What expenditures would have been capitalized versus expensed in converting a church building to Belltower Brewing Co.?

What expenditures would have been capitalized versus expensed in converting a church building to Bell Tower Brewing Co.?

The owners of Bell Tower Brewing Co. in Kent, Ohio, purchased a 150-year-old church a few years ago. Over a three-year period, they converted the church building into a two-story, 9,000-square foot brewery. Pews from the church were converted into booths in the brewery. Historical church architectural details were preserved when possible, such as the arches throughout the space. The owners did have to replace much of the floor in the original church and make other renovations to adapt the space into brewery space. They installed a long bar. Brewery equipment such brewing tanks, filtration systems, and fermenters was installed in an outer room. In addition to craft beers, the brewery also serves food, so a kitchen was built.

Assume that the following costs were incurred during the year that Bell Tower Brewing Co. opened (all costs are hypothetical.) Also assume that brewers and wait staff started work after the opening of Bell Tower Brewing.

• Cost of church building $250,000
• Laundry service for wait staff uniforms $3,000
• Cost of CPA firm to compile financial statements for first year of operations $2,000
• Replacement windows for the renovation $50,000
• Cost of ingredients (grain, hops, and yeast) used to brew beer served in brewery $35,000
• Carpentry costs for adapting pews into booths $75,000
• Replacement heating and cooling system $125,000
• Costs to rewire building to code $65,000
• Costs of electricity after brewery opens for business $10,000
• Purchase price of delivery van $45,000
• Wages of brewers and wait staff $15,000
• Drywall and painting costs as part of renovation prior to brewery opening $80,000

View a quick tutorial video about capitalizing versus expensing plant asset purchases at this link and then answer the following questions.

Questions

1. For each of the listed costs, specify whether that cost would be expensed or capitalized. Explain your reasoning.
2. If Bell Tower Brewing spends $30,000 to repaint interior walls after two years of operations due to normal wear and tear, would the cost of that repainting be capitalized or expensed by Bell Tower? Why does it matter?
3. What is the impact of capitalizing an item on the balance sheet? On the income statement?
4. What is the impact of expensing an item on the balance sheet? On the income statement?

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