A $480,000 Brewhouse Three Ways: Capitalizing a Craft Brewery's New System, Comparing Straight-Line, Declining-Balance and Units-of-Production Depreciation, Selling an Old Canning Line and Accounting for Two Intangibles
[Student Name]
University of Phoenix
ACC/291: Principles of Accounting II
Week 2 Assignment
[Instructor Name]
[Date]
The brewery and all figures are a composite written for a model paper.
A composite craft brewery, organized as a corporation, has outgrown the seven-barrel system it opened with. Its beers now sell in its taproom and in about 90 grocery and liquor stores in two counties, and the owners have bought a fifteen-barrel brewhouse to keep up. A single machine now accounts for most of the brewery's assets, so how it is recorded and depreciated will shape reported profit for a decade. This paper determines the brewhouse's cost, compares three depreciation methods, records the sale of an old canning line and accounts for two intangible assets.
Step 1: What the Brewhouse Cost
A plant asset is recorded at every cost necessary to acquire it and get it ready for use (Weygandt et al., 2021). The brewery paid the following.
Invoice price, $410,000; state sales tax at 6%, $24,600; freight from the manufacturer, $12,400; installation, including a new electrical service and steam piping, $31,000; and ingredients and labor for two test batches that were poured down the drain, $2,000. These costs total $480,000, and all of them are capitalized, because each was needed to make the brewhouse ready to produce beer that could be sold.
Two other payments were not capitalized. A one-year insurance policy on the equipment, $3,600, covers a period after the brewhouse is in service, so it is recorded as Prepaid Insurance and expensed as it expires. A $1,500 fee paid to a designer for new taproom menus has nothing to do with the equipment and is an operating expense.
Entry for the capitalized cost: debit Equipment, Brewhouse $480,000; credit Cash $449,000 and Notes Payable $31,000, since the installer agreed to a short-term note.
Step 2: The Estimates
The brewers expect the brewhouse to last ten years and to be sold for about $30,000 at the end. They also estimate that over its life it will produce 45,000 barrels. The depreciable cost, the amount to be spread over the asset's life, is $480,000 minus $30,000, or $450,000. Output is planned at 3,200 barrels in the first year, 4,800 in the second and 5,800 in the third, as new store accounts come on.
Step 3: Three Methods Compared
Straight-line
Depreciable cost divided by ten years is $45,000 a year. After three years, accumulated depreciation is $135,000 and book value is $345,000.
Double-declining-balance
The straight-line rate of 10% doubles to 20%, applied to book value at the start of each year, ignoring salvage value until the end of the asset's life. Year 1: 20% of $480,000, $96,000. Year 2: 20% of $384,000, $76,800. Year 3: 20% of $307,200, $61,440. After three years, accumulated depreciation is $234,240 and book value is $245,760.
Units-of-production
Depreciable cost divided by 45,000 barrels is $10 per barrel. Year 1: 3,200 barrels, $32,000. Year 2: 4,800 barrels, $48,000. Year 3: 5,800 barrels, $58,000. After three years, accumulated depreciation is $138,000 and book value is $342,000.
Step 4: What the Choice Changes
Over the brewhouse's full life, all three methods charge the same $450,000 to expense. They differ in timing. Declining-balance puts almost 75% more expense into the first three years than straight-line does, which lowers reported profit early and raises it later. Units-of-production ties expense to use, so a slow year carries little depreciation and a busy one carries more.
For the brewery, units-of-production matches the economics best. Wear on kettles, pumps and heat exchangers follows the number of brews, and output will grow for several years as the brewery adds stores. It also keeps first-year profit close to what the owners' bank expects, since first-year depreciation is only $32,000.
The choice has consequences beyond the income statement. Jackson et al. (2009) found that firms using accelerated depreciation for financial reporting made larger capital investments than firms using straight-line, consistent with managers responding to how depreciation affects reported profit. The owners should know that the method they choose may shape how comfortable they feel buying the next tank.
Depreciation for tax purposes follows separate rules. Federal tax returns use the Modified Accelerated Cost Recovery System and set recovery periods by class of property, so the brewery's tax depreciation will differ from its book depreciation whichever book method it chooses (Internal Revenue Service, 2025).
Step 5: Selling the Old Canning Line
The new brewhouse came with a faster canning line, so the brewery sold its old one. That line had cost $60,000 and had accumulated depreciation of $44,000 at the date of sale, a book value of $16,000. A smaller brewery paid $11,000 for it.
Entry: debit Cash $11,000; debit Accumulated Depreciation $44,000; debit Loss on Disposal $5,000; credit Equipment $60,000.
The $5,000 loss does not mean the sale was a bad decision. It means that the earlier depreciation estimates, made when the line was new, turned out to be too low for how quickly used canning equipment loses value. A gain or loss on disposal is the correction for estimates that were not exactly right.
Step 6: Two Intangible Assets
A purchased trademark
The brewery bought the name and label of a closed local brewery's best-known lager for $40,000, intending to revive the beer. A registered trademark can be renewed indefinitely, and the brewery plans to keep renewing it, so the trademark has an indefinite life. It is recorded at $40,000, is not amortized and is tested for impairment at least once a year. If the revived lager fails and the name loses value, the brewery writes the trademark down and records an impairment loss.
A distribution agreement
The brewery also paid a regional distributor $25,000 for the exclusive right to have its beer carried into a third county for five years. That right has a fixed term, so it is amortized over five years at $5,000 a year.
Entry each year: debit Amortization Expense $5,000; credit Distribution Rights $5,000.
Costs of creating intangibles internally are handled differently. The brewery's own recipes, developed by its brewers over several years, do not appear on the balance sheet at all, because the salaries and ingredients spent developing them were expensed as incurred. Only the purchased trademark and the purchased agreement are assets.
Step 7: The Balance Sheet After Year 1
Using units-of-production, the brewhouse appears at $480,000 less accumulated depreciation of $32,000, or $448,000. The trademark appears at $40,000 and the distribution rights at $20,000. The income statement for year 1 reports depreciation of $32,000 on the brewhouse, amortization of $5,000 and the $5,000 loss on the canning line.
Conclusion
The brewery's new brewhouse cost $480,000 once sales tax, freight, installation and testing were included, and three reasonable methods produce first-three-year depreciation from $135,000 to $234,240. Units-of-production fits a brewery whose wear follows its output, while the sale of the old canning line shows how disposals correct earlier estimates. The trademark and the distribution agreement show that intangible assets follow the same logic as equipment: a limited life is amortized, and an indefinite one is watched for impairment.
References
Internal Revenue Service. (2025). How to depreciate property (Publication 946). https://www.irs.gov/publications/p946
Jackson, S. B., Liu, X., & Cecchini, M. (2009). Economic consequences of firms' depreciation method choice: Evidence from capital investments. Journal of Accounting and Economics, 48(1), 54-68. https://doi.org/10.1016/j.jacceco.2009.06.001
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2021). Accounting principles (14th ed.). Wiley.
How this ACC 291 Week 2 example is structured
The ACC/291 shelf page describes Week 2 as covering long-lived assets, depreciation choices and intangibles. The paper follows one asset from purchase to its third year so that every method is applied to the same cost, then records a disposal, because the gain or loss on sale is where earlier depreciation choices come back. Intangibles close the paper, since the brewery's name and its right to reach stores are worth as much to it as its tanks. Students search this week as ACC 291 Week 2, ACC291 Wk 2 or ACC/291 Wk 2; all three are the same assignment.
ACC/291 Week 2 questions, answered
What does ACC/291 Week 2 usually ask for?
The ACC/291 shelf describes Week 2 as covering long-lived assets, depreciation choices and intangibles. Many sections assign problems that determine an asset's cost, compute depreciation under several methods, record a disposal and amortize an intangible.
Which costs are capitalized as part of equipment?
All costs needed to acquire the asset and make it ready for its intended use: the purchase price, sales tax, freight, installation and testing. Costs that benefit only the current period, such as insurance after the asset is in service, are expensed.
Are all intangible assets amortized?
No. Intangibles with a limited useful life, such as a contract right for a fixed term, are amortized over that life. Intangibles with an indefinite life, such as a trademark the company intends to keep renewing, are not amortized but are tested for impairment at least once a year.
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