Problem

Consolidation of a Variable Interest EntityOn December 28, 20X3, Stern Corporation and Ram...

Consolidation of a Variable Interest Entity

On December 28, 20X3, Stern Corporation and Ram Company established S&R Partnership, with cash contributions of $10,000 and $40,000, respectively. The partnership’s purpose is to purchase from Stern accounts receivable that have an average collection period of 80 days and hold them to collection. The partnership borrows cash from Midtown Bank and purchases the receivables without recourse but at an amount equal to the expected percent to be collected, less a financing fee of 3 percent of the gross receivables. Stern and Ram hold 20 percent and 80 percent of the ownership of the partnership, respectively, and Stern guarantees both the bank loan made to the partnership and a 15 percent annual return on the investment made by Ram. Stern receives any income in excess of the 15 percent return guaranteed to Ram. The partnership agreement provides Stern total control over the partnership’s activities. On December 31, 20X3, Stern sold $8,000,000 of accounts receivable to the partnership. The partnership immediately borrowed $7,500,000 from the bank and paid Stern $7,360,000. Prior to the sale, Stern had established a $400,000 allowance for uncollectibles on the receivables sold to the partnership. The balance sheets of Stern and S&R immediately after the sale of receivables to the partnership contained the following:

	Stern Corporation	S&R Partnership
Cash	$7,960,000	$ 190,000
Accounts Receivable	4,200,000	8,000,000
Allowance for Uncollectible Accounts	(210,000)	(400,000)
Other Assets	5,400,000
Prepaid Finance Charges	240,000
Investment in S&R Partnership	10,000
Accounts Payable	950,000
Deferred Revenue		240,000
Bank Notes Payable		7,500,000
Bonds Payable	9,800,000
Common Stock	700,000
Retained Earnings	6,150,000
Capital, Stern Corporation		10,000
Capital, Ram Company		40,000