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 Darbys 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 Darbys Roundball manufacturing facility, and Darby agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October 1, 2016. Renovations were neces- sary to convert the factory for Darbys manufacturing use. The terms of the agreement required Darby to pay Encino $50,000 when renovations started on January 1, 2017, with the bal- ance to be paid as renovations were completed. The overall purchase price for the factory and machinery was $400,000. The build- ing renovations were contracted to Malone Construction at $100,000. The payments made, as renovations progressed during 2017, are shown below. The factory was placed in service on January 1, 2018.

1/1 4/1 10/1 12/31 Encino $50,000 $90,000 $110,000 $150,000 Malone 30,000 30,000 40,000

On January 1, 2017, 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 Darbys only outstanding loan during 2017. Bob Sprague, Darbys controller, will capitalize the maximum allowable interest costs for this project. Darbys policy regard- ing 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 Encino $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 Encinos 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 salvage value of $30,000. Justice estimated that the productive machinery would have a remaining useful life of 5 years and a salvage value of $3,000. Darbys depreciation policy specifies the 200% declining-balance method for machinery and the 150% declining- balance method for the plant. One-half years 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 Inc. as of December 31, 2017, for each of the following properties acquired from Encino Athletic Equipment Company. (1) Land. (2) Buildings. (3) Machinery. (b) Calculate Darby Sporting Goods Inc.s 2018 depreciation expense, for book purposes, for each of the properties acquired from Encino Athletic Equipment Company. (c) Discuss the arguments for and against the capitalization of interest costs.