Target Corporation and Bark Company (forest products companies) need additional pulp-processing capacity.Each firm could borrow the needed funds and build its own manufacturing plant.Instead, they form a joint venture to build a pulp-processing plant.Each firm agrees to use half of the new plant's capacity each year for 20 years and to pay half of all operating and debt service costs.The joint venture uses the purchase commitments of Target Corporation and Bark Company to obtain a loan to build the facility.The firms structure the arrangement so that neither firm controls the joint venture.Which of the following is/are true?

Question

Quizplus · Accepted Answer

The purchase commitments are considered executory contracts because they involve a series of actions to be performed in the future. Neither firm will recognize a liability for its portion of the loan directly on its balance sheet because the loan is taken by the joint venture, not the individual firms. The loan will appear as a liability on the balance sheet of the joint venture, as it is the entity that has legally taken out the loan. Each firm effectively obtains financing for the services of the plant without showing a liability on its balance sheet, as the debt is recorded under the joint venture.

Target Corporation and Bark Company (Forest Products Companies) Need Additional