(8) Property, plant and equipment

As of September 30, 2014 and December 31, 2013, property, plant and equipment consisted of the following:

	September 30,			December 31,
	2014			2013
Property, Plant, and Equipment:
Land use rights	$	7,710,672		$	7,761,511
Building and improvements		22,260,067			22,406,836
Machinery and equipment		120,744,142			121,088,942
Vehicles		702,701			683,051
Construction in progress		86,866,437			65,160,213
		238,284,019			217,100,553
Less: accumulated depreciation and amortization		(42,193,445	)		(38,565,294	)
Property, Plant and Equipment, net	$	196,090,574		$	178,535,259

As of September 30, 2014 and December 31, 2013, land use rights represented a parcel of state-owned land located in Xushui County of Hebei Province in China, with lease terms of 50 years expiring in 2061.

The Company entered into a sale-leaseback arrangement with a leasing company in China on June 16, 2013 for a total financing proceeds in the amount of RMB 150 million (approximately US$24 million). Under the sale-leaseback arrangement, Orient Paper HB sold certain of its paper manufacturing equipment to the leasing company for an amount of RMB 150 million (approximately US$24 million). Concurrent with the sale of equipment, Orient Paper HB leases back all of the equipment (“Leased Equipment”) sold to the leasing company for a lease term of three years. At the end of the lease term, Orient Paper HB may pay a nominal purchase price of RMB 15,000 (approximately $2,400) to the leasing company and buy back all of the Leased Equipment. The sale-leaseback is treated by the Company as a mere financing and capital lease transaction, rather than a sale of assets (under which gain or loss is immediately recognized) under ASC 840-40-25-4. All of the Leased Equipment are included as part of the property, plant and equipment of the Company as of September 30, 2014 and December 31, 2013. As a result of the sale, a deferred gain on sale of Leased Equipment in the amount of $1,379,282 was created at the closing of the transaction and presented as a non-current liability. The deferred gain would be amortized by the Company during the lease term and would be used to offset the depreciation of the Leased Equipment, which are recorded at the new cost of $25,823,414 and $25,993,677 as of September 30, 2014 and December 31, 2013, respectively. See “Financing with Sale-Leaseback” under Note (9), Loans Payable, for details of the transaction and asset collaterals. The depreciation of Leased Equipment has started in July 2013 and was included with the depreciation expense of the Company’s own assets in the consolidated statement of income. During the three months ended September 30, 2014 and 2013, depreciation of Leased Equipment were $825,620 and $396,736, respectively. During the nine months ended September 30, 2014 and 2013, depreciation of Leased Equipment were $1,237,181 and $396,736, respectively. The accumulated depreciation of the Leases Equipment was $2,060,896 and $829,794 as of September 30, 2014 and December 31, 2013. During the three months ended September 30, 2014 and 2013, the gain realized on sale-leaseback transaction were $115,094 and $62,798, respectively. During the nine months ended September 30, 2014 and 2013, the gain realized on sale-leaseback transaction were $345,981 and $62,798, respectively. The gain realized was recorded in cost of sales as a reduction of depreciation expenses. The unamortized deferred gains on sale-leaseback are $806,870 and $1,160,271 as of September 30, 2014 and December 31, 2013, respectively.

Construction in progress mainly represents payments for the new 15,000 tonnes per year tissue paper manufacturing equipment PM8, the tissue paper workshops, four warehouses, office buildings and the new staff dormitory in the Wei County industrial park. The tissue paper development project at the Wei County Industrial Park is expected to be completed in the second half of 2015. Upon completion, it will bring about an addition of $117,930,321 to the Company’s machinery and equipment. For the three months ended September 30, 2014 and 2013, the amount of interest capitalized is $207,830 and $113,941, respectively. For the nine months ended September 30, 2014 and 2013, the amount of interest capitalized is $717,058 and $152,036, respectively.

As of September 30, 2014 and December 31, 2013, certain property, plant and equipment of Orient Paper HB with net values of $16,956,708 and $21,901,456 have been pledged for the long-term loan from credit union of Orient Paper HB, respectively. As of September 30, 2014 and December 31, 2013, certain of the Company’s property, plant and equipment in the amount of $32,767 and $34,177 have been pledged for the facility obtained from Bank of Hebei. See “Notes Payable” under Note (11) for details. In addition, land use right with net values of $7,337,989 and $7,502,794 as of September 30, 2014 and December 31, 2013 was pledged for the sale-leaseback financing. See “Financing with Sale-Leaseback” under Note (9), Loans Payable, for details of the transaction and asset collaterals.

As of September 30, 2014 and December 31, 2013, essentially all production equipment of Orient Paper Shengde with net value of $33,820,493 and $36,134,038 has been pledged for the guarantee of Orient Paper HB’s performance under the capital lease.

Depreciation and amortization of property, plant and equipment was $2,010,130 and $2,059,270 for the three months ended September 30, 2014 and 2013, respectively. Depreciation and amortization of property, plant and equipment was $5,877,824 and $5,980,720 for the nine months ended September 30, 2014 and 2013, respectively.