Chapter_6_solutions - 1. Chapter 6 answers A variable...

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1. Chapter 6 answers A variable interest entity (VIE) is a business structure that is designed to accomplish a specific purpose. A VIE can take the form of a trust, partnership, joint venture, or corporation although typically it has neither independent management nor employees. The entity is frequently sponsored by another firm to achieve favorable financing rates. 2. Variable interests are contractual, ownership, or other pecuniary interests in an entity that change with changes in the entity's net asset value. Variable interests will absorb portions of a variable interest entity's expected losses if they occur or receive portions of the entity's expected residual returns if they occur. Variable interests typically are accompanied by contractual arrangements that provide decision making power to the owner of the variable interests. Examples of variable interests include debt guarantees, lease residual value guarantees, participation rights, and other financial interests. 3. The following characteristics are indicative of an enterprise qualifying as a primary beneficiary with a controlling financial interest in a VIE. The direct or indirect ability to make decisions about the entity's activities The obligation to absorb the expected losses of the entity if they occur, or The right to receive the expected residual returns of the entity if they occur 4. Because the bonds were purchased from an outside party, the acquisition price is likely to differ from the book value of the debt as found on the subsidiary's records. This difference creates accounting problems in handling the intercompany transaction. From a consolidated perspective, the debt has been retired; a gain or loss should be reported with no further interest being recorded. In reality, each company will continue to maintain these bonds on their individual financial records. Also, because discounts and/or premiums are likely to be present, both of these account balances as well as the interest income/expense will change from period to period because of amortization. For reporting purposes, all individual accounts must be eliminated with the gain or loss being reported so that the events are shown from the vantage point of the consolidated entity. 5. If the bonds are acquired directly from the affiliate company, all reciprocal accounts will be equal in amount. The debt and the receivable will be in agreement so that no gain or loss is created. Interest income and interest expense should also reflect identical amounts. Therefore, the consolidation process for this type of intercompany debt requires no more than
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This note was uploaded on 04/05/2010 for the course ACCY 260 taught by Professor Yu during the Spring '10 term at Ferrum.

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Chapter_6_solutions - 1. Chapter 6 answers A variable...

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