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Chapter 14: Q23Q (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

Find the polynomials q(x)andr(x)such that f(x)=g(x)q(x)+r(x),andr(x)ordegr(x)<degg(x):

(a)f(x)=3x4-2x3+6x2-x+2andg(x)=x2+x+1in□[x].(b)f(x)=x4-7x+1andg(x)=2x2+1in□[x].(c)f(x)=2x4+x2-x+1andg(x)=2x-1in□5[x].(d)f(x)=4x4+2x3+6x2+4x+5andg(x)=3x2+2in□7[x].

On December 31, 2017, Hyasaki Corporation has the following account balance:

Bonds payable, due January 1, 2026 \(2,000,000

Discount on bonds payable \) 88,000

Interest payable $ 80,000

Show how the above accounts should be presented on the December 31, 2017, balance sheet, including the proper classifications.

Question: Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a transaction.

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.

Question: Wie Company has been operating for just 2 years, producing specialty golf equipment for women golfers. To date, the company has been able to finance its successful operations with investments from its principal owner, Michelle Wie, and cash flows from operations. However, current expansion plans will require some borrowing to expand the company’s production line

As part of the expansion plan, Wie will acquire some used equipment by signing a zero-interest-bearing note. The note has a maturity value of $50,000 and matures in 5 years. A reliable fair value measure for the equipment is not available, given the age and specialty nature of the equipment. As a result, Wie’s accounting staff is unable to determine an established exchange price for recording the equipment (nor the interest rate to be used to record interest expense on the long-term note). They have asked you to conduct some accounting research on this topic.

Instructions

If your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.

  1. Identify the authoritative literature that provides guidance on the zero-interest-bearing note. Use some of the examples to explain how the standard applies in this setting.
  2. How is present value determined when an established exchange price is not determinable and a note has no ready market? What is the resulting interest rate often called?
  3. Where should a discount or premium appear in the financial statements?
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