Problem 11-13 Determine the amounts to be recorded on the books of Shamrock Spor
ID: 2556388 • Letter: P
Question
Problem 11-13
Determine the amounts to be recorded on the books of Shamrock 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.
Calculate Shamrock 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.)
Problem 11-13
Shamrock 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 Shamrock’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, Shamrock had to increase its manufacturing capacity. A real estate firm found an available factory close to Shamrock’s Roundball manufacturing facility, and Shamrock 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 Shamrock’s manufacturing use.
The terms of the agreement required Shamrock 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 $500,000. The building renovations were contracted to Malone Construction at $125,000. 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 $100,000 $120,000 $220,000 Malone 25,000 25,000 75,000
On January 1, 2017, Shamrock secured a $625,000 line of credit with a 12% interest rate to finance the purchase cost of the factory and machinery and the renovation costs. Shamrock drew down on the line of credit to meet the payment schedule shown above; this was Shamrock’s only outstanding loan during 2017.
Bob Sprague, Shamrock’s controller, will capitalize the maximum allowable interest costs for this project, which he has calculated to be $23,000. Shamrock’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 $400,000 and had a carrying amount of $50,000, while the machinery originally cost $150,000 and had a carrying amount of $40,000 on the date of sale. The land was recorded on Encino’s books at $60,000. An appraisal, conducted by independent appraisers at the time of acquisition, valued the land at $380,000, 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 $20,000. Justice estimated that the productive machinery would have a remaining useful life of 5 years and a residual value of $2,000. Shamrock’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
Purchase costs(Land at apprasied value and others on pro rata basis of appraised value) Renovation costs Capitalized interest in proportion Capitalized interest specific to factory Renovation The total amount to be recorded in books at December 31, 2017 Land 380000 15200 395200 Factory 84000 125000 3360 3000 215360 Machinery 36000 1440 37440 Total 500000 20000 648000 Depreciation expense for 2018 Costs of an asset Useful life of an asset Rate of depreication in % Depreciation for full year Depreciation for half year Land 395200 NA 0 0 0 Factory 215360 15 10 21536 10768 Machinery 37440 5 40 14976 7488 Total 648000 Total 18256