Question

Power Pro, Inc., is a large manufacturer of marine engines. In recent years, Power Pro, like other engine manufacturers, has purchased a controlling interest in independent boat builders. The intent of the acquisitions is to control the engine choice of the boat builder. By including the outboard engine in the boat package, it is not necessary to sell to and finance many small dealers. Power Pro purchased an 80% interest in Swift-Craft during the last year. Swift-Crafts are built in California and are sold only in western states. Power Pro wants to build the boats in the Midwest as well, so as to expand sales without paying major shipping costs from the West. A new plant will cost $1,000,000 to build and another $1,500,000 to equip for production. Currently, Swift-Craft has $800,000 in long-term debt. It has 11% annual interest bonds outstanding in the hands of local investors. Current investors have no interest in lending any more funds. The interest rate Swift-Craft pays is high due to its size and credit rating. Power Pro has ready access to the bond market and borrows at 7.5% annual interest. Power Pro also has expertise in constructing and equipping new facilities since it has built many new plants. Power Pro also has a sophisticated fixed asset accounting system. Power Pro would prefer to build the new plant and turn it over to Swift-Craft when it is complete. It is considering either selling the building to Swift-Craft and taking back the mortgage or leasing the asset to Swift-Craft under a long-term capital lease. Power Pro would like you to cover the options it has in using its borrowing ability and asset management experience in assisting Swift-Craft. There is a concern as to existing debt and with respect to funds needed to finance the new plant. Your discussion should con- sider the impact of alternatives on the consolidation process and on NCI shareholde

Answer 1

Answer:

1. pp could sell the assets for sc as an end-result of a long term mortgage.
2. the rate under 11% is a reward to the non controlling interest investors.
3. the intercompany debt and interest revenue/expense are dispensed with in the solidification procedure.

Best circumstance

• it may be for pp to rent the assets to sc under a financing type rent.

Conclusion

1. it would be a business type lease:thus the benefit would be conceded in a similar way as though the assets were offered to sc.
2. this would enable pp to decide the financing cost and would give it power over the accounting for the assets.
3. at any rate underneath 11%is useful to the non controlling interest and any benefit beneath that charged by outside gatherings is an or more to the non controlling interest investors.
4. the intercompany debt and interest revenue or expenses coming about because of the rent are wiped out in the solidification procedure.
5. the assets under the rent are renamed to show up as normal owned assets.

7189-5-ic AID: 1825 |26/07/2013

RID:3209| 01/08/2013

Consider:

1. the current exceptional securities are a significant distinction in interest rates between those accessible to pp and sc.
2. the debt shoud be directy or indiectly resigned to the conceivable degree.
3. the immediate retirement would be practiced by pp loaning assets to sc ,which sc would in return use to resign the bonds.

Elective:

• pp is to buy the current bonds that it could and afterward hold them as a venture.

Assumption:

1. the present acquiring rate is 11% for sc :the securities woud exchange close to confront esteem.
2. the immediate obtaining course would enable the parent to pick the interest rate it needed to charge.
3. the rate is under 11%would advantage the non controlling interest portion of income since it would build the auxiliary's reported income.
4. the intercompany debt and interest revenue/expense would be eliminated in union .
5. the indirect route buys the sc bonds would most likely leave the non controlling interest investors in the same position.

the parent gets the 11%interest and can boorrow at 75%

• the bonds are resigned for solidification purposes in the period in which they are acquired by pp.

the intercompany interest revenue/expense on the bonds is dispensed with

1. no doubt pp will fabricate and equip the new plant.
2. it can include a reasonable profit.
3. higher the value ,more prominent the shift of income from the backup to the parent.

consoidating:

1. the benefit is removed from the increase account and the assets accounts.
2. it is conceded over the time of utilization as a decline in depreciation expense.