Darby Sporting Goods Inc has been experiencing growth in

the
Darby Sporting Goods Inc has been experiencing growth in the

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 be able 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, 2016. Renovations were necessary 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, 2017, 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 2017 are shown below. The factory began operating on January 1, 2018.

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 Darby's only outstanding
loan during 2017.

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 appraisal value of the land 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 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 factory. Half a year's depreciation is taken in the year the

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 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, 2017, for each of the following properties acquired from Encino Athletic
Equipment Company:

(1) Land,

(2) Factory, and

(3) Machinery.

(b) Calculate Darby Sporting Goods Inc.'s 2018 depreciation expense, for book purposes, for
each of the assets acquired from Encino Athletic Equipment Company.

(c) 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?

Darby Sporting Goods Inc has been experiencing growth in the

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experiencing-growth-in-the/

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