In 2016, The Cheesecake Factory Incorporated (NASDAQ: CAKE) opened its first New York City restaurant. The new Cheesecake Factory is in Queens and is 8,850 square feet and seats 240 guests.

Rather than selling franchises, Cheesecake Factory owns and operates all of its U.S. restaurants, which at last count numbered more than 200. It typically has a long-term lease for each restaurant location and depreciates the cost of building a restaurant over the life of the lease.

Planning for this NYC Cheesecake Factory started a few years ago when the former facility in this location, Children’s Place, closed. Cheesecake Factory officials had been searching for a suitable location for some time and this Queens location seemed to be a good fit. Prior to building, Cheesecake Factory had to have architects draw up building plans to be approved by the city. In addition, Cheesecake Factory had to obtain the City’s permission to operate a sidewalk cafe. Its plans called for outdoor dining during good weather; large windows can be closed in times of inclement weather. The last roadblock, the permit for a sidewalk cafe, was granted in March 2016. Construction started soon thereafter and the restaurant officially opened seven months later in late October 2016.

In Cheesecake Factory’s Form 10-K for 2016, it indicates that its average cost to build and equip a new restaurant is approximately $900 per interior square foot. Furnishings and equipment would typically include booths, chairs, grills, ovens, refrigerators, plates, glasses, and the like. Leasehold improvements could include walls, flooring, ceilings, windows, doors, lighting, heating and cooling systems, and similar items. Combined, the estimated cost of this new location is $7.965 million. For the purpose of this analysis, assume that 75% of the estimated cost covers leasehold improvements, with the remainder covering furnishings and equipment.

The Cheesecake Factory’s fiscal year end is the closest Tuesday to December 31 each year. Partial year depreciation would be calculated based on the number of whole months out of twelve months that the asset is in service the first year. For this analysis, estimate the salvage value of Cheesecake Factory’s plant and equipment as 10% of the original cost. To follow are excerpts from Cheesecake Factory’s 2016 Form 10-K related to its property and equipment.

We currently lease all of our restaurants and utilize capital for leasehold improvements and furnishings, fixtures and equipment (“FF&E”) to build out our restaurant premises. Total costs are targeted at approximately $900 per interior square foot for The Cheesecake Factory restaurants. (Source: Page 4, Description of Business)

We record property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred.

The useful life of property and equipment and the determination as to what constitutes a capitalized cost versus a repair and maintenance expense involve judgment by management, which may produce materially different amounts of repairs and maintenance or depreciation expense than if different assumptions were used. (Source: Page 39, Critical Accounting Policies in Management’s Discussion and Analysis)

We record property and equipment at cost less accumulated depreciation. Improvements are capitalized while repairs and maintenance costs are expensed as incurred. Depreciation and amortization are calculated using the straight-line method over the estimated useful life of the assets or the lease term, whichever is shorter. Leasehold improvements include the cost of our internal development and construction department. Depreciation and amortization periods3 are as follows:

■ Buildings and land improvements 25 to 30 years

■ Leasehold improvements 10 to 30 years

■ Furnishings, fixtures and equipment 3 to 15 years

■ Computer software and equipment 3 to 5 years

Gains and losses related to property and equipment disposals are recorded in interest and other expenses, net. (Source: Page 51, Notes to Consolidated Financial Statements) Data from the U.S. Securities and Exchange Commission EDGAR Company Filings, www.sec.gov

Requirements

1. Assume that the Cheesecake Factory paid cash for all costs of building and equipping its new restaurant in NYC. How would its assets, liabilities, and equity each be impacted by the construction and opening of this restaurant in 2016? (Ignore the impact of depreciation when answering this question.)

2. On which 2016 financial statement would you find the costs of building and equipping this new restaurant?

3. Which financial statement(s) would be impacted by depreciation on the new restaurant and its furniture and fixtures?

4. Calculate the total depreciation expense related to this new restaurant’s property and equipment for:

a. 2016 (assume two months of depreciation in 2016)

b. 2017

5. What would the net book value of the NYC Queens restaurant’s property and equipment be at the end of fiscal year 2017?