Question #71
Reading: Reading 8 Intercorporate Investments
PDF File: Reading 8 Intercorporate Investments.pdf
Page: 31
Status: Unattempted
Correct Answer: B
Question
Maverick Incorporated formed a special purpose entity (SPE) to purchase and lease a 50,000 acre ranch. The SPE financed 95% of the purchase price with debt. The remaining 5% was financed with equity capital received from two separate independent investors. The lender would not make the loan without Maverick's guarantee. How should Maverick treat the SPE in its financial statements if Maverick is the lessee?
Answer Choices:
A. No firm must consolidate the SPE
B. Maverick must consolidate the SPE
C. Each equity investor must proportionately consolidate the SPE
Explanation
The 5% at-risk equity investment is not sufficient to support the activities of the SPE
without Maverick's guarantee. Thus, the SPE is considered a variable interest entity (VIE).
Since Maverick is responsible for the guarantee, Maverick is the primary beneficiary and
must consolidate the SPE.