1. Answer the following questions about AIR Finance.
   1. Evaluate each of the three condition for VIE and indicate whether AIR Finance is a VIE and explain why (6pt each - total18 pts).
   2. Determine which party, if any is the primary beneficiary (6pts).

To take advantage of the lower interest rate, on January 1, 2019, CC Airline establishes AIR Finance Co., an entity designed solely to own, finance, and lease airplanes to CC Airline. The documents governing the new entity specify the following:

• The sole purpose of AIR Finance is to purchase an flee of airplanes at $600 million, provide equity and debt financing, and lease the airplanes to CC Airline.
• An outside investor will provide $50 million in exchange for a 100% nonvoting equity interest in AIR Finance.
• AIR Finance will issue debt in exchange for $550 million cash. CC Airline will guarantee the debt.
• AIR Finance has no other assets, liabilities and equity.
• CC Airline will lease the airplanes from AIR Finance in exchange for payments of $18 million per year based on a 3 percent fixed interest rate for both the debt and equity investors for an initial lease term of ten years.
• At the end of the 10-year lease term, CC Airline must do one of the following:
  1. Renew the lease for another ten years subject to the approval of the equity investor.
  2. Purchase all the airplanes for $600 million.
  3. Sell all the airplanes to an independent third party. If the proceeds of the sale are insufficient to repay the equity investor, CC Airline must make a payment of $50 million to the equity investor.