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Chapter 14: 23Q (page 753)

What is off-balance sheet financing? Why might a company be interested in using off-balance sheet financing?

Short Answer

Expert verified

Off-balancesheet financing is a methodto lend funds in a manner in which the debts are not listed. The company shows interest in off-balance sheet financingbecause it appeals to more investors or in casethey (company) are burdened by debt but require additional capital to finance their business affairs.

Step by step solution

01

Meaning of off-balancesheet financing

Off-balance sheet financing is a financial method wherein firms list particular assets or liabilities so as to prevent them from displaying on their balance sheet.

02

Reasons behindoff-balance sheet financing

A companygenerally uses off-balance sheet financing because:

  • Eliminating debt improves the balance sheet quality and allows credit to be obtained easily at a minimal cost.
  • The asset side of the balance sheet is undervalued as fair value is not used in the case of various assets. Therefore, not listing certain debt transactions offsets the non-acceptance of fair values on definite assets.
  • Loans undertaken are unlikely to be contravened.

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Most popular questions from this chapter

(Debtor/Creditor Entries for Continuation of Troubled Debt) Daniel Perkins is the sole shareholder of Perkins Inc., which is currently under protection of the U.S. bankruptcy court. As a “debtor in possession,” he has negotiated the following revised loan agreement with United Bank. Perkins Inc.’s \(600,000, 12%, 10-year note was refinanced with a \)600,000, 5%, 10-year note.

Instructions

(a) What is the accounting nature of this transaction?

(b) Prepare the journal entry to record this refinancing:

(1) On the books of Perkins Inc.

(2) On the books of United Bank.

(c) Discuss whether generally accepted accounting principles provide the proper information useful to managers and investors in this situation.

On January 1, 2017, Aumont Company sold 12% bonds having a maturity value of \(500,000 for \)537,907.37, which provides the bondholders with a 10% yield. The bonds are dated January 1, 2017, and mature January 1, 2022, with interest payable December 31 of each year. Aumont Company allocates interest and unamortized discount or premium on the effective-interest basis.

Instructions

(Round answers to the nearest cent.)

  1. Prepare the journal entry at the date of the bond issuance.
  2. Prepare a schedule of interest expense and bond amortization for 2017–2019.
  3. Prepare the journal entry to record the interest payment and the amortization for 2017.
  4. Prepare the journal entry to record the interest payment and the amortization for 2019.

Gottlieb Co. owes \(199,800 to Ceballos Inc. The debt is a 10-year, 11% note. Because Gottlieb Co. is in financial trouble, Ceballos Inc. agrees to accept some land and cancel the entire debt. The property has a book value of \)90,000 and a fair value of $140,000.

Instructions

  1. Prepare the journal entry on Gottlieb’s books for debt restructure.
  2. Prepare the journal entry on Ceballos’s books for debt restructure

Question: What is the required method of amortizing discount and premium on bonds payable? Explain the procedures.

E14-15 (L01,2) (Entries for Redemption and Issuance of Bonds) Jason Day Company had bonds outstanding with a maturity value of \(300,000. On April 30, 2017, when these bonds had an unamortized discount of \)10,000, they were called in at 104. To pay for these bonds, Day had issued other bonds a month earlier bearing a lower interest rate. The newly issued bonds had a life of 10 years. The new bonds were issued at 103 (face value $300,000).

Instructions

Ignoring interest, compute the gain or loss, and record this refunding transaction. (AICPA adapted)
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