Explain whether Bullworks or Rodeo must consolidate BR

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Question - Bullworks sponsors the establishment of BR corporation. Bullworks sells its receivables to BR which is a special purpose entity. Other information:

1) Bullworks owns 5% of the owners equity of BR. Rodeo Corporation owns the remaining 95%.

2) Owners equity constitutes 3% of the total assets of BR, the remaining 97% of total assets is financed through debt securitized by the receivables that Bullworks sells to BR.

Circumstance 2

Bullworks agrees to absorb any losses that BR sustains and is willing to infuse BR with cash as necessary.

Rodeo's return on investment is limited to 5% with an excess attributed to Bullworks.

The Board of Directors composition is 6 appointed by Bullworks and 5 by Rodeo.

A. Explain if BR is a variable interest entity or not. Support your answers using the facts above.

B. Explain whether Bullworks or Rodeo must consolidate BR? Support your explanation with facts.

Reference no: EM133026601

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