Question #40
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 17
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Mustang Corporation formed a special purpose entity (SPE) for purposes of providing research and development. An unrelated firm absorbs the expected losses of the SPE and the independent shareholders of the SPE receive the expected residual returns. Is the SPE considered a variable interest entity (VIE) according to FASB Interpretation No. 46(R) and is consolidation required by Mustang, respectively?
Answer Choices:
A. Yes ; Yes
B. No ; No
C. Yes ; No
Explanation
Since the shareholders do not absorb the expected losses, the SPE is considered a VIE. The
unrelated firm (not Mustang) that absorbs the losses is the primary beneficiary and must
consolidate the VIE.