Which of the following statements about variable interest entities (VIE) are correct or incorrect?
Statement #1
One potential benefit of a VIE is a lower cost of capital since the assets and liabilities of the VIE are isolated in the event the sponsor experiences financial difficulties.
Statement #2
The organizational form of a VIE must be either a partnership or a joint venture and it is necessary for the VIE to have separate management and employees.
A. Both are correct. B. Both are incorrect. C. Only one is correct.
Statement #1 is a correct statement. A lower cost of capital is a potential benefit of forming a VIE. Statement #2 is an incorrect statement. The organizational form can be a corporation, partnership, joint venture or trust. It is not necessary for the VIE to have separate management and employees.
