Case Background Information
On August 4, 2011, the Board of Directors of Redstone Corporation (the “Company”), a publicly
held regional electric utility providing generation, transmission, and distribution service to retail
and wholesale customers, authorized the disposition of its existing water treatment equipment
using chemical-based filtration processes and its replacement with new water treatment
equipment using electro-coagulation-based technology (so called “shock the water” technology).
The Board authorized the Company’s management to decide among three financing proposals
recently received in response to a request for proposal—a vendor financing proposal, a true lease
proposal, and a service contract proposal.
The Board directed management to implement its
decision on or before November 30, 2011 to ensure the Company’s 2011 annual report would list
this asset replacement initiative as evidence of its commitment to sustainability. The Company is
a calendar year reporting entity.
The Company plans to continue using the existing equipment until September 30, 2011, and to
dismantle and sell it immediately thereafter, on or before October 31.
The Company plans to
commence activities relating to the acquisition and installation of the new equipment on
November 1, 2011, with an expected placed in service date of November 30, 2011.
The existing equipment has appraised fair market value, in-exchange of $1.75 million.
summary of its book and tax bases as of September 30, 2011 follows:
Deferred tax liability
* Equal to salvage value.
Accordingly, depreciation has been discontinued
**Difference between the book and tax basis multiplied by the effective income tax rate
of 40% ($2,000,000 minus $0 = $2,000,000 [temporary difference] x 40% [effective
income tax rate] = $800,000 [deferred tax liability].
The selected vendor for the new equipment has offered to sell and install the equipment for a