Tiêu đề Reading 8 Intercorporate Investments.pdf ✅

Evergreen Brothers is a large producer of bedding plants and shrubs that are sold to various retail nurseries and home improvement stores located across the western coast of the United States with approximately $85 million in annual sales. Evergreen grows its products at two facilities, one in Northern California and the other in the Southern part of the state. Each production facility currently distributes its products within an approximate 150 mile radius of its location. All aspects of the shipping and delivery of products have historically been provided by an independent, third-party distribution company. Because of impressive growth in the company's sales over the past several years, management has decided to pursue plans to bring "in-house" the distribution of the company's products. They believe that the projected decreased freight costs as well as the increased efficiencies in more actively managing the distribution of their production should immediately yield increased profit margins. As an initial step, Evergreen has negotiated the price for ten delivery trucks, which could provide all distribution capacity needed for the company's Northern production facility for the upcoming season. Current plans are to continue the use of the independent distribution company for the needs of the firm's Southern facility for at least the next several years. Under advice from the company's CFO, Evergreen has created a new special purpose entity (SPE), QuickTime, Inc., which will serve as the entity that will purchase the trucks from the dealer. The purchase will be financed through a combination of debt and equity, with the dealer lending 75% of the total cost. The loan is collateralized by both the trucks and Evergreen's guarantee of the debt, as required by the dealer. Evergreen has arranged for an outside investor to provide the remaining 25% of the upfront costs of the equipment in exchange for 100% of QuickTime's nonvoting stock. In addition, the outside investor is guaranteed an 8% annual return for the life of the financing term. At the end of seven years, QuickTime will be liquidated and Evergreen will have the option of purchasing the equipment for its fair value at that time. The proceeds of the liquidation will be used to repurchase the outside investor's stock at par value. In the event that the liquidation value is insufficient to buy back the outside investor's stock, Evergreen has committed to fund the shortfall. Management has given its tentative approval of the project and the proposed structure. Questions remain, however, as to the effect of the creation of QuickTime on Evergreen's financial statements. With the relatively recent issuance of FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities" (FIN 46(R)), the management of Evergreen has not had prior experience with the new consolidation requirements for SPEs.
Question #1 - 4 of 84 Question ID: 1586042 Which of the following statements regarding special purpose entities (SPEs) is least accurate? A) An SPE can be established as one of several legal forms, such as corporations, partnerships, or trusts, but must establish separate management from that of the sponsor. B) In general, the equity investors in an SPE can expect to receive a limited rate of return on their investment in exchange for limited risk exposure. C) An SPE can be formed to isolate specific assets from the sponsor, thus lowering the cost of capital by protecting the assets of the SPE in the event the sponsor experiences financial distress. Question #2 - 4 of 84 Question ID: 1472432 According to US GAAP, if an SPE is to be considered a variable interest entity (VIE), it must meet which of the following conditions? A) The equity investors in the VIE must bear all of the SPE's risk up to a pre-determined level as outlined in the governing documents. B) The SPE must be consolidated by the primary beneficiary, whose status as primary beneficiary is defined by the level of the firm's percentage of voting control. C) The total at-risk equity of the SPE is not sufficient to finance the entity's activities without additional subordinated financial support. Question #3 - 4 of 84 Question ID: 1472433 As outlined in FIN 46(R), the primary beneficiary of a VIE is that entity which meets which of the following conditions? A) Holds the majority voting control of the VIE and has separate management from the VIE. B) Has exposure to the majority of the loss risks or receives the majority of the residual benefits of the VIE. C) Holds the majority voting control of the VIE and shares management with the VIE.
Question #4 - 4 of 84 Question ID: 1472434 Assuming that QuickTime is considered a VIE in accordance with FIN 46(R), which of the following statements regarding the consolidation of QuickTime on Evergreen's financial statements is most accurate? A) The truck dealer is supplying the financing for the majority (75%) of QuickTime's debt, so Evergreen may not consolidate QuickTime on its financial statements. B) Evergreen is exposed to the majority of QuickTime's risks and rewards, so Evergreen must consolidate QuickTime on its financial statements. C) Because the outside investor holds only nonvoting stock, Evergreen holds the majority controlling financial interest in QuickTime and must consolidate QuickTime on its financial statements. Question #5 of 84 Question ID: 1472379 Under IFRS rules, which of the following accounting treatments is most preferred for joint ventures where there is shared control? A) Acquisition method. B) Proportionate consolidation method. C) Equity method. Question #6 of 84 Question ID: 1472356 Milburne Company purchased 1,000 shares of Marino Co. for $20 per share on January 1 classified as FVPL. By December 31, shares of Marino were trading at $15 per share in the open market. Marino Co. has 100,000 shares outstanding with a dividend yield of 2% at year end. The impact of the Marino holding on the Milburne income statement is: A) −$5,300. B) −$4,700. C) −$5,000.