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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

Pierre Company has a 12% note payable with a carrying value of \(20,000. Pierre applies the fair value option to this note. Given an increase in market interest rates, the fair value of the note is \)22,600. Prepare the entry to record the fair value option for this note, assuming

(a) no change in credit risk, and

(b) the change is due to a change in credit risk.

Question: Describe how a company would classify debt that includes covenants. What conditions must exist in order to depart from the normal rule?

Question: Under IFRS, bonds issuance costs, including the printing costs and legal fees associated with the issuance, should be:

  1. expensed in the period when the debt is issued.
  2. recorded as a reduction in the carrying value of bonds payable.
  3. accumulated in a deferred charge account and amortized over the life of the bonds.

d.reported as an expense in the period the bonds mature or are redeemed.

Question: What is the 鈥渃all鈥� feature of a bond issue? How does the call feature affect the amortization of bond premium or discount?

(Issuance and Redemption of Bonds) Venezuela Co. is building a new hockey arena at a cost of \(2,500,000. It received a downpayment of \)500,000 from local businesses to support the project, and now needs to borrow \(2,000,000 to complete the project. It therefore decides to issue \)2,000,000 of 10.5%, 10-year bonds. These bonds were issued on January 1, 2016, and pay interest annually on each January 1. The bonds yield 10%.

Instructions

(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2016.

(b) Prepare a bond amortization schedule up to and including January 1, 2020, using the effective-interest method.

(c) Assume that on July 1, 2019, Venezuela Co. redeems half of the bonds at a cost of $1,065,000 plus accrued interest. Prepare the journal entry to record this redemption.
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