Janet, Brian, and Natalie have decided to take on the additional work offered by Coffee Beans. Recall that Coffee Beans is doubling the number of cupcakes required on a weekly basis. The Koebels are also reconsidering the Biscuits offer to provide chocolate chip cookies on a weekly basis. Currently, Koebel’s Family Bakery has enough capacity to bake all of the cupcakes required by Coffee Beans and, if they accept the Biscuits offer, has enough capacity to bake all of the cookies required on a weekly basis. If, however, any other large orders are received they would have to turn these orders away.
The Koebels would like to buy two new ovens (including one to replace one of their commercial ovens) as well as purchase another refrigerator. The Koebels have discussed the required changes with a contractor, and estimate the costs as follows:
1. Cost of two new ovens, $30,000 (2 at $15,000).
2. The old oven could be sold to the community daycare centre for $100. The oven was originally purchased for $5,000 on January 3, 2008. It has been depreciated on a straight-line basis over a five-year useful life with no residual value.
3. Cost of new refrigerator, $8,000.
4. Cost of plumbing upgrade as a result of the installation of the new refrigerator, $1,500.
5. Cost of electrical panel upgrade as a result of the installation of the two new ovens, $2,500.
6. Shipping costs, $500 per appliance.
7. Additional insurance required on the new equipment, $1,200 per year.
8. Painting of the walls in the bakery to “freshen things up,” $3,850.
The Koebels anticipate that the cost of the upgrade can be financed with cash they currently have in the bank. The equipment upgrade could take place during the late summer when the sales at the bakery are a little slower. If all goes smoothly in terms of installation, the new equipment could be ready for use by September 1, 2012.
Natalie is concerned about the recording of these transactions in the accounting records. She is not certain which costs should be capitalized and which should be expensed.
Instructions
(a) Identify which of the above costs should be capitalized and which should be expensed.
(b) Record the journal entry for the disposal of the old oven on September 1, 2012. Assume that the last time depreciation was recorded was on June 30, 2012.
(c) Record the journal entry for the purchase and installation of the new equipment on September 1, 2012.
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