Darby Sporting Goods Inc. has been experiencing growth in the demand for its products over the last several years. The last two Olympic Games greatly increased the popularity of basketball around the world. As a result, a European sports retailing consortium entered into an agreement with Darby?s Roundball Division to purchase an increasing number of basketballs and other accessories over the next five years.To meet the quantity commitments of this agreement, Darby had to increase its manufacturing capacity. A real estate firm found an available factory close to Darby?s Roundball manufacturing facility, and Darby agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October 1, 2019. Renovations were needed to convert the factory for Darby?s manufacturing use. The terms of the agreement required Darby to pay Encino $50,000 when renovations started on January 1, 2020, with the balance to be paid as renovations were completed. The overall purchase price for the factory and machinery was $400,000. The building renovations were contracted to Malone Construction at $100,000. The payments made as renovations progressed during 2020 are shown below. The factory began operating on January 1, 2021.

On January 1, 2020, Darby secured a $500,000 line of credit with a 12% interest rate to finance the purchase cost of the factory and machinery and the renovation costs. Darby drew down on the line of credit to meet the payment schedule shown above; this was Darby?s only outstanding loan during 2020.

Bob Sprague, Darby?s controller, will capitalize the maximum allowable interest costs for this project, which he has calculated to be $21,000. Darby?s policy regarding purchases of this nature is to use the land?s appraisal value for book purposes and pro-rate the balance of the purchase price over the remaining items. The factory had originally cost Encino $300,000 and had a carrying amount of $50,000, while the machinery originally cost $125,000 and had a carrying amount of $40,000 on the date of sale. The land was recorded on Encino?s books at $40,000. An appraisal, conducted by independent appraisers at the time of acquisition, valued the land at $290,000, the factory at $105,000, and the machinery at $45,000.

Angie Justice, chief engineer, estimated that the renovated factory would be used for 15 years, with an estimated residual value of $30,000. Justice estimated that the productive machinery would have a remaining useful life of five years and a residual value of $3,000. Darby?s depreciation policy specifies the 200% declining-balance method for machinery and the 150% declining-balance method for the factory.

Half a year?s depreciation is taken in the year the factory is placed in service and half a year?s depreciation is allowed when the property is disposed of or retired.

Instructions

a. Determine the amounts to be recorded on the books of Darby Sporting Goods Inc. as at December 31, 2020, for each of the following assets acquired from Encino Athletic Equipment Company:

(1) land,

(2) Factory,

(3) Machinery.

b. Calculate Darby Sporting Goods Inc.?s 2021 depreciation expense, for book purposes, for each of the assets acquired from Encino Athletic Equipment Company.

c. Digging Deeper Discuss the arguments for and against the capitalization of interest costs. Why would the treatment of interest costs matter to a shareholder of a public company, for instance?

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Jan. 1 $50,000 Apr. 1 Oct. 1 Dec. 31 Encino $110,000 30,000 $90,000 30,000 $150,000 40,000 Malone