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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
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 world. As a result, a European sports retailing consortium entered into an agreement with Sarasota's Roundball Division to purchase basketballs and other accessories on an increasing basis over the next five years.
Sarasota had to obtain additional manufacturing capacity to meet this agreement's quantity commitments. A real estate firm located an available factory close to Sarasota's Roundball manufacturing facility. Sarasota agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October Renovations were necessary to convert the factory for Sarasota's manufacturing use.
The terms of the agreement required Sarasota to pay Encino $ when renovations started on January with the balance to be paid as renovations were completed. The overall purchase price for the factory and machinery was $ The building renovations were contracted to Malone Construction at $ The payments made as renovations progressed during are shown below. The factory was placed in service on January
Purchasing price and renovations over the year.
Encino $ $ $ $
Malone
On January Sarasota secured a $ lineofcredit with a interest rate to finance the purchase cost of the factory and machinery, and the renovation costs. Sarasota drew down on the lineofcredit to meet the payment schedule shown above; this was Sarasota's only outstanding loan during Interest will be paid annually on January
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 book purposes and prorate the purchase price balance over the remaining items. The building had initially cost Encino $ and had a net book value of $ while the machinery initially cost $ and had a net book value of $ on the date of sale. The land was recorded on Encino's books at $ An appraisal conducted by independent appraisers during the acquisition valued the land at $ the building at $ and the machinery at $
Angie Justice, the chief engineer, estimated that the renovated plant would be used for years, with an estimated salvage value of $ Justice estimated that the productive machinery would have a remaining useful life of years and a salvage value of $ Sarasota's depreciation policy specifies the decliningbalance method for machinery and the decliningbalance method for the plant. Onehalf year's depreciation is taken in the year the plant is placed in service, and onehalf year is allowed when the property is disposed of or retired. Sarasota uses a day year for calculating interest costs.
Present the accounts and dollar amounts on the comparative balance sheet and income statement for the year ended related to these new assets, the lineofcredit, and depreciation. Ignore the cash account and the interest expense account.
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