Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 14: Q22Q (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.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

E14-1 (L01) (Classification of Liabilities) Presented below are various account balances of K.D. Lang Inc.

(a) Unamortized premium on bonds payable, of which \(3,000 will be amortized during the next year.

(b) Bank loans payable of a winery, due March 10, 2021. (The product requires aging for 5 years before sale.)

(c) Serial bonds payable, \)1,000,000, of which \(200,000 are due each July 31.

(d) Amounts withheld from employees’ wages for income taxes.

(e) Notes payable due January 15, 2020.

(f) Credit balances in customers’ accounts arising from returns and allowances after collection in full of account.

(g) Bonds payable of \)2,000,000 maturing June 30, 2018.

(h) Overdraft of $1,000 in a bank account. (No other balances are carried at this bank.)

(i) Deposits made by customers who have ordered goods.

Instructions

Indicate whether each of the items above should be classified on December 31, 2017, as a current liability, a long-term liability, or under some other classification. Consider each one independently from all others; that is, do not assume that all of them relate to one particular business. If the classification of some of the items is doubtful, explain why in each case.

Question: (Debt Securities) Presented below is an amortization schedule related to Spangler Company’s 5-year, \(100,000

bond with a 7% interest rate and a 5% yield, purchased on December 31, 2015, for \)108,660.

Cash Interest Bond Premium Carrying Amount

Date Received Revenue Amortization of Bonds

12/31/15 \(108,660

12/31/16 \)7,000 \(5,433 \)1,567 107,093

12/31/17 7,000 5,354 1,646 105,447

12/31/18 7,000 5,272 1,728 103,719

12/31/19 7,000 5,186 1,814 101,905

12/31/20 7,000 5,095 1,905 100,000

The following schedule presents a comparison of the amortized cost and fair value of the bonds at year-end.

12/31/16 12/31/17 12/31/18 12/31/19 12/31/20

Amortized cost \(107,093 \)105,447 \(103,719 \)101,905 $100,000

Fair value 106,500 107,500 105,650 103,000 100,000

Instructions

(a) Prepare the journal entry to record the purchase of these bonds on December 31, 2015, assuming the bonds are classified

as held-to-maturity securities.

(b) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2016.

(c) Prepare the journal entry(ies) related to the held-to-maturity bonds for 2018.

(d) Prepare the journal entry(ies) to record the purchase of these bonds, assuming they are classified as available for-

sale.

(e) Prepare the journal entry(ies) related to the available-for-sale bonds for 2016.

(f) Prepare the journal entry(ies) related to the available-for-sale bonds for 2018.

Briggs and Stratton recently issued debt with issue costs of $5.1 million. How should the costs of issuing these bonds be accounted for and classified in the financial statements?

Question: (Restructure of Note under Different Circumstances) Halvor Corporation is having financial difficulty and therefore has asked Frontenac National Bank to restructure its \(5 million note outstanding. The present note has 3 years remaining and pays a current rate of interest of 10%. The present market rate for a loan of this nature is 12%. The note was issued at its face value.

Instructions

The following are four independent situations. Prepare the journal entry that Halvor and Frontenac National Bank would make for each of these restructurings.

(a) Frontenac National Bank agrees to take an equity interest in Halvor by accepting common stock valued at \)3,700,000 in exchange for relinquishing its claim on this note. The common stock has a par value of \(1,700,000.

(b) Frontenac National Bank agrees to accept land in exchange for relinquishing its claim on this note. The land has a book value of \)3,250,000 and a fair value of \(4,000,000.

(c) Frontenac National Bank agrees to modify the terms of the note, indicating that Halvor does not have to pay any interest on the note over the 3-year period.

(d) Frontenac National Bank agrees to reduce the principal balance due to \)4,166,667 and require interest only in the second and third year at a rate of 10%.

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

Recommended explanations on Business Studies Textbooks

Business Operations

Read Explanation

Managers

Read Explanation

Organizational Communication

Read Explanation

Managerial Economics

Read Explanation

Intermediate Accounting

Read Explanation

Change Management

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free