Energy Works is forming a joint venture (JV) with Big Oil, Inc.for the extraction...

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Accounting

Energy Works is forming a joint venture (JV) with Big Oil, Inc.for the extraction of proved oil reserves in the artic. Bothventures wish to share in the risks and rewards of this venture,while benefiting from each other’s technical expertise and sharingof key assets. Energy Works will contribute a floating productionstorage and offloading facility (FPSO), valued at $100 million,along with $20 million in cash, to the venture in exchange for a50% equity interest.
Big Oil will contribute its arctic drilling permit, also valuedat $100 million, along with $20 million in cash, to the venture inexchange for a 0% equity interest. Assume that the cost basis ofthe contributed assets is the same as the fair values of thesesassets. Profits and losses of the venture will be shared based uponthe quit interest held by each investor.
Operations of the joint venture will be overseen by its Board ofDirectors. Each venture will receive two seats on the Board, for atotal of four seats, and all significant decisions of the JVrequire the unanimous consent of the Board, with any dispute to besettled by an independent arbitrator (binding arbitration). TheBoard has appointed Energy Works to manage the day-to-dayoperations of the FPSO facility. Additionally, both ventures willprovide employees and managerial personnel with technical expertiseto perfom day-to-day operations for the JV. Energy Works will notreceive separate compensation for its role as manager. The jointventure will be legally organized as an LLC.
1. In your opinion, what are some of the most critical resourcesthat Richard should consider – and key questions he should ask – inhis effort to understand this proposed transaction?
2. Assume that you have been asked to review a lease agreementto determine whether it should be classified as a capital lease oras an operating lease. In this case, knowing that this is a uniquetype of transaction that may be governed by its own set of rules,you should begin by searching for guidance specific to this type oftransaction. Your first researchable question for this contractmight be: “Should the lease agreement be classified as an operatinglease or as a capital lease?” What browse path might be anappropriate starting point for this question?
3. Take a moment to practice identifying a single, researchablequestion for the following issues:
a) A company ships its widgets to a customer on December 31 buthas not yet collected payment from the customer. The customer haspromised to pay within 30 days but has never purchased good withthis company before. Researchable question?
b) A customer is suing the local grocery store for aslip-and-fall incident. The grocery store believes the lawsuit willlikely be considered frivolous and rejected by the court. Thegrocery store must decide whether to record or disclose thismatter. Researchable question?
Can I get some ideas or answers for theses questions?

Answer & Explanation Solved by verified expert

4.3 Ratings (698 Votes)

Some of the key questions that need to be asked to understand the JV agreement Both the parties contribute equally interms of the contribution towards the JV Big Oils interest in the JV is mentioned as 0 This should be 50 being an equal partner Was tht a typo The Board has appointed Energy Works to manage the daytoday operations In that case who will execute the banking transactions and signing of cheques If this has to be only energy works then conflicts might start If the management of affairs is with Energy works there should be clear understanding of the roles See Answer

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In: AccountingEnergy Works is forming a joint venture (JV) with Big Oil, Inc.for the extraction of...Energy Works is forming a joint venture (JV) with Big Oil, Inc.for the extraction of proved oil reserves in the artic. Bothventures wish to share in the risks and rewards of this venture,while benefiting from each other’s technical expertise and sharingof key assets. Energy Works will contribute a floating productionstorage and offloading facility (FPSO), valued at $100 million,along with $20 million in cash, to the venture in exchange for a50% equity interest.Big Oil will contribute its arctic drilling permit, also valuedat $100 million, along with $20 million in cash, to the venture inexchange for a 0% equity interest. Assume that the cost basis ofthe contributed assets is the same as the fair values of thesesassets. Profits and losses of the venture will be shared based uponthe quit interest held by each investor.Operations of the joint venture will be overseen by its Board ofDirectors. Each venture will receive two seats on the Board, for atotal of four seats, and all significant decisions of the JVrequire the unanimous consent of the Board, with any dispute to besettled by an independent arbitrator (binding arbitration). TheBoard has appointed Energy Works to manage the day-to-dayoperations of the FPSO facility. Additionally, both ventures willprovide employees and managerial personnel with technical expertiseto perfom day-to-day operations for the JV. Energy Works will notreceive separate compensation for its role as manager. The jointventure will be legally organized as an LLC.1. In your opinion, what are some of the most critical resourcesthat Richard should consider – and key questions he should ask – inhis effort to understand this proposed transaction?2. Assume that you have been asked to review a lease agreementto determine whether it should be classified as a capital lease oras an operating lease. In this case, knowing that this is a uniquetype of transaction that may be governed by its own set of rules,you should begin by searching for guidance specific to this type oftransaction. Your first researchable question for this contractmight be: “Should the lease agreement be classified as an operatinglease or as a capital lease?” What browse path might be anappropriate starting point for this question?3. Take a moment to practice identifying a single, researchablequestion for the following issues:a) A company ships its widgets to a customer on December 31 buthas not yet collected payment from the customer. The customer haspromised to pay within 30 days but has never purchased good withthis company before. Researchable question?b) A customer is suing the local grocery store for aslip-and-fall incident. The grocery store believes the lawsuit willlikely be considered frivolous and rejected by the court. Thegrocery store must decide whether to record or disclose thismatter. Researchable question?Can I get some ideas or answers for theses questions?