accounting-It is not unusual to issue long term debt in conjunction

QUESTION

Essay 1
It is not unusual to
issue long term debt in conjunction with an arrangement under which lenders
receive an option to buy common stock during all or portion of the time the
debt is outstanding. Sometimes the vehicle is convertible bonds. Sometimes
warrants to buy stock is accompany the bonds and are separable. Interstate
Chemical is considering these options in conjunction with a planned debt issue.
“You mean we have to
report 7 million more in liabilities if we go with convertible bonds? Make no
sense to me”, Your CFO said. “Both ways seem pretty much the same transaction.
Explain it to me?”
REQUIRED:
Write a memo. Include in
your explanation each of the following.
1.
The differences in accounting for proceeds from
the issuance of convertible bonds and debt instruments with separate warrants
to purchase common stock.
2.
The underlying rationale for the differences.
3.
Arguments that could be presented for the
alternative accounting treatment.

Essay 2
“I thought I understand earnings
per share,” Lamented Brad Dawson, “but your telling me we need to pretend our
convertible bonds have been converted! Or maybe not?”
Dawson, your boss, is
the new manager of the fabricating division of BVT Corporation. His background
is engineering and he has only a basic understanding of earning per share.
Knowing you are accounting graduate, he asks you to explain the questions he
has about the calculation of the company’s EPS. His reaction is to your
explanation that the company’s convertible bonds might be included in this year’s
calculation.
“Put it in a memo! “He
grumbled as he left your office.
REQUIRED.
Write a memo to Dawson.
Explain the effect on earnings per share of each of the following.
1.
Convertible securities
2.
Antidilutive securities

ANSWER:

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