Determine the amounts to be recorded on the books of Windsor Sporting Goods Inc.
ID: 2557701 • Letter: D
Question
Determine the amounts to be recorded on the books of Windsor 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.
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Calculate Windsor Sporting Goods Inc.’s 2018 depreciation expense, for book purposes, for each of the assets acquired from Encino Athletic Equipment Company. (Do not leave any answer field blank. Enter 0 for amounts.)
To be able to meet the quantity commitments of this agreement, Windsor had to increase its manufacturing capacity. A real estate firm found an available factory close to Windsor’s Roundball manufacturing facility, and Windsor 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 Windsor’s manufacturing use.
The terms of the agreement required Windsor to pay Encino $60,000 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 $450,000. The building renovations were contracted to Malone Construction at $112,500. The payments made as renovations progressed during 2017 are shown below. The factory began operating on January 1, 2018.
Jan. 1 Apr. 1 Oct. 1 Dec. 31 Encino $60,000 $120,000 $140,000 $130,000 Malone 30,000 30,000 52,500
On January 1, 2017, Windsor secured a $562,500 line of credit with a 12% interest rate to finance the purchase cost of the factory and machinery and the renovation costs. Windsor drew down on the line of credit to meet the payment schedule shown above; this was Windsor’s only outstanding loan during 2017.
Bob Sprague, Windsor’s controller, will capitalize the maximum allowable interest costs for this project, which he has calculated to be $20,000. Windsor’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 $350,000 and had a carrying amount of $50,000, while the machinery originally cost $137,500 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 $310,000, the factory at $126,000, and the machinery at $54,000.
Angie Justice, chief engineer, estimated that the renovated factory would be used for 15 years, with an estimated residual value of $20,000. Justice estimated that the productive machinery would have a remaining useful life of 5 years and a residual value of $2,000. Windsor’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 factory is placed in service and half a year’s depreciation is allowed when the property is disposed of or retired.
Explanation / Answer
Cost Allocations to Acquired Properties Appraisal Value Remaining purchase price allocation (a) Renovations Capitalized Interest (b) Total Land $310,000 $310,000 Buildings $98,000 $112,500 $25,800 $236,300 Machinery $42,000 $42,000 Total $310,000 $140,000 $112,500 $25,800 $588,300 a) Balance of purchase price to be allocated Total purchase price $450,000 Less: Land appraisal -$310,000 Balance to be allocated $140,000 Appraisal Value Ratios Balance to be allocated Allocated values Building $126,000 70.00% $140,000 $98,000 Machinery $54,000 30.00% $140,000 $42,000 Total $180,000 100.00% $140,000 b) Capitalized interest Expenditures Date Encino Malone Total Amount Capitalization Period Weighted-Average Accumulated Expenditures 1/1/17 $60,000 $60,000 12/12 $60,000 4/1/17 $120,000 $30,000 $150,000 9/12 $112,500 10/1/17 $140,000 $30,000 $170,000 3/12 $42,500 12/31/17 $130,000 $52,500 $182,500 0/12 $0 $562,500 $215,000 Avoidable Interest = Weighted-Average Accumulated Expenditures x 12% $25,800 b)Calculate Grouper Sporting Goods Inc.’s 2018 depreciation expense, for book purposes, for each of the properties acquired from Encino Athletic Equipment Company. Depreciation rate Depreciation Expense 1) Land No Depreciation 2) Building 150% x 1/15 = 10% $236,300 x 10% x 1/2 $11,815 3) Machinery 200% x 1/5 = 40% $42,000 x 40% x 1/2 $8,400
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