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

Question

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. The lender requires both firms to guarantee payment of the loan in case the joint venture defaults, Which of the following is/are true?
a. Under both U.S. GAAP and IFRS, the guarantors would recognize the fair value of the guarantee when they signed the loan.
b. If it becomes probable that the joint venture will default, then the guarantor would apply loss contingency accounting (U.S. GAAP) and recognize a liability.
c. If it becomes probable that the joint venture will default, then the guarantor would apply provision accounting (IFRS) and recognize a liability.
d. all of the above
e. none of the above

Answer 1

D