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Chapter 14: 24Q (page 753)

What are some forms of off-balance-sheet financing?

Short Answer

Expert verified

Some forms of off-balancesheet financing comprise operating leases, utilization of special purpose entities, and investments in disjointed subsidiaries.

Step by step solution

01

Meaning of off-balanceSheet Financing

Off-balance sheet financing is an accounting procedure where firms preventcertain assets and liabilities from being recorded on the balance sheets.

02

Forms of off-balancesheet financing

Forms of off-balancesheet financing include:

  • Operating leases, which, when organized conservatively,provide the firm the advantages of ownership without recording the liability for the lease payments.
  • Application of special purpose entities (SPEs), used for lending money for special projects.
  • Investments in non-consolidated subsidiaries for which the owner is responsible for the subsidiary debt.

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Most popular questions from this chapter

Karen Austin Inc. has issued three types of debt on January 1, 2017, the start of the company’s fiscal year.

  1. \(10 million, 10-year, 15% unsecured bonds, interest payable quarterly. Bonds were priced to yield 12%.
  2. \)25 million par of 10-year, zero-coupon bonds at a price to yield 12% per year.
  3. $20 million, 10-year, 10% mortgage bonds, interest payable annually to yield 12%.

Instructions

Prepare a schedule that identifies the following items for each bond: (1) maturity value, (2) number of interest periods over life of bond, (3) stated rate per each interest period, (4) effective-interest rate per each interest period, (5) payment amount per period, and (6) present value of bonds at date of issue.

(Equity Securities Entries) On December 21, 2017, Bucky Katt Company provided you with the following information

regarding its equity investments.

December 31, 2017

Investments Cost Fair Value Unrealized Gain (Loss)

Clemson Corp. stock \(20,000 \)19,000 \((1,000)

Colorado Co. stock 10,000 9,000 (1,000)

Buffaloes Co. stock 20,000 20,600 600

Total of portfolio \)50,000 \(48,600 (1,400)

Previous fair value adjustment balance –0–

Fair value adjustment—Cr. \)(1,400)

During 2018, Colorado Co. stock was sold for \(9,400. The fair value of the stock on December 31, 2018, was Clemson Corp.

stock—\)19,100; Buffaloes Co. stock—$20,500. None of the equity investments result in significant influence.

Instructions

(a) Prepare the adjusting journal entry needed on December 31, 2017.

(b) Prepare the journal entry to record the sale of the Colorado Co. stock during 2018.

(c) Prepare the adjusting journal entry needed on December 31, 2018.

(a) In a troubled-debt situation, why might the creditor grant concessions to the debtor?

The following article appeared in the Wall Street Journal.

Bond Markets

Giant Commonwealth Edison Issue Hits Resale Market With \(70 Million Left Over

New york—Commonwealth Edison Co.’s slow-selling new 91 /4% bonds were tossed onto the resale market at a reduced price with about \)70 million still available from the \(200 million offered Thursday, dealers said.

The Chicago utility’s bonds, rated double-A by Moody’s and double-A-minus by Standard & Poor’s, originally had been priced at 99.803, to yield 9.3% in 5 years. They were marked down yesterday the equivalent of about \)5.50 for each $1,000 face amount, to about 99.25, where their yield jumped to 9.45%.

Instructions

  1. How will the development above affect the accounting for Commonwealth Edison’s bond issue?
  2. Provide several possible explanations for the markdown and the slow sale of Commonwealth Edison’s bonds.

Using the same information as in E14-22, answer the following questions related to American Bank (creditor).

Instructions

  1. What interest rate should American Bank use to calculate the loss on the debt restructuring?
  2. Compute the loss that American Bank will suffer from the debt restructuring. Prepare the journal entry to record the loss.
  3. Prepare the interest receipt schedule for American Bank after the debt restructuring.
  4. Prepare the interest receipt entry for American Bank on December 31, 2019.
  5. What entry should American Bank make on January 1, 2021?
See all solutions

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