Question

On May 15, 2019 Boise Mechanical Systems, Inc. (BMS) paid $ 320 m cash for a Thallium smelter. The company engineers estimated that the facility would have a sixteen-year service life and that its retirement in accordance with then-current Idaho environmental regulations would cost $80 m. The risk-free rate (rF) was 2.8% and BMS, a BB- credit, expects a 550 bps credit spread to rF. On March 1, 2025 BMS sold the smelter for $190 m. The buyer paid cash and assumed the ARO.

Required: Book the 2025 03 01 transfer. Assume that BMS accountants depreciated the smelter SLN with zero salvage, that discounting was calculated on a continuously compounded basis and that the ARO assumptions had not changed.

Answer 1

Cash paid to purchase Thallium Smelter (+) PV of retirement cost (Note) Total Cost of the asset 320.00 m 21.20 m 341.20 m Note The appropriate compound interest formula is Present Value = Ae" where, A = amount paid at the end of tenure = $ 80 m where, r=rate of interest = (2.80+5.50)% = 8.30% where, t = tenure = 16 years Using the above formula, PV = 80m*e-0.083-16 PV = 80m*e-1.328 PV = 80m*0.265 PV = 21.20m 341.20 m Computation of Book Value of machine on March 1, 2025 Total Cost Salvage Value Expected Useful Life (n) (16*12) Period in use (from may 15, 2019 to Mar 1, 2025) Depreciation upto Mar 1, 2025 (341.20*69.50/192) 192 months 69.5 months 123.51 m $ Book Value as on Mar 1, 2025 (341.20-123.51) (-) Cash received on sale Loss on transfer (217.69-190) $ 217.69 m -190.00 m 27.69 m $ Journal Date Particulars 01-Mar-25 Cash Accumulated Depreciation Loss on Sale of asset Thallium Smelter Machine (To transfer of smelter machine for cash) (in $ m) (in $ m) Debit Credit 190.00 123.51 27.69 341.20