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Chapter 14: Q24Q (page 753)

Question: Explain how a non-consolidated subsidiary can be a form of off-balance-sheet financing.

Short Answer

Expert verified

Answer

GAAP does not require a parent firm to consolidate a subsidiary company owned by less than fifty percent.

Step by step solution

01

Meaning of Balance sheet

Assets are recorded on one side of a balance sheet, whereas liabilities and capital are recorded on the other. The odds are continuous with the sides. It, too, shows the amount of cash contributed within the company. Calculating a company's profitability, liquidity, leverage, and productivity together with other financial information is supportive.

02

Explaining how a non-consolidated subsidiary can be a form of off-balance-sheet financing.

A subsidiary firm owned by a parent business of less than 50% is not required to be consolidated under GAAP. The parent in such circumstances does not disclose the subsidiary's assets and liabilities. Only the parent's stake in the subsidiary is disclosed on its balance sheet. Users of the financial statements could not realize the subsidiary has a sizable amount of debt, and the parent could ultimately be responsible if the company experiences financial difficulties.

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Most popular questions from this chapter

Lady Gaga Co. recently made an investment in the bonds issued by Chili Peppers Inc. Lady Gaga鈥檚 business model for this investment is to profit from trading in response to changes in market interest rates. How should this investment be classified by Lady Gaga? Explain.

Question: (Debtor/Creditor Entries for Continuation of Troubled Debt with New Effective Interest)

Crocker Corp. owes D. Yaeger Corp. a 10-year, 10% note in the amount of \(330,000 plus \)33,000 of accrued interest. The note is due today, December 31, 2017. Because Crocker Corp. is in financial trouble, D. Yaeger Corp. agrees to forgive the accrued interest, \(30,000 of the principal, and to extend the maturity date to December 31, 2020. Interest at 10% of revised principal will continue to be due on 12/31 each year.

Assume the following present value factors for 3 periods.

Single sum

0.93543

0.93201

0.92589

0.92521

0.92184

0.91514

Ordinary annuity of 1

2.86989

2.86295

2.85602

2.84913

2.84226

2.82861

Instructions

(a) Compute the new effective-interest rate for Crocker Corp. following restructure. (Hint: Find the interest rate that establishes approximately \)363,000 as the present value of the total future cash flows.)

(b) Prepare a schedule of debt reduction and interest expense for the years 2017 through 2020.

(c) Compute the gain or loss for D. Yaeger Corp. and prepare a schedule of receivable reduction and interest revenue for the years 2017 through 2020.

(d) Prepare all the necessary journal entries on the books of Crocker Corp. for the years 2017, 2018, and 2019.

(e) Prepare all the necessary journal entries on the books of D. Yaeger Corp. for the years 2017, 2018, and 2019.

(Effective-Interest Method) Samantha Cordelia, an intermediate accounting student, is having difficulty amortizing bond premiums and discounts using the effective-interest method. Furthermore, she cannot understand why GAAP requires that this method be used instead of the straight-line method. She has come to you with the following problem, looking for help.

On June 30, 2017, Hobart Company issued \(2,000,000 face value of 11%, 20-year bonds at \)2,171,600, a yield of 10%. Hobart Company uses the effective-interest method to amortize bond premiums or discounts. The bonds pay semiannual interest on June 30 and December 31. Prepare an amortization schedule for four periods.

Question: How are gains and losses from extinguishment of a debt classified in the income statement? What disclosures are required of such transactions?

Determine Proper Amounts in Account Balances) Presented below are two independent situations.

(a) George Gershwin Co. sold \(2,000,000 of 10%, 10-year bonds at 104 on January 1, 2017. The bonds were dated January 1, 2017, and pay interest on July 1 and January 1. If Gershwin uses the straight-line method to amortize bond premium or discount, determine the amount of interest expense to be reported on July 1, 2017, and December 31, 2017.

(b) Ron Kenoly Inc. issued \)600,000 of 9%, 10-year bonds on June 30, 2017, for $562,500. This price provided a yield of 10% on the bonds. Interest is payable semiannually on December 31 and June 30. If Kenoly uses the effective interest method, determine the amount of interest expense to record if financial statements are issued on October 31, 2017.
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