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Comprehensive Fixed Asset Problem Darby Sporting Goods Inc Has PDF

Darby Sporting Goods purchased a factory, land, and machinery from Encino Athletic Equipment to increase production capacity. The purchase price was $400,000 and renovations cost $100,000. Darby took out a $500,000 loan at 12% interest to finance the acquisition and renovations. An appraisal valued the land at $290,000, building at $105,000, and machinery at $45,000. Darby will record the assets based on these appraised values and depreciate them over their estimated useful lives.

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57 views1 page

Comprehensive Fixed Asset Problem Darby Sporting Goods Inc Has PDF

Darby Sporting Goods purchased a factory, land, and machinery from Encino Athletic Equipment to increase production capacity. The purchase price was $400,000 and renovations cost $100,000. Darby took out a $500,000 loan at 12% interest to finance the acquisition and renovations. An appraisal valued the land at $290,000, building at $105,000, and machinery at $45,000. Darby will record the assets based on these appraised values and depreciate them over their estimated useful lives.

Uploaded by

Anbu jaromia
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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Comprehensive Fixed Asset Problem Darby Sporting

Goods Inc has


Comprehensive Fixed-Asset Problem 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 Round ball 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 Round ball
manufacturing facility, and Darby agreed to purchase the factory and used machinery from
Encino Athletic Equipment Company on October 1, 2009. 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, 2010, 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 2010, are shown below. The factory
was placed in service on January 1, 2011. 1/1 4/1 10/1 12/31Encino $50,000 $90,000 $110,000
$150,000Malone 30,000 30,000 40,000On January 1, 2010, 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 2010. 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 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 Encino’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 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. 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. (a) Determine
the amounts to be recorded on the books of Darby Sporting Goods Inc. as of December 31,
2010, for each of the following properties acquired from Encino Athletic Equipment Company.(1)
Land. (2) Building. (3) Machinery.(b) Calculate Darby Sporting Goods Inc.’s 2011 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.(CMA
adapted)View Solution:
Comprehensive Fixed Asset Problem Darby Sporting Goods Inc has
SOLUTION-- http://accountinginn.online/downloads/comprehensive-fixed-asset-problem-darby-
sporting-goods-inc-has/

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