Background Sarasota Sporting Goods Inc. has been experiencing growth in the demand for its products over the last several years. The last two Olympic Games significantly increased the popularity of basketball around the workd As a result, a European sports retailing consortium entered into an agreement with Sarasota's fioundball Division to purchase basketbalk and ocher accessories on an increasing bask over the next five pears. Sarasota had to obtain additional manufacturing capacity to mect this agroement's quantity commitments. A real tate finm locatod an available factory close to Sarzota's Roundball manulacturing faclity. Sarasota agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October 1, 2020. Flenovations were necessary to comvert the factory for Sarasota's manufacturing use. The terms of the agreement required Sarasota to pay Encino $60,000 when renovations started on danuary 1, 2021, with the balance to be paid as renovations were completed. The overall purchase price for the factory and machinery was $480,000. The building renovations were contracted to Malone Constnuction at $120,000. The payments made as renovations progressed during 2021 are shown below. The factory was placed in service on danuary 1, 2022. Purchasing prioe and renovations over the vear. On danuary 1, 2021, 5arasota secured a $600,000 line-of -credit with a 12% interest rate to finance the purchase cost of the factory and machinery, and the renovation costs. Sarasota drew down on the fine-of-credit to meet the payment schedule shown above; this was Sarasota's only outstanding loan during 2021. Interest will be paid annually on January 1. Bob Sprague, Sarasota's controller, will capitalize on this project's maximum allowable interest costs Sarasota's policy regarding purchases of this nature is to use the appraisal value of the land for boak purposes and prorate the purchase price balanoe over the remaining iteme. The building had initially cost Encino $360,000 and had a net bock value of $60,000, while the machinery initlally cost $150,000 and had a net boak value of \$48,000 on the date of sale. The land was reconded an Encino's books at $48,000. An appraisal conducted by independent appraisers during the acquisition valued the land at $348,000, the bulding at $126,000, and the machinery at $54,000 Angic Justice, the chicf engineer, cstimated that the renovated plant would be used for 15 years, with an timated salvage value of $36,000. Justice estimated that the productive machinery would hawe a remaining useful life of 5 years and a salvage value of $3,600 Sarasota's depreclation policy specifies the 200% declining-balance method for machinery and the 1 sox declining-balance method for the plant. One-half year's depeceiation is taken in the year the plant is placed in service, and one-halt year is allowod when the property k disposed of or retired. Sarasota uses a 360 -day year for calculating interest costs. Instructions In vour group, prepare the following: - Detemine the amounts to be recorded on the books of Sarasota Sporting Goods lnc. as of December 31, 2021, for cach of the following properties acquired from Encino Athletic Equipment Company: Land, Building and Machincry. - Calculate Sarasota Sporting Coods Inc's 2022 desreclation expense, for book purposes, for each of the properties acquired from Encino Athletic Equipment Compary. - Present the aocounts and dollar amounts on the comparative balance sheet and income statement for the year ended 12/31/22 related to these new assets, the line-of-credit, and depreciation. (lonore the cach aocount and the interest expense account.)
