ADVANCED ACCOUNTING COMPLETE STUDY
GUIDE WITH SOLVED QUESTIONS
◉ The primary beneficiary of VIE
Answer: must include the VIE's assets and liabilities in its
consolidated balance sheet.
◉ If a VIE is unable to obtain needed creditor financing because the
equity investments are too small, then non-equity investors may
provide additional financial support and
Answer: provide a small guaranteed return to the equity holders in
exchange for financial control over the VIE.
obtain rights to the VIE's profits
will likely limit the decision-making ability of the equity investors.
◉ A business enterprise is required to consolidate the assets,
liabilities, and results of operations of a VIE in which it holds no
equity interest if
Answer: it can exercise financial control over the VIE in its role as
primary beneficiary.
,◉ In evaluating an entity's status as a VIE, if equity at risk is less
than (Blank)% of total assets, the risk is deemed insufficient and the
entity is considered a VIE
Answer: 10
◉ Variable interests entities are often established to provide
Answer: low-cost financing for asset purchases.
leasing arrangements
research and development arrangements
◉ Control over a VIE's decision-making process is typically
exercised through
Answer: power granted contractually to a primary beneficiary.
◉ In general, which of the following characteristics are needed to
establish that an enterprise with an variable interest in a VIE has a
controlling financial interest?
Answer: The enterprise is obligated to absorb significant losses of
the VIE or is is entitled to receive significant benefits from the VIE.
The enterprise has the power to direct the economically significant
activities of the VIE.
,◉ Why do the risks and rewards from a VIE often get distributed to
the primary beneficiary rather than equity investors?
Answer: VIEs may separate ownership from the VIE's economic
benefits and risks to enable beneficial contracting (e.g., financing)
for a primary beneficiary.
Contractual arrangements often specify that the VIE's risks and
rewards go to the primary beneficiary.
Equity investors frequently bear little economic risk in the VIE.
◉ Consolidation is required when one company possesses a
controlling financial interest over another company. When is a
majority voting interest not effective in identifying a controlling
financial interest in an affiliated entity?
Answer: When variable interests allow a primary beneficiary to
exercise financial control over a variable interest entity.
◉ The fact that Twin Peaks (rather than the equity investor) has an
obligation to absorb any losses of Power Finance points to a
conclusion that Power Finance is a (Blank) (Blank) entity.
Answer: Variable Interest
, ◉ Under what general conditions does an entity qualify as a variable
interest entity?
Answer: Equity investors' returns are capped by contractual
arrangements with variable interest holders.
The equity investors lack the ability to exercise financial control over
the entity.
There is insufficient equity at risk to enable the entity to finance its
activities without additional support.
◉ In general, an enterprise that has the power to direct the activities
of a variable interest entity (VIE) and the obligation to absorb the
losses of the VIE is the (Blank) (Blank) of the VIE
Answer: Primary Beneficiary
◉ What characteristics of Power Finance Company suggest that it
qualifies as a variable interest entity?
Answer: Theequity investor's ownership at risk is less than 10% of
total assets
The equity investors bears little to no risk from ownership of the
plant asset.
GUIDE WITH SOLVED QUESTIONS
◉ The primary beneficiary of VIE
Answer: must include the VIE's assets and liabilities in its
consolidated balance sheet.
◉ If a VIE is unable to obtain needed creditor financing because the
equity investments are too small, then non-equity investors may
provide additional financial support and
Answer: provide a small guaranteed return to the equity holders in
exchange for financial control over the VIE.
obtain rights to the VIE's profits
will likely limit the decision-making ability of the equity investors.
◉ A business enterprise is required to consolidate the assets,
liabilities, and results of operations of a VIE in which it holds no
equity interest if
Answer: it can exercise financial control over the VIE in its role as
primary beneficiary.
,◉ In evaluating an entity's status as a VIE, if equity at risk is less
than (Blank)% of total assets, the risk is deemed insufficient and the
entity is considered a VIE
Answer: 10
◉ Variable interests entities are often established to provide
Answer: low-cost financing for asset purchases.
leasing arrangements
research and development arrangements
◉ Control over a VIE's decision-making process is typically
exercised through
Answer: power granted contractually to a primary beneficiary.
◉ In general, which of the following characteristics are needed to
establish that an enterprise with an variable interest in a VIE has a
controlling financial interest?
Answer: The enterprise is obligated to absorb significant losses of
the VIE or is is entitled to receive significant benefits from the VIE.
The enterprise has the power to direct the economically significant
activities of the VIE.
,◉ Why do the risks and rewards from a VIE often get distributed to
the primary beneficiary rather than equity investors?
Answer: VIEs may separate ownership from the VIE's economic
benefits and risks to enable beneficial contracting (e.g., financing)
for a primary beneficiary.
Contractual arrangements often specify that the VIE's risks and
rewards go to the primary beneficiary.
Equity investors frequently bear little economic risk in the VIE.
◉ Consolidation is required when one company possesses a
controlling financial interest over another company. When is a
majority voting interest not effective in identifying a controlling
financial interest in an affiliated entity?
Answer: When variable interests allow a primary beneficiary to
exercise financial control over a variable interest entity.
◉ The fact that Twin Peaks (rather than the equity investor) has an
obligation to absorb any losses of Power Finance points to a
conclusion that Power Finance is a (Blank) (Blank) entity.
Answer: Variable Interest
, ◉ Under what general conditions does an entity qualify as a variable
interest entity?
Answer: Equity investors' returns are capped by contractual
arrangements with variable interest holders.
The equity investors lack the ability to exercise financial control over
the entity.
There is insufficient equity at risk to enable the entity to finance its
activities without additional support.
◉ In general, an enterprise that has the power to direct the activities
of a variable interest entity (VIE) and the obligation to absorb the
losses of the VIE is the (Blank) (Blank) of the VIE
Answer: Primary Beneficiary
◉ What characteristics of Power Finance Company suggest that it
qualifies as a variable interest entity?
Answer: Theequity investor's ownership at risk is less than 10% of
total assets
The equity investors bears little to no risk from ownership of the
plant asset.
