Reference no: EM133079501

Question - HB Country Outfitters Inc., entered into an agreement for HCO Media LLC to exclusively conduct HB's e-commerce initiatives through a jointly owned (50% each) internet site known as HCO.com. HCO Media receives percent of all sales revenue generated through the site up to a maximum of P500,000 per year. Both HB and HCO media pay 50 percent of the costs to maintain the internet site. However, if HCO Media's fees are insufficient to cover its 50 percent share of the costs, HB absorbs the loss. Assuming that HCO Media qualifies as a VIE, should HB consolidate HCO Media LLC? The following describes a set of arrangements between TPC Company and a variable interest entity( VIE) as of December 31,20x4. TPC agrees to design and construct a new development (R&D) facility. The VIE's sole purpose is to finance and own the R&D facility and lease it to TPC Company after construction is completed. Payments under the operating lease are expected to begin in the first quarter of 20x6. The VIE has financing commitments sufficient for the construction project from equity and debt participants (investors) of P4 million and P42 million, respectively. TPC in its role as the VIE's construction agent, is responsible for completing construction by December 31,20x5. TPC has guaranteed a portion of the VIE's obligations during the construction and post construction periods. TPC agrees to lease the R&D facility for five years with multiple extension options. The lease is a variable rate obligation indexed to three month market rate. As market interest rate increase or decrease the payments under this operating lease also increase or decrease, sufficient to provide a return to the investors. If all extension options are exercise, the total lease term is 35 years.

Required - At the end of the first five-year lease term or any extension, TPC may choose one of the following:

1. Renew the lease at fair market value subject to investor approval

2. Purchase the facility at its original construction cost

3. Sell the facility on the VIE's behalf, to an independent third party. If TPC sells the project and the proceeds from the sale are insufficient to repay the investors their original cost. TPC may be required to pay the VIE up to 85% of the project cost.

a. What is the purpose of reporting consolidated statements for a company and the entities that it controls?

b. When should a VIE's financial statements be consolidated with those of another company?

c. Identify the risks of ownership of the R&D facility that (1) TPC has effectively shifted to the VIE's owners and (2) remain with TPC.

d. What characteristics of a primary beneficiary does TPC possess?