REDSTONE CASE_AC 300 COHORT_FALL 2011 - Golden Gate...

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Golden Gate University School of Accounting Homework Assignment #1A and #1B Case Background The attached case involves accounting issues that typically arise in asset replacement, the financing of such assets, and the allocation of risks and rewards of ownership through contracts. It also intends to illustrate the difference between legal, tax and accounting analysis. Homework deliverables : #1A: Research Deliverables – Due 8/11/10. Prepare three (3) research tables, one for each financing proposal. For this assignment, do not complete the Issue Identification section since this first assignment involves responding to specific questions (see IB). #1B: Writing Deliverables – Due 8/18/10. Prepare short, generally one paragraph length, responses to the ten (10) questions listed at the end of this case. Use the effective paragraph writing techniques set forth in the May reader.
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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. A summary of its book and tax bases as of September 30, 2011 follows: Book Basis Tax Basis Original cost $ 10,000,000 $ 10,000,000 Accumulated depreciation ( 8,000,000 ) (10,000,000 ) Net cost $ 2,000,000* $ -0- Deferred tax liability $ 800,000** N/A * 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
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This note was uploaded on 11/02/2011 for the course ACCOUNTING 300 taught by Professor Rodhurd during the Fall '11 term at Golden Gate.

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REDSTONE CASE_AC 300 COHORT_FALL 2011 - Golden Gate...

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