences consist of the following: DECEMBER 31, 19X1 19X0 Deductible temporary differences: Accrued interest 31,000 $ 50,880 $ Accounts payable 11,000 31,792 Other liabilities 4,000 13,379 Reserve for possible uncollectible dividends 6,334 6,334 Total 52,334 $ 102,385 $ DECEMBER 31, 19X1 19X0 Taxable temporary differences: Commodity receivables 130,471 $ 152,011 $ Inventory 252,714 300,342 Prepaid expense 15,446 19,668 Livestock 79,885 80,040 Accumulated depreciation on property and equipment 14,000 13,000 Total 492,516 $ 565,061 $ (CONTINUED) November, 1997 B – 18 F & F FARMS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 19X1 AND 19X0 NOTE 4 — DEFERRED INCOME TAXES: (CONTINUED) For December 31, 19X1 and 19X0, it is reasonably certain that all the deductible temporary differences and taxable temporary differences will reverse in future years. Therefore, no valuation allowance is needed. Using the applicable federal tax rate of 15% each year, the deferred tax assets and liabilities are as follows: DECEMBER 31, 19X1 19X0 Total deferred tax assets (7,850) $ (15,350) $ Total deferred tax liabilities 73,880 84,760 Net deferred tax liability 66,030 $ 69,410 $ These amounts have been presented in the combined financial statements as follows: DECEMBER 31, 19X1 19X0 Current deferred tax liability 52,900 $ 56,400 $ Non current deferred tax liability 13,130 13,010 Total 66,030 $ 69,410 $ NOTE 5 — SHORT TERM NOTES PAYABLE: DECEMBER 31, 19X1 19X0 Operating line of credit from Local Ag Bank due January 31, 19X2 and 19X1, with interest at the bank's variable rate currently at 11.9%. This line of credit is secured by all crops, and has an authorized limit of $300,000. 175,190 $ 200,000 $ Notes payable to Local Ag Bank due March 31, 19X2 and 19X1, with interest at the bank's variable rate currently at 11.9%. These notes are secured by 381 and 408 head of cattle at December 31, 19X1 and 19X0, respectively. 190,000 204,000 Note payable to Rural Cooperative due on or before June 30, 19X2 with interest at 9%. This note is secured by 3,115 cwt of navy beans held at the Cooperative under a price later agreement. 28,035 0 Total 393,225 $ 404,000 $ (CONTINUED) November, 1997 B – 19 F & F FARMS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 19X1 AND 19X0 NOTE 6 — LONG-TERM DEBT: DECEMBER 31, 19X1 19X0 Note payable to John Deere Finance Co. due in annual installments of $12,500 each November 30, until 19X5. This note is secured by a money purchase security interest in a John Deere tractor. The interest rate is variable, currently at 10%. 40,000 $ 0 $ Machinery and equipment note payable, dated March 31, 19X0, to Local Ag Bank with annual installments including interest of $95,000, until March 31, 19X3. This note is secured by all machinery and equipment and carries the bank variable interest rate, currently at 11.9%. 180,000 244,000 Mortgage note payable to Local Ag Bank with a fixed interest rate of 10.5% due in annual installments of $25,000 including interest until December 31, 19X5, collateralized by 200 acres of farmland. 196,000 200,000 Mortgage note payable to Farm Credit Services with a fixed interest rate of 10.25% due in annual installments of $45,000 including interest until December 31, 19X6, collateralized by 404 acres of farmland. This mortgage is subject to prepayment penalties if paid before maturity. 380,000 385,000 Land contract payable to John Smith with interest at 9% due in annual principal payments of $5,000 plus interest each December 31, until paid in full. This land contract is secured by 79 acres of farmland located in Section 2 of Winsor Township. 70,000 75,000 Land contract payable to James Jones with interest at 9.3% due in annual principal payments of $5,000 plus interest each December 31, until paid in full. This land contract is secured by 38 acres of farmland located in Section 4 of Chandler Township. 35,000 40,000 Land contract payable to Freddie's father, Frank Farmer, with interest at 9.5% due in annual principal payments of $5,000 plus interest each December 31, until paid in full. This land contract is secured by 79 acres in Section 6 of Grant Township. 80,000 85,000 Total 981,000 1,029,000 Less: Current portion of above notes 108,000 90,252 Total long-term debt 873,000 $ 938,748 $ (CONTINUED) November, 1997 B – 20 F & F FARMS NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 19X1 AND 19X0 NOTE 6 — LONG-TERM DEBT: (CONTINUED) Current portion of above notes consist of: Current Long-term Portion Portion Total Note payable - John Dere Finance Co. 8,000 $ 32,000 $ 40,000 $ Machinery and equipment note payable - Local Ag. Bank 75,000 105,000 180,000 Mortgage - Local Ag Bank 5,000 191,000 196,000 Mortgage - Farm Credit Services 5,000 375,000 380,000 Land contracts 15,000 170,000 185,000 Totals 108,000 $ 873,000 $ 981,000 $ Maturities of long-term debt are as follows: Year ending December 31, Amount 19X2 108,000 $ 19X3 160,000 19X4 72,000 19X5 75,000 19X6 456,000 Thereafter 110,000 Total 981,000 $ Interest expense on long-term debt amounted to $102,645 and $108,902, respectively, for the years ended December 31, 19X1 and 19X0. NOTE 7 — PENSION PLAN: The Corporation sponsors a pension and profit sharing plan covering substantially all full time employees. Contributions are decided by the board of directors each year, however, contributions can not exceed 15% of each covered employee’s salary. Contributions amounted to $11,000 and $9,200 for the years ended December 31, 19X1 and 19X0, respectively. NOTE 8 — OPERATING LEASES: The Corporation leases farmland from various individuals. The leases are renewable annually. November, 1997 B – 21 SUPPLEMENTARY INFORMATION November, 1997 B – 22 [Page is intentionally left blank.] November, 1997 B – 23 F & F FARMS SCHEDULE OF PROPERTY, EQUIPMENT AND PURCHASED BREEDING LIVESTOCK DECEMBER 31, 19X1 COST BALANCE AT BALANCE AT DECEMBER 31, DECEMBER 31, 19X0 ADDITIONS DISPOSITIONS 19X1 PROPERTY AND EQUIPMENT: Land 600,000 $ 600,000 $ Buildings 400,000 400,000 Machinery and equipment 500,000 40,000 $ (20,000) $ 520,000 Tiling 117,000 117,000 Breeding livestock 3,000 3,000 TOTAL PROPERTY AND EQUIPMENT 1,620,000 $ 40,000 $ (20,000) $ 1,640,000 $ ACCUMULATED DEPRECIATION BALANCE AT PROVISION BALANCE AT DECEMBER 31, FOR DECEMBER 31, 19X0 DEPRECIATION DISPOSITIONS 19X1 ACCUMULATED DEPRECIATION: Buildings 140,000 $ 20,000 $ 160,000 $ Machinery and equipment 205,000 56,000 (20,000) $ 241,000 Tiling 59,000 3,000 62,000 Breeding livestock 1,000 1,000 2,000 TOTAL ACCUMULATED DEPRECIATION 405,000 $ 80,000 $ (20,000) $ 465,000 $ See Accountant’s Report. November, 1997 B – 24 F & F FARMS SCHEDULE OF RAISED DAIRY AND BREEDING LIVESTOCK DECEMBER 31, 19X1 NUMBER OF BORN OR RAISED ANIMALS TRANSFERRED TRANSFERRED DESCRIPTIONS 12/31/X0 IN OUT Sows 32 18 Milking cows 61 17 Heifers over one year old 16 23 (17) Heifers under one year old 23 23 (23) Total NUMBER OF TOTAL ANIMALS SOLD ANIMALS BASE VALUE BASE VALUE Sows 15 110 $ 1,650 $ Milking cows 17 1,000 $ 17,000 Heifers over one year old 5 625 $ 3,125 ANIMALS DIED Sows 1 110 110 Milking cows 1 1000 1,000 Total 22,885 $ BORN OR TRANSFERRED IN Revenue from increase in quantities: Sows 18 Milking cows 17 Heifers over one year old 23 Heifers under one year old 23 Total revenue from increase in quantities TOTAL REVENUE FROM RAISED DAIRY AND BREEDING LIVESTOCK See Accountant’s Report. (CONTINUED) November, 1997 B – 25 NUMBER OF ANIMALS BASE VALUE TOTAL SOLD DIED 12/31/X1 PER HEAD BASE VALUE (15) (1) 34 110 $ 3,740 $ (17) (1) 60 1,000 60,000 (5) 17 625 10,625 23 240 5,520 79,885 $ TOTAL NET CASH RECEIVED GAIN (LOSS) 2,010 $ 360 $ 15,300 (1,700) 3,425 300 (110) (1,000) 20,735 $ (2,150) $ BASE VALUE INCREASE 110 $ 1,980 $ 375 6,375 385 8,855 240 5,520 22,730 20,580 $ November, 1997 B – 26 F & F FARMS COMBINING STATEMENT OF ASSETS, LIABILITIES AND NET WORTH ESTIMATED CURRENT VALUE DECEMBER 31, 19X1 TOTAL ESTIMATED CURRENT F & F VALUE FARMS, INC. ASSETS CURRENT ASSETS: Cash 1,125 $ 1,125 $ Hedging accounts 526 526 Commodity receivables (Note B) 130,471 130,471 Inventory (Note C) 252,714 252,714 Prepaid expenses (Note D) 15,446 15,446 Other current assets 12,000 TOTAL CURRENT ASSETS 412,282 400,282 PROPERTY, EQUIPMENT AND LIVESTOCK: Land, buildings and tiling (Note F) 1,118,000 Machinery and equipment (Note G) 290,000 290,000 Livestock (Note H) 97,870 97,870 TOTAL PROPERTY, EQUIPMENT AND LIVESTOCK 1,505,870 387,870 OTHER ASSETS: Investments in cooperatives (Note I) 47,595 47,595 Other receivables (Note E) 24,000 TOTAL OTHER ASSETS 71,595 47,595 PERSONAL ASSETS: (NOTE J): Cash 800 Cash value of life insurance 33,000 Personal residence 68,000 Cottage 55,000 Personal effects 25,000 100% vested interest in pension plan 19,000 TOTAL PERSONAL ASSETS 200,800 TOTAL ASSETS 2,190,547 $ 835,747 $ LIABILITIES AND NET WORTH CURRENT LIABILITIES: Short-term notes payable 393,225 $ 393,225 $ Accounts payable and other accrued expenses 52,650 49,150 TOTAL CURRENT LIABILITIES 445,875 442,375 LONG TERM OBLIGATIONS: Long-term debt (Note F) 981,000 220,000 Mortgage payable on cottage (Note J) 39,000 Note payable on auto (Note J) 4,500 Deferred income taxes 66,030 66,030 Estimated income taxes (Note K) 157,390 85,765 TOTAL LIABILITIES 1,693,795 814,170 NET WORTH 496,752 21,577 TOTAL LIABILITIES AND NET WORTH 2,190,547 $ 835,747 $ See Accountant’s Report. (Continued on page B-27) November, 1997 B – 27 FREDDIE FREDDIE AND FARMER'S FRIEDA FARMER LAND RENTAL PERSONAL PROPRIETORSHIP EFFECTS 12,000 $ 12,000 1,118,000 1,118,000 24,000 24,000 800 $ 33,000 68,000 55,000 25,000 19,000 200,800 1,154,000 $ 200,800 $ 3,500 $ 3,500 761,000 39,000 4,500 65,520 6,105 826,520 53,105 327,480 147,695 1,154,000 $ 200,800 $ (Continued from page B-26) November, 1997 B – 28 F & F FARMS NOTES TO COMBINING STATEMENT OF ASSETS, LIABILITIES AND NET WORTH DECEMBER 31, 19X1 NOTE A — BASIS OF PRESENTATION: This information is presented on an estimated current value basis as determined by the owners and does not present financial position and results of operations in accordance with generally accepted accounting principles. Information prepared on an estimated current value basis is characterized by greater subjectivity and imprecision than conventional historical cost information. In addition, the supplemental current value financial statements do not purport to present the net realizable, liquidation, or market value of F & F Farms as a whole. Furthermore, amounts ultimately realized by F & F Farms from the disposal of properties may vary significantly from the current values presented. NOTE B — COMMODITY RECEIVABLES: Estimated crop receivables consist of the following: Commodity receivable held under price later agreements at a local elevator: December 31, Commodity Quantity Price 19X1 Navy beans 3,115 cwt. 13.00 $ 40,495 $ Corn 11,314 bu. 2.20 $ 24,891 Black beans 1,310 cwt. 15.00 $ 19,650 Soybeans 845 bu. 5.84 $ 4,935 Less: Storage, drying, picking, and other charges on above commodities (2,516) Total price later receivable 87,455 Other commodity receivable: Commodity Quantity Price Sugar beets 3,210 tons 12.00 $ 38,520 Pooled black beans 3,752 cwt. 1.00 $ 3,752 Pooled wheat 3,720 bu. 0.20 $ 744 Total commodity receivables 130,471 $ (CONTINUED) November, 1997 B – 29 F & F FARMS NOTES TO COMBINING STATEMENT OF ASSETS, LIABILITIES AND NET WORTH DECEMBER 31, 19X1 NOTE C — INVENTORY: Inventory is valued at market and consists of the following: Livestock inventory: Livestock Number Average Market Price Type of Head Weight Per Pound Feeder cattle over 400 lbs 381 850 lbs 0.58 $ 187,833 $ Feeder cattle under 400 lbs 20 275 lbs 0.72 $ 3,960 Feeder hogs 240 125 lbs 0.41 $ 12,300 Feeders 110 25 lbs 1.00 $ 2,750 Total livestock held for resale 206,843 Feed inventory: Type Quantity Price Baled hay 2,300 bales 1.85 $ 4,255 Silage 640 tons 26.00 $ 16,640 High moisture corn 1,900 bu. 1.99 $ 3,781 Haylage 325 tons 58.00 $ 18,850 Straw 35 tons 15.00 $ 525 Total feed inventory-At market 44,051 Feed supplement purchased-Valued at lower of cost or market 1,820 Total Inventory 252,714 $ NOTE D — PREPAID EXPENSES: Prepaid expenses consist of the following: December 31, 19X1 Growing wheat-70 acres @ $35/acre 2,450 $ Fall applied fertilizer 8,600 Prepaid fertilizer for spring 3,000 Gasoline 395 Diesel Fuel 1,001 15,446 $ NOTE E — OTHER RECEIVABLES: Other receivables consist of a land contract which calls for annual principal payments of $1,000 plus interest at 10%. This land contract is secured by a home located in Winsor Township. (CONTINUED) November, 1997 B – 30 F & F FARMS NOTES TO COMBINING STATEMENT OF ASSETS, LIABILITIES AND NET WORTH DECEMBER 31, 19X1 NOTE F — LAND, BUILDINGS AND TILING: Land, buildings and tiling are valued as of December 31, 19X1 at twice the state equalized value (“SEV”). Most of this land is used as collateral for various loans. The land and the related debt are as follows: Number of Amount of Township Section Acres 2 x S.E.V. Mortgagor Debt Brookfield 1 80 160,000 $ McKinley 3 120 136,000 296,000 Local Ag. Bank 196,000 $ Oliver 5 119 164,000 Caseville 6 125 168,000 *Lake 7 160 320,000 Farm Credit 652,000 Services 380,000 Winsor 2 79 86,000 John Smith 70,000 Chandler 4 38 52,000 James Jones 35,000 Grant 6 79 100,000 Frank Farmer 80,000 *Less: Value of personal residence (68,000) Total land, buildings and tiling 1,118,000 $ 761,000 Add: machinery and equipment debt: Note payable to Local Ag. Bank 180,000 Note payable to John Deere Finance Co. 40,000 Total machinery and equipment debt 220,000 Less current portion (108,000) Total long-term debt 873,000 $ (CONTINUED) November, 1997 B – 31 F & F FARMS NOTES TO COMBINING STATEMENT OF ASSETS, LIABILITIES & NET WORTH DECEMBER 31, 19X1 NOTE G — MACHINERY AND EQUIPMENT: Machinery and equipment was valued by the owners as follows: Estimated Accumulated Net Current Cost Depreciation Book Value Value Four wheel drive tractor 90,000 $ (45,000) $ 45,000 $ 44,000 $ Front wheel assist tractor 75,000 (20,000) 55,000 55,000 Loader tractor 15,000 (6,000) 9,000 10,000 Combine 80,000 (40,000) 40,000 40,000 Chopper 30,000 (18,000) 12,000 14,000 Semitruck 30,000 (9,000) 21,000 25,000 Tandem stake truck 20,000 (6,000) 14,000 15,000 Beet harvester 40,000 (21,000) 19,000 20,000 Beet topper 15,000 (9,000) 6,000 5,000 Field cultivator 15,000 (9,000) 6,000 5,000 8 row planter 20,000 (8,000) 12,000 14,000 8 row cultivator 8,000 (5,000) 3,000 4,000 8 row puller and windrower 20,000 (9,000) 11,000 10,000 6 bottom plow 12,000 (3,000) 9,000 10,000 Manure spreader 10,000 (4,000) 6,000 5,000 Silo unloaders 20,000 (17,000) 3,000 5,000 Pickup 20,000 (12,000) 8,000 9,000 Total Machinery and Equipment 520,000 $ (241,000) $ 279,000 $ 290,000 $ NOTE H — LIVESTOCK HELD FOR DAIRY AND BREEDING PURPOSES: Average Number of Market December 31, Type Head Value 19X1 Raised dairy and breeding livestock: Sows 34 130 $ 4,420 $ Milking cows 60 1,100 66,000 Heifers over 1 year old 17 800 13,600 Heifers under 1 year old 23 550 12,650 Total Raised Dairy and Breeding Livestock 96,670 Purchased breeding livestock: Boars 4 300 1,200 Total Livestock Held for Dairy and Breeding Purposes 97,870 $ (CONTINUED) November, 1997 B – 32 F & F FARMS NOTES TO COMBINING STATEMENT OF ASSETS, LIABILITIES & NET WORTH DECEMBER 31, 19X1 NOTE I — INVESTMENTS IN COOPERATIVES: Book Estimated Value Current Value Rural Cooperative 29,160 $ 18,714 $ Ag Livestock Exchange 13,760 8,831 Farm Milk Producers 6,334 Total allocated patronage dividends 49,254 27,545 Less: Reserve for possible uncollectable dividends (6,334) Net allocated patronage dividends 42,920 Farm Credit Services stock 20,000 20,000 Rural Cooperative stock 50 50 Total investments in cooperatives 62,970 $ 47,595 $ Rural Cooperative and Ag Livestock Exchange are presently on a ten year revolvement of allocated patronage and have no unallocated losses. The book value amount of these allocated dividends has been reduced to an estimated current value using a discounted future cash flow method, assuming the ten year revolvement will continue and using a discount rate of 9%. Farm Milk Producers has not revolved patronage during the past few years. In addition, Farm Milk Producers has unallocated losses. Since collection of these allocated dividends is uncertain, no reasonable estimate of the current value can be calculated. NOTE J — PERSONAL ASSETS AND LIABILITIES: The Farmers’ personal assets and liabilities consist of the following: DECEMBER 31, 19X1 ASSETS: Cash in a personal checking account. 800 $ $500,000 life insurance policy on Freddie Farmer with a cash value of $33,000 with Rock Solid Insurance Co. Local Ag Bank is named as beneficiary. 33,000 Personal residence located in Section 7 of Lake Township, valued by the Farmers. 68,000 Cottage at 800 Sunny Lane, Lakeville, Michigan valued at twice the state equalized value. 55,000 Personal effects: Household items valued at the insured amount. 15,000 $ 19X0 automobile with 30,000 miles valued at blue book. 10,000 Total personal effects 25,000 Freddie Farmer's 100% vested interest in F & F Farms, Inc. employees pension and profit sharing plan. 19,000 TOTAL ASSETS 200,800 $ November, 1997 B – 33 (CONTINUED) F & F FARMS NOTES TO COMBINING STATEMENT OF ASSETS, LIABILITIES & NET WORTH DECEMBER 31, 19X1 NOTE J — PERSONAL ASSETS AND LIABILITIES: (CONTINUED) LIABILITIES: VISA credit card with charges through December 30, 19X1 not due until January 15, 19X2. The minimum payment due on this credit card is $175 with interest charged on the unpaid balance at 14.9%. 3,500 $ Mortgage Note payable to Lakeville Bank with monthly payments of principal and interest of $370, with an 8% fixed interest rate until December 30, 20Y9. This mortgage is secured by a cottage at 800 Sunny Lane, Lakeville, Michigan. 39,000 Note payable to GMAC with monthly payments of principal and interest of $200 until December 30, 19X3. This note has a fixed interest rate of 7% and is secured by a 19X0 automobile. 4,500 Estimated income tax (See Note K) 6,105 TOTAL LIABILITIES 53,105 $ NOTE K — ESTIMATED INCOME TAXES: Estimated income taxes have been provided on the excess of the estimated current values of assets and liabilities over their tax basis as if the estimated current values of the assets and liabilities had been realized on the statement date, using applicable tax laws and regulations. The provision will probably differ from the amounts of regulations. The provision will probably differ from the amounts of income taxes that eventually might be paid because those amounts are determined by the timing and method of disposal or realization and the tax laws and regulations in effect at the time of disposal or realization. The estimated current values of assets net of liabilities exceeded the tax basis of Freddie and Frieda Farmer, individually, by $255,807 at December 31, 19X1, resulting in estimated income tax of $71,625 at December 31, 19X1 on this excess as follows: Freddie Farmer's Land Rental Proprietorship 65,520 $ Freddie and Frieda Farmer's Personal Effects 6,105 71,625 $ (CONTINUED)
