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Business Accounting ADVANCED FINANCIAL ACCOUNTING-ACCESS

The financial reporting standards associated with accounting for variable interest entities. Introduction: H Corporation needed to build a new production facility. Because it already had a relatively high debt ratio, the company decided to establish a joint venture with RC Bank. This arrangement permitted the joint venture to borrow $30,000,000 for 20 years on a fixed-interest- rate basis at a rate nearly 2 percent less than H would have paid if it had borrowed the money. RC Bank purchased 100 percent of the joint venture equity for $200,000, and H provided a guarantee of the debt to the bondholders and a guarantee to RC Bank that it would earn a 20 percent annual return on its investment. The consolidated income statement or H will not comprise the lease payments as an operating expense but comprise the depreciation expense on a production facility and the interest expense for the interest payments made on the debt of the joint venture. Borrowing by variable interest entities: Memo: To: President H Corporation From: AAA, Accounting Staff Re: Consolidation of Joint-Venture H Corporation and RC bank have set up a joint venture which has taken a debt of amount $30,000,000 and constructed a new production facility. The facility is leased for 10 years to H. The annual lease payment is documented by H as operating expenses and is documented as a contingent liability in the notes to financial statements as a guarantee of the borrowed amount of the joint venture. The lease agreement of the joint venture with H presents the requirement for H to consolidate the joint venture with its own operations. The RC bank owns 100% of the equity of the joint venture but has less than 1% of the contribution to the total assets of the joint venture. The normal situation states that investment of less than 10% in the total assets of the equities is considered insufficient to allow the entity to finance its activities. In this circumstance, H guarantees the borrowed amount of $30,000,000 by the joint venture and has guaranteed an annual return on the equity investment of RC bank to 20 percent. These results in absorbing the losses by Corporation H which are incurred by the joint venture and sets up H Corporation as the beneficiary of the entity at the primary level. The FASB states that the entity should absorb the losses if occurred. The consolidation of joint venture results in comprising the production facility among the assets or H and the amount borrowed as a portion of the long-term liabilities. RC bank holds the claim on the net assets or the joint venture which is documented as non-controlling interest. The consolidated income statement or H will not comprise the lease payments as an operating expense but comprise the depreciation expense on a production facility and the interest expense for the interest payments made on the debt of the joint venture.

The financial reporting standards associated with accounting for variable interest entities. Introduction: H Corporation needed to build a new production facility. Because it already had a relatively high debt ratio, the company decided to establish a joint venture with RC Bank. This arrangement permitted the joint venture to borrow $30,000,000 for 20 years on a fixed-interest- rate basis at a rate nearly 2 percent less than H would have paid if it had borrowed the money. RC Bank purchased 100 percent of the joint venture equity for $200,000, and H provided a guarantee of the debt to the bondholders and a guarantee to RC Bank that it would earn a 20 percent annual return on its investment. The consolidated income statement or H will not comprise the lease payments as an operating expense but comprise the depreciation expense on a production facility and the interest expense for the interest payments made on the debt of the joint venture. Borrowing by variable interest entities: Memo: To: President H Corporation From: AAA, Accounting Staff Re: Consolidation of Joint-Venture H Corporation and RC bank have set up a joint venture which has taken a debt of amount $30,000,000 and constructed a new production facility. The facility is leased for 10 years to H. The annual lease payment is documented by H as operating expenses and is documented as a contingent liability in the notes to financial statements as a guarantee of the borrowed amount of the joint venture. The lease agreement of the joint venture with H presents the requirement for H to consolidate the joint venture with its own operations. The RC bank owns 100% of the equity of the joint venture but has less than 1% of the contribution to the total assets of the joint venture. The normal situation states that investment of less than 10% in the total assets of the equities is considered insufficient to allow the entity to finance its activities. In this circumstance, H guarantees the borrowed amount of $30,000,000 by the joint venture and has guaranteed an annual return on the equity investment of RC bank to 20 percent. These results in absorbing the losses by Corporation H which are incurred by the joint venture and sets up H Corporation as the beneficiary of the entity at the primary level. The FASB states that the entity should absorb the losses if occurred. The consolidation of joint venture results in comprising the production facility among the assets or H and the amount borrowed as a portion of the long-term liabilities. RC bank holds the claim on the net assets or the joint venture which is documented as non-controlling interest. The consolidated income statement or H will not comprise the lease payments as an operating expense but comprise the depreciation expense on a production facility and the interest expense for the interest payments made on the debt of the joint venture.

Solution Summary: The author explains the financial reporting standards associated with accounting for variable interest entities.

ADVANCED FINANCIAL ACCOUNTING-ACCESS

ADVANCED FINANCIAL ACCOUNTING-ACCESS

12th Edition

ISBN: 9781260518740

Author: Christensen

Publisher: MCG

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ADVANCED FINANCIAL ACCOUNTING-ACCESS

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