Question : 41. Target Corporation and Bark Company (forest products companies) need additional : 1245711

41. Target Corporation and Bark Company (forest products companies) need additional pulp-processing capacity. Each firm could borrow the needed funds and build its own manufacturing plant. Instead, they form a joint venture to build a pulp-processing plant. Each firm agrees to use half of the new plant’s capacity each year for 20 years and to pay half of all operating and debt service costs. The joint venture uses the purchase commitments of Target Corporation and Bark Company to obtain a loan to build the facility. The firms structure the arrangement so that neither firm controls the joint venture. Which of the following is/are true? A. Accounting views the purchase commitments as executory contracts.B. Neither firm will recognize a liability for its portion of the loan. C. The loan will appear as a liability on the balance sheet of the joint venture. D. Each firm obtains financing for the services of the plant without showing a liability on its balance sheet.E. all of the above

42. Target Corporation and Bark Company (forest products companies) need additional pulp-processing capacity. Each firm could borrow the needed funds and build its own manufacturing plant. Instead, they form a joint venture to build a pulp-processing plant. Each firm agrees to use half of the new plant’s capacity each year for 20 years and to pay half of all operating and debt service costs. The joint venture uses the purchase commitments of Target Corporation and Bark Company to obtain a loan to build the facility. The firms structure the arrangement so that neither firm controls the joint venture. The lender requires both firms to guarantee payment of the loan in case the joint venture defaults, Which of the following is/are true? A. Under both U.S. GAAP and IFRS, the guarantors would recognize the fair value of the guarantee when they signed the loan. B. If it becomes probable that the joint venture will default, then the guarantor would apply loss contingency accounting (U.S. GAAP) and recognize a liability. C. If it becomes probable that the joint venture will default, then the guarantor would apply provision accounting (IFRS) and recognize a liability. D. all of the aboveE. none of the above

43. Walnut Queen Corporation and Pine King Company (forest products companies) need additional pulp-processing capacity. Each firm could borrow the needed funds and build its own manufacturing plant. Instead, they form a joint venture to build a pulp-processing plant. Each firm agrees to use half of the new plant’s capacity each year for 20 years and to pay half of all operating and debt service costs. The joint venture uses the purchase commitments of Walnut Queen Corporation and Pine King Company to obtain a loan to build the facility. The firms structure the arrangement so that neither firm controls the joint venture. Which of the following is not true? A. Accounting views the purchase commitments as executory contracts.B. Neither firm will recognize a liability for its portion of the loan. C. The loan will appear as a liability on the balance sheet of the joint venture. D. Each firm obtains financing for the services of the plant without showing a liability on its balance sheet.E. The loan will appear as a liability on the balance sheet of Walnut Queen Corporation and Pine King Company, half of the loan amount allocated to each.

44. Often cited reasons for using off-balance-sheet financing include that this accounting technique A. lowers the cost of borrowing and is inexpensive.B. lowers the cost of borrowing because borrowers already provide the correct information for reporting purposes.C. lowers the cost of borrowing and avoids violation of debt covenants.D. simplifies contracts and improves cash flows.E. simplifies contracts and lowers the cost of borrowing.

45. Forman Corporation extends credit to its customers to purchase appliances, furniture, and other goods. Forman Corporation could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet. Forman Corporation would then use the cash collections from the receivables to repay the bank loan with interest. Instead, Forman Corporation sells the accounts receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased. The amount takes account of expected defaults, which would reduce the cash generated by the receivables. This difference between the amount paid to Forman Corporation by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return.  Which of the following is/are true? A. Forman Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet and recognizing bad debt expense on the income statement.  B. Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing bad debt expense on the income statement. C. Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet. D. Forman Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet. E. Forman Corporation has further obligations and will treat this transaction as a financing arrangement, recognizing incremental debt on the balance sheet and recognizing bad debt expense on the income statement.  

46. Electro Corporation extends credit to its customers to purchase appliances, furniture, and other goods. Electro Corporation could borrow from a bank using its accounts receivable as collateral, thereby placing debt on the balance sheet. Electro Corporation would then use the cash collections from the receivables to repay the bank loan with interest. Instead, Electro Corporation sells the accounts receivable to the bank for an amount that is less than the cash the bank expects to collect from receivables purchased. The amount takes account of expected defaults, which would reduce the cash generated by the receivables. This difference between the amount paid to Electro Corporation by the bank for the receivables and the amount that the bank expects to collect from the receivables provides the bank with its expected return.  Electro Corporation must transfer additional uncollected receivables to the lender/purchaser bank under either of two conditions: (1) if any receivables become uncollectible, and (2) if interest rates rise above a specified level. Which of the following is/are true? A. Electro Corporation bears both credit risk and interest rate risk and should treat the transfer of receivables as a loan, with debt appearing on its balance sheet. B. Electro Corporation bears both credit risk and interest rate risk and should not treat the transfer of receivables as a loan, with no debt appearing on its balance sheet. C. Electro Corporation does not bear credit risk or interest rate risk and should not treat the transfer of receivables as a loan, with no debt appearing on its balance sheet. D. Electro Corporation has no further obligation and will treat this transaction as a sale, with no incremental debt on the balance sheet. E. Electro Corporation bears credit risk but no interest rate risk and should treat the transfer of receivables as a loan, with debt appearing on its balance sheet.

47. Cutter Company, a distiller of liquors, ages its whiskeys for approximately 10 years. The firm must pay the costs to produce the whiskey and to store it during the aging process. Using the whiskey as collateral, Cutter could borrow to finance the costs incurred during the aging process; doing so would, however, lead to Cutter reporting increased liabilities. Instead, Cutter sells the whiskey to a bank and agrees to oversee the aging process on the bank’s behalf. At the completion of the aging, Cutter assists the bank in finding a buyer but is not responsible for ensuring that a sale occurs at a specific price, or at all. Under this arrangement, the bank bears the risk of changes in selling prices for the whiskey. Cutter will probably treat this transaction as a(n) A. executory contract, with no incremental debt on the balance sheet. B. financing arrangement, with incremental debt on the balance sheet. C. financing arrangement, with no incremental debt on the balance sheet. D. sale, with no incremental debt on the balance sheet. E. sale, with incremental debt on the balance sheet.

48. Zoom Company, a distiller of liquors, ages its whiskeys for approximately 10 years. The firm must pay the costs to produce the whiskey and to store it during the aging process. Using the whiskey as collateral, Zoom could borrow to finance the costs incurred during the aging process; doing so would, however, lead to Zoom reporting increased liabilities. Instead, Zoom sells the whiskey to a bank and agrees to oversee the aging process on the bank’s behalf. At the completion of the aging, Zoom Company guarantees an ultimate selling price that pays the lender both the original purchase price and a reasonable return over that amount. Zoom A. bears the economic risks and must show a liability on its balance sheet.B. bears the economic risks and but does not show a liability on its balance sheet.C. does not bear the economic risks and must show a liability on its balance sheet.D. does not bear the economic risks and does not show a liability on its balance sheet. E. will likely record the transaction as a sale and not a loan.

49. A complicated financing arrangement, whereby firms sell batches of receivables to a legally separate entity whose sole purpose is to hold the receivables and issue claims on their cash flows. The process is referred to as _____ of the receivables.  A. consolidationB. transformationC. hypothecationD. securitizationE. credit enhancement

50. In more complicated financing arrangements, firms sell batches of receivables to a legally separate entity whose sole purpose is to hold the receivables and issue claims on their cash flows.  The entity holding the receivables issues securities to investors in return for cash and transfers the cash to the transferor in payment for the receivables. The investors in securities issued by the entity receive payments out of the cash flow from the transferred receivables. Common terminology refers to such an entity as a  A. special purpose entity.B. pass-through entity.C. tax shelter.D. subsidiary entity.E. securitized entity.