Can someone tell me if this answer is correct? I have one chance at it. Hillsbor

Question

Can someone tell me if this answer is correct? I have one chance at it.

Hillsborough Country Outfitters, Inc., entered into an agreement for HCO Media LLC to exclusively conduct Hillsborough's e-commerce initiatives through a jointly owned (50 percent each) Internet site known as HCO.com. HCO Media receives 2 percent of all sales revenue generated through the site up to a maximum of dollar 500,000 per year. Both Hillsborough 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, Hillsborough absorbs the loss. Assuming that HCO Media qualifies as a VIE, should Hillsborough consolidate HCO Media LLC? Yes No

Explanation / Answer

Your answer is correct.

Hillsborough should consolidate HCO media LLC.

Reasons for consolidation are given below:

The purpose of consolidated financial statements is to present the financial position and results of operations of a group of businesses as if they were a single entity. They are designed to provide information useful for making business and economic decisions—especially assessing amounts, timing, and uncertainty of prospective cash flows. Consolidated statements also provide more complete information about the resources, obligations, risks, and opportunities of an enterprise than separate statements.

An entity qualifies as a VIE and is subject to consolidation if either of the following conditions exist. The total equity at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support from other parties. In most cases, if equity at risk is less than 10% of total assets, the risk is deemed insufficient. The equity investors in the VIE lack any one of the following three characteristics of a controlling financial interest 1. The power, through voting rights or similar rights, to direct the activities of an entity that most significantly impact the entity’s economic performance. 2. The obligation to absorb the expected losses of the entity if they occur. 3. The right to receive the expected residual returns of the entity.

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