The reported balances of certain liabilities carried on a corporation's books do not always indicate the maximum obligation potentially facing the firm as a result of past transactions. In addition, a firm may have potential obligations that are not recorded at all.
Required:
For each of the following potential or actual liability items, briefly discuss in writing whether the firm is subject to off-balance-sheet risk of accounting loss and, if so, whether that risk arises from credit risk or market risk (or both), and why. Your discussion should be from the point of view of the company named.
1. Fixed-rate mortgage payable by Wellco, Inc., secured by real estate owned by Wellco.
2. The guarantee by Jolko, Inc., of a $4 million loan obtained by one of Jolko's subsidiaries.
3. Bonds payable issued by Samson, Inc. at a discount, due in five years.
4. Convertible bonds issued by Coastal Company at a premium, due in two years.
5. Transfer of accounts receivable by Jenell Company, accounted for as a borrowing. The transfer is with recourse to Jenell.
6. Variable-rate mortgage payable by Angeles, Inc., secured by real estate owned by Angeles.
7. A loan commitment made by BCCJ Bank to a computer manufacturer, guaranteeing a fixed line of credit at a fixed rate of interest for one year from the commitment date.