Electricity may exceed company power-generating capacity

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Reference no: EM131613723

ABC Company and EFG Inc. form a joint venture—ABC and EFG Partners—to manufacture and distribute agricultural pesticides. ABC and EFG each contribute $20 million cash and receive 50% of ABC’s common stock. ABC then borrows $200 million from a consortium of banks and uses the money to build its manufacturing and distribution facilities. The loan is made on December 31, 2011, and is fully guaranteed by both ABC and EFG.

1. How much of the $200 million debt shows up on the December 31, 2011, balance sheet of ABC Company? Why? Would the same be true for EFG Inc.? Why or why not?

Which of the following qualifies as an eligible risk for hedge accounting?

a. Alliant Energy’s risk that summer demand for electricity may exceed the company’s power-generating capacity.

b. Ford Motor Company’s risk that not enough steel will be available in six months when the company must purchase steel to produce a new sports utility vehicle.

c. The risk to American Express that its members won’t pay their credit card bills.

d. The risk to Farmers’ Cooperative that corn mold will destroy its inventory of corn held in silos for sale next year.

e. The possibility of changes in the exchange rate of U.S. dollars for Mexican pesos for Coca-Cola Company, which has a major foreign investment in Mexico.

Reference no: EM131613723

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