Selig 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 in to an agreement with Selig’s Roundball 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, Selig had to obtain additional manufacturing capacity. A real estate firm located an available factory in close proximity to Selig’s Roundball manufacturing facility, and Selig agreed to purchase the factory and used machinery from Starks Athletic Equipment Company on October 1, 2005. Renovations were necessary to convert the factory for Selig’s manufacturing use.
The terms of the agreement required Selig to pay $50,000 when renovations started on January 1, 2006, 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 2006, are shown below. The factory was placed in service on January 1, 2007.
On January 1, 2006, Selig 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. Selig drew down on the line-of-credit to meet the payment schedule shown above; this was Selig’s only outstanding loan during 2006.
Rob Stewart, Selig’s Controller, will capitalize the maximum allowable interest costs for this project. Selig’s policy regarding purchases of this nature is to use the appraisal value of the land for book purposes and prorate the balance of this purchase price over the remaining items. The...
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