Assignment: Property, Plant and Equipment
Old Line Manufacturing
Fixed assets are the primary asset of Old Line Manufacturing Company (Old Line). As of December 2012, Old Line is having liquidity problems. Old Line's borrowing base is limited to 60% of its net fixed assets. The CFO has been entertaining the idea of changing from US GAAP to IFRS. The bank has agreed to loan up to 60% of the net fixed assets regardless of whether Old Line uses US GAAP or IFRS for accounting purposes. Land A Land is carried at its historical cost of $4.0 million, while its fair value is $5.0 million. Building B Building B, with a 30-year life, was acquired 10 years ago at a cost of $60.0 million. The fair value of the building is estimated to be $40.0 million at the end of 2012. Equipment C On January 1, 2007, equipment C was acquired at a cost of $10.0 million. It had a 10-year service life with no estimated scrap value. At the end of 2012, there have been technological innovations that may have impaired this equipment, which now has an estimated fair value of $1.0 million.
The future undiscounted cash flows from this equipment are estimated to be $5.0 million, while the discounted net present value of the expected cash flows is estimated to be $3.0 million. Equipment D This equipment was acquired in 2008 at a cost of $10.0 million. It had a six-year service life with a $1.0 million estimated scrap value. At the end of 2009, the equipment was believed to be impaired and it was written down $2.0 million. At the end of 2012, it no longer appears any impairment reserve is necessary. Equipment E This piece of equipment was acquired in 2011 at a cost of $12.0 million. The service life is expected to be eight years and no net salvage value is expected.
A major component of this equipment is the motor, which costs $4.0 million and must be replaced every four years. Equipment F Construction of this equipment started on January 1, 2011 and was completed on January 1, 2012. Old Line borrowed $20.0 million denominated in US dollars on January 1, 2011 to finance construction of this equipment. The interest rate on this loan was 10%. Old Line made payments to the construction company of $10.0 million on January 1, 2011 and $10.0 million on July 1, 2011. Excess funds during this period were invested at a return of 6%.
Equipment G Two years ago, Old Line purchased a delivery truck for $80,000. Old Line uses straight line depreciation with no salvage and a 10 year life. Included in the purchase price was $10,000 for additional airbags and a backup warning device which is not legally required for this equipment. Because of the uniqueness of this equipment, it is unrealistic to get a market value for it so it will be carried at book value. . Equipment H Three years ago, Old Line borrowed one-million British Pound Sterling when the Pound Sterling was $2. This loan was at 10% interest with principle and interest due in 1 year. Old Line used this money to finance the construction of an office building which was completed at the end of that year. When the loan came due the British Pound Sterling was $2.20, so Old Line had to pay $2,420,000 on this $2,000,000 (1million Pound Sterling) loan.
Required
1. Analyze the accounting for each fixed asset class using US GAAP and IFRS. Assume the Company uses straight-line depreciation for all its fixed assets and takes a full year of depreciation in the year of the addition.
2. Based on your analysis, determine how to best maximize the amount of net fixed assets.
3. Prepare a formal report addressed to the CFO of Old Line formally articulating your analysis and recommendations to Old Line.