P roblem 1 l —13 Sage Hill 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 basketballaround the world. As a result, a European sports retailing consortium entered into an agreement with Sage Hill’s Roundball Division to purchase an increasing number of baskedJalls and otheraccessories over the next five years. To be able to meet the quantity commitments of this agreement, Sage Hill had to increase its manufacturing capacity. A real estate firm found an available factory close to Sage Hill‘s Roundbailmanufacturing facility, and Sage Hill agreed to purchase the factory and used machinery from Encino Athletic Equipment Company on October 1, 2016. Renovations were necessary to convert thefactory for Sage Hill‘s manufacturing use. The terms of the agreement required Sage Hill to pay Encino $50,000 when renovations started on January 1, 2017, with the balance to be paid as renovations were completed. The overall purchaseprice for the factory and machinery was $450,000. The building renovations were contracted to Malone Construction at $112,500. The paymenm made as renovations progressed during 2017 areshown below. The factory began operating on January 1, 2018. Jan. 1 Apr. 1 Oct. 1 Dec. 31Encino $50,000 $110,000 $130,000 $160,000Malone 30,000 30,000 52,500 On January 1, 2017, Sage Hill 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. Sage Hiil drew down onthe line of credit to meet the payment schedule shown above; this was Sage Hill’s only outstanding loan during 2017. Bob Sprague, Sage Hill‘s controller, will capitalize the maximum allowable interest costs for fl'ris project, which he has calculated to be $25,000. Sage Hill’s policy regarding purchases of this nature isto use the appraisal value of the land for book purposes and prosrate the balance ofthe purchase price over the remaining items. The factory had originally cost Encino $350,000 and had a carryingamount 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 $320,000, the factory at $140,000, and the machinery at $60,000. 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. Sage Hill‘s depreciation policy specifies the 200% declining—balance method for machinery and the 150% declining-balancemethod 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. Determine the amounts to be recorded on the books of Sage Hill Sporting Goods Inc. as at December 31, 201?, for each of the following properties acquired from Encino Athletic EquipmentCompany: (1) land, (2) factory, and [3) machinery. (1) Land(2) Factory(3) Machinery Totals
