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Property, Plant and Equipment, Net
 3 Months Ended
Mar. 31, 2015
Property, Plant and Equipment, Net [Abstract]  
Property, plant and equipment, net

(7) Property, plant and equipment, net

 

As of March 31, 2015 and December 31, 2014, property, plant and equipment consisted of the following:

 

    March 31,     December 31,  
    2015     2014  
Property, Plant, and Equipment:                
Land use rights   $ 7,723,602     $ 7,752,886  
Building and improvements     80,080,972       44,889,395  
Machinery and equipment     122,184,521       121,332,310  
Vehicles     703,880       706,548  
Construction in progress     45,815,355       78,484,066  
Totals     256,508,330       253,165,205  
Less: accumulated depreciation and amortization     (47,412,561 )     (44,952,007 )
Property, Plant and Equipment, net   $ 209,095,769     $ 208,213,198  

 

As of March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014. 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 $25,866,717 and $25,964,790 as of March 31, 2015 and December 31, 2014, respectively. See “Financing with Sale-Leaseback” under Note (8), 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 March 31, 2015 and 2014, depreciation of Leased Equipment were $412,870 and $414,524, respectively. The accumulated depreciation of the leased asset were $2,890,093 and $2,486,615 as of March 31, 2015 and December 31, 2014. During the three months ended March 31, 2015 and 2014, the gain realized on sale-leaseback transaction were $115,460 and $115,923, respectively. The gain realized was recorded in cost of sales as a reduction of depreciation expenses. The unamortized deferred gains on sale-lease back are $577,302 and $695,389 as of March 31, 2015 and December 31, 2014, respectively.

 

Construction in progress mainly represents payments for the new 15,000 tonnes per year tissue paper manufacturing equipment PM8, the tissue paper workshops and general infrastructure and administrative facilities 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 $65,860,783 to the Company’s building and improvements, and machinery and equipment. For the three months ended March 31, 2015 and 2014, the amount of interest capitalized is $17,739 and $261,433, respectively.

 

As of March 31, 2015 and December 31, 2014, certain property, plant and equipment of Orient Paper HB with net values of $15,715,157 and $19,300,765 have been pledged for the long-term loan from credit union of Orient Paper HB, respectively. As of December 31, 2014, certain of the Company’s property, plant and equipment in the amount of $29,995 have been pledged for the facility obtained from Bank of Hebei. See “Notes Payable” under Note (10) for details. In addition, land use right with net values of $7,273,059 and $7,339,399 as of March 31, 2015 and December 31, 2014 was pledged for the sale-leaseback financing. See “Financing with Sale-Leaseback” under Note (8), Loans Payable, for details of the transaction and asset collaterals.

 

As of March 31, 2015 and December 31, 2014, essentially all production equipment of Orient Paper Shengde with net value of $32,468,616 and $33,287,324 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 $2,514,884 and $1,938,794 for the three months ended March 31, 2015 and 2014, respectively.