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Dale Brewery is a craft brewery located in Oshawa Ontario. In May 2017, Dale Brewery acquired...

Dale Brewery is a craft brewery located in Oshawa Ontario. In May 2017, Dale Brewery acquired new equipment that will be used in his flagship store. Details of his purchase are as follows:

Dale paid the following for the equipment: -

Equipment $375,000

- Delivery $3,000

- Training for staff: $10,000

- Staff party to celebrate the new brewery opening: $3,500

- Equipment set-up & installation: $30,000

- Advertisements in a local paper: $1,100

Part 1 – Capitalization vs. Expense

a) Prepare the journal entries to record the above purchases.

b) Why might a company prefer to classify items as assets, rather expensing them?

Part 2 – Depreciation

Dale Brewery is contemplating the method of depreciation for this new equipment. The equipment has a useful life of four years and will produce approximately 110,000 kegs of beer in its life.

c) Assuming that the company uses the units of production method of depreciation. Prepare the journal entries assuming that the following number of kegs were produced in 2017, 2018 and 2019. - 2017: 15,000 kegs - 2018: 31,000 kegs

d) Explain why a company may choose to use the units of production method of depreciation, rather than using the straight-line method for calculating depreciation?

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Answer #1

Answer the following questions? Answer: a) Journal Entries: Account Titles & Explanation Debit Equipment b) Why might a company prefer to classify items as assets, rather expensing them As the economic benefit from the equipment is going to be derived froma number of years rather than a single year the cost should also be apportioned over the life of the asset. Credit S 3,75,000.00 3,75,000.00 an Paid for purchase of equipment c) Journal Entries for Depreciation Equipment S 3,000.00 Account titles & explanation Debit Credit S 3,000.00 2017 Depreciation Expense Accumulated Depreciation Equip an Paid for delivery of equipment S55,636.36 (408000 15000)/110000 55,636.36 Training Expenses Staff Welfare Expenses Advertisement S 10,000.00 $ 3,500.00 S 1,100.00 2018 Depreciation Expense Accumulated Depreciation Equip $1,14,981.82 S 14,600.00 $1,14,981.82 an Various expenses paid d) Explain why a company could choose units of production method? Depreciation is based on the assumption that the asset value decreases due to wear & tear. Where asset value can be estimated in the form of production units it is better to charge depreciation on this basis as this provides the actual depreciation for the year on the basis of production, for example higher when we produced more kegs of beer and lower depreciation when we produced less kegs of beer rather than equal deprecition using straight line method Equipment S 30,000.00 an S 30,000.00 Installation cost of equipment

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