Darby Sporting Goods Plc 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 basketballs and other accessories on an increasing basis over the next 5 years.
To be able to meet the quantity commitments of this agreement, Darby had to obtain additional manufacturing capacity. A real estate firm located an available factory in close proximity to Darby's Roundball manufacturing facility, and Darby agreed to purchase the factory and used machinery from Quay Athletic Equipment Company on October 1, 2018. Renovations were necessary to convert the factory for Darby's manufacturing use.
The terms of the agreement required Darby to pay Quay £50,000 when renovations started on January 1, 2019, 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 2019, are shown below. The factory was placed in service on January 1, 2020.

On January 1, 2019, 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 2019.
Bob Sprague, Darby's controller, will capitalize the maximum allowable interest costs for this project. Darby's policy regarding purchases of this nature is to use the appraisal value of the land for book purposes and prorate the balance of the purchase price over the remaining items. The building had originally cost Quay £300,000 and had a net book value of £50,000, while the machinery originally cost £125,000 and had a net book value of £40,000 on the date of sale. The land was recorded on Quay's books at £40,000. An appraisal, conducted by independent appraisers at the time of acquisition, valued the land at £290,000, the building at £105,000, and the machinery at £45,000.
Angie Justice, chief engineer, estimated that the renovated plant 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 5 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 plant. One-half year's depreciation is taken in the year the plant is placed in service and one-half year is allowed when the property is disposed of or retired. Darby uses a 360-day year for calculating interest costs.
Instructions
a. Determine the amounts to be recorded on the books of Darby Sporting Goods as of December 31, 2019, for each of the following properties acquired from Quay Athletic Equipment Company.
1. Land.
2. Building.
3. Machinery.
b. Calculate Darby Sporting Goods' 2020 depreciation expense, for book purposes, for each of the properties acquired from Quay Athletic Equipment Company.
c. Discuss the arguments for and against the capitalization of interest costs.
d. Given the enhancements to the building, Darby thinks it would make its financial position look better if it used revaluation accounting. Advise Darby management on whether the company can use revaluation accounting for this building. Should Darby management use revaluation accounting? Briefly discuss some of the reasons for and against use of revaluation accounting.