Question

Purified Oil Company and Midwest Pipeline Corporation established Venture Company to conduct oil exploration activities in North America to reduce their dependence on imported crude oil. Midwest Pipeline purchased all 20,000 shares of the newly created company for $10 each. Purified Oil agreed to purchase all of Venture's output at market price, guarantee up to $5,000,000 of debt for Venture, and absorb all losses if the company proved unsuccessful. Purified and Midwest agreed to share equally the profits up to $80,000 per year and to allocate 70 percent of those in excess of $80,000 to Purified and 30 percent to Midwest. Venture immediately borrowed $3,000,000 from Second National Bank and purchased land, drilling equipment, and supplies to start its operations. Following these asset purchases, Venture and Purified Oil reported the following balances:


The only disclosure that Purified Oil currently provides in its financial statements with respect to its relationship with Midwest Pipeline and Venture is a brief note indicating that a contingent liability exists on the guarantee of Venture Company debt.

Required
Assuming that Venture is considered to be a variable interest entity and Purified Oil is the primary beneficiary, prepare a balance sheet in good form for PurifiedOil.


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  • CreatedMay 23, 2014
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