First Motor
AUDIT MEMORANDUM
To: First Motors Corporation
From: Nam Do
CC: Dr. Jeff Archambault
Date: 11/10/2011
Re: The Accounting Policies and Procedures
Purpose:
The purpose of the audit memo is to clarify the accounting policies and procedures used by clients and the accounting policies and procedures that should be followed. The audit memorandum also provides a clear explanation of a difference between the risk premium in discounting the free cash flow from Plant 3 and the risk premium in discounting the cash flows for the Macinaw Division and which of the appropriate discount rate for computation of goodwill impairment. The case mentioned about impairments which will be written down after the assets are tested for impairments and how the impairment loss will be allocated among group of assets. The audit memo gives the answer about whether long-lived asset or goodwill write-downs due to impartment or write-ups if the fair value subsequently increases.
Fact:
To take advantage of the alternative fuel source expertise, First Motors purchased Macinaw Motors Corporation which has significantly specialized in hydrogen-powered cars. Although First Motors and Macinaw merged together, they want to operate separately to utilize its own efficiency and engage in its own business activities. Macinaw Motors has three manufacturing plants which are still in operation. Each plant is located in different locations such as Plant 1 (California) specializing in the hydro-powered Mankato, Plant 2 (Indiana) focusing in the hydrogen-powered Sheboygan and Plant 3 (Georgia) working on the gasoline-powered Spokane. The long-lived assets in Plant 3 do not generate the net cash flow as expected since the plant was retooled that caused the argument whether or not to keep Plant 3 open. Management required an impairment test to determine if the long-lived assets impaired. * The estimated remaining life: 11 years * Net cash flow for next 11 years: $62,504,377 * Selling
To: First Motors Corporation
From: Nam Do
CC: Dr. Jeff Archambault
Date: 11/10/2011
Re: The Accounting Policies and Procedures
Purpose:
The purpose of the audit memo is to clarify the accounting policies and procedures used by clients and the accounting policies and procedures that should be followed. The audit memorandum also provides a clear explanation of a difference between the risk premium in discounting the free cash flow from Plant 3 and the risk premium in discounting the cash flows for the Macinaw Division and which of the appropriate discount rate for computation of goodwill impairment. The case mentioned about impairments which will be written down after the assets are tested for impairments and how the impairment loss will be allocated among group of assets. The audit memo gives the answer about whether long-lived asset or goodwill write-downs due to impartment or write-ups if the fair value subsequently increases.
Fact:
To take advantage of the alternative fuel source expertise, First Motors purchased Macinaw Motors Corporation which has significantly specialized in hydrogen-powered cars. Although First Motors and Macinaw merged together, they want to operate separately to utilize its own efficiency and engage in its own business activities. Macinaw Motors has three manufacturing plants which are still in operation. Each plant is located in different locations such as Plant 1 (California) specializing in the hydro-powered Mankato, Plant 2 (Indiana) focusing in the hydrogen-powered Sheboygan and Plant 3 (Georgia) working on the gasoline-powered Spokane. The long-lived assets in Plant 3 do not generate the net cash flow as expected since the plant was retooled that caused the argument whether or not to keep Plant 3 open. Management required an impairment test to determine if the long-lived assets impaired. * The estimated remaining life: 11 years * Net cash flow for next 11 years: $62,504,377 * Selling