Question

JV, a corporation, was formed in 20X9 to design and manufacture electric cars. JV is 60 percent owned by AutoCo (a car manufacturer) and 40 percent owned by ElectricCo (a developer of electric car technology). The decision-making authority of JV is equally shared between AutoCo and ElectricCo: the JV board of directors is composed of two members appointed by AutoCo and two members appointed by ElectricCo. JV's board of directors (1) sets the annual budgets; (2) is responsible for the hiring, firing, and compensation of management; and (3) approves all material contracts. As part of the agreement, all cars produced by JV will bear AutoCo's logo and will be sold at AutoCo branded auto dealers. AutoCo is an established car manufacturer that has been producing cars in the United States for the past century. To meet governmental mandates of lowering emissions and increasing the fuel economy of its fleet, AutoCo has been evaluating various ways to enter the electric vehicle market. AutoCo does not currently have viable technology for the production of electric cars. ElectricCo was established by professors that developed cutting-edge battery technology for electric cars. Although ElectricCo has not produced electric cars in a mass market, the battery technology is tested and highly valued. AutoCo and ElectricCo jointly formed JV to produce electric cars for the mass market. JV benefits from ElectricCo's proprietary technology and AutoCo's manufacturing expertise and access to credit markets and distribution channels. JV is financed with 30 percent equity and 70 percent debt. When JV was formed, ElectricCo did not have access to sufficient cash at inception to fund its equity interest. To purchase its equity interest, ElectricCo received a loan from AutoCo. The debt financ credit facility from a third-party bank. For the bank to provide debt to JV, it required that AutoCo guarantee the loan. Is JV a VIE? was obtained in the form of a Which of the following indicators of a VIE are present for JV? Answer "Yes" or “No" A related party (i.e., the potential parent company) significantly contributed to JV's design A substantial part of JV's activities are conducted on behalf of the potential parent company More than half of the financing is provided by the parent company The primary goal of JV is to provide asset-backed financing or lease arrangements related to the primary activity of the potential parent company

Answer 1

JV is a VIE . The fact that the company is owned by 2 Autoco and Electric co and to form the company, one of the company provided credit to other company obtain the shares or funds required to own the company

Yes. The related party potentially contributed to JV's design. It is provided that Electric co provided the designs for the cars but to be a investors in JV , AutoCo financed the investment for ElectricCo , Which clearly gives the idea that Auto Co is the potential controlling owner

No. Only the marketinf and sales part are conducted on behalf of patent company

Yes. More than Half financing is provided by the AutoCo company as it itself invested in the company and also financed the other shareholder investment

No. The primary goal of the company is to provide Electric vehicle and gsin market share in the electric vehicle market