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Chapter 14: Q22Q (page 753)

What is off-balance sheet financing? Why might a company be interested in using off-balance sheet financing?

Short Answer

Expert verified

Off-balancesheet financing is a methodto lend funds in a manner in which the debts are not listed. The company shows interest in off-balance sheet financingbecause it appeals to more investors or in casethey (company) are burdened by debt but require additional capital to finance their business affairs.

Step by step solution

01

Meaning of off-balancesheet financing

Off-balance sheet financing is a financial method wherein firms list particular assets or liabilities so as to prevent them from displaying on their balance sheet.

02

Reasons behindoff-balance sheet financing

A companygenerally uses off-balance sheet financing because:

  • Eliminating debt improves the balance sheet quality and allows credit to be obtained easily at a minimal cost.
  • The asset side of the balance sheet is undervalued as fair value is not used in the case of various assets. Therefore, not listing certain debt transactions offsets the non-acceptance of fair values on definite assets.
  • Loans undertaken are unlikely to be contravened.

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Most popular questions from this chapter

E14-3 (L01) (Entries for Bond Transactions) Presented below are two independent situations.

1. On January 1, 2017, Simon Company issued \(200,000 of 9%, 10-year bonds at par. Interest is payable quarterly on April 1, July 1, October 1, andJanuary 1.

2. On June 1, 2017, Garfunkel Company issued \)100,000 of 12%, 10-year bonds dated January 1 at par plus accrued interest. Interest is payable semi-annually on July 1 and January 1.

Instructions

For each of these two independent situations, prepare journal entries to record the following.

(a) The issuance of the bonds.

(b) The payment of interest on July 1.

(c) The accrual of interest on December 31.

What are the types of situations that result in troubled debt?

Devers Corporation issued $400,000 of 6% bonds on May 1, 2017. The bonds were dated January 1, 2017, and mature January 1, 2020, with interest payable July 1 and January 1. The bonds were issued at face value plus accrued interest. Prepare Devers’s journal entries for (a) the May 1 issuance, (b) the July 1 interest payment, and (c) the December 31 adjusting entry.

What is the fair value option? Briefly describe the controversy of applying the fair value option to financial liabilities.

How should discounts on bonds payable be reported on the financial statements? Premium on bonds payable?
See all solutions

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