Financial Accounting: Liabilities & Equities
Question 1 (33 marks)
Canadian Scientific Ltd. issued €600,000 of convertible bonds on July 1, 20X2. The
bonds mature on June 30, 20X9, and bear an interest rate of 7%, paid each June 30. The
bonds are convertible at the rate of 100 ordinary shares for every €1,000 bond.
Required
Answer each of the following two parts independently.
Part (a) (16 marks: 3 marks for Requirements 1, 2, 3, and 5; 4 marks for
Requirement 4)
The bonds are convertible at the option of Canadian Scientific Ltd. The market interest
rate on the day of issuance was 7%.
1. Calculate the portion of the bond proceeds allocated to debt versus equity.
2. Prepare a table showing the interest expense over the life of the bond and the
amortization of the interest liability.
3. Prepare a table showing the charge to retained earnings for each period for the life of
the bond and the change in the equity component.
4. What would appear on the balance sheet, income statement, retained earnings
statement, and cash flow statement for the year ended June 30, 20X4? Indicate which
category each balance sheet item would fall under. Do not separate the current
portion of long-term debt. On the cash flow statement, the direct method is used to
disclose operating activities.
5. What items would be included in a disclosure note related to the bond at June 30,
20X4? List the disclosures; you do not need to prepare them.
Part (b) (17 marks: 3 marks for Requirements 1, 2, and 3; 4 marks each for
Requirements 4 and 5)
All terms are the same as Part (a), except the bonds are convertible at the investor’s
option. The financial instrument was issued for total proceeds of €680,000. The bond
alone was valued at €539,602. No value can be separately calculated to value the option.
1. Calculate the portion of the bond proceeds allocated to debt versus equity.
2. What interest rate is implicit in the bond valuation?
3. Prepare a table showing the interest expense and the net bond liability over the life of
the bond.
4. What would appear on the balance sheet (indicate category), income statement, and
cash flow statement for the year ended June 30, 20X6? Do not separate the current
portion of long-term debt. On the cash flow statement, the direct method is used to
disclose operating activities.
5. Prepare a journal entry to reflect the following independent events:
a. Conversion of the bond to ordinary shares on June 30, 20X9.
b. Repayment of the bond with cash on June 30, 20X9, and the lapse of rights.
Procedure
Part (a)
1. Open the file FA3L4Q1, which contains the worksheets L4Q1A and L4Q1B. You
will use worksheet L4Q1A to complete Part A, requirements 1, 2, and 3.
2. Examine the layout of the worksheet. It is similar to the one used in Computer
illustration 4-1.
3. To complete the calculation for Requirement 1, enter PV functions in cells B21 and
B22 to determine the PV of the interest and principal. Sum the values in cell B23.
4. Complete the amortization schedule to determine the interest expense for
Requirement 2 by entering the appropriate formulas into cells B30 to E36.
5. Complete the table to determine the capital charge to retained earnings for
Requirement 3 by entering the appropriate formulas into cells B43 to D49.
6. Save your file.
7. Copy and paste cells A1 to E49 into a word-processing document.
8. Answer Requirements 4 and 5 in your word-processing document.
Part (b)
1. Click the worksheet L4Q1B.
2. Examine the layout of the worksheet.
3. From the information given in the problem, determine the values for Requirement 1
and enter them into cells B21 and B22. Sum the values in cell B23.
4. To complete Requirement 2, enter the required cash flows for the issuer of the bonds
in cells B30 to B37. Determine the IRR by entering the correct function in cell C30.
Enter this interest rate in B14 and B15.
5. To complete Requirement 3, enter the appropriate formulas into cells B45 to E51.
Note:
Adjust cell C51 for rounding error as needed.
6. Save your file.
7. Copy and paste cells A1 to E53 into your word-processing document.
8. Answer Requirements 4 and 5 in your word-processing document.
Question 2 (19 marks)
R&P Steering Corporation reported the following balances for shareholders’ equity as of
January 1, 20X4:
Share equity – 8% bonds (€10,000,000 par value). Bonds are convertible
at maturity into ordinary shares at the company’s option.
Convertible €8, no-par preference shares, 60,000 shares outstanding;
convertible into 8 ordinary shares for every 3 preference shares
outstanding.
Class A no-par ordinary shares, unlimited shares authorized, 915,000
issued and 899,000 outstanding
Ordinary share warrants, allowing purchase of 90,000 shares at €32.50
Contributed capital on preference share retirement
Retained earnings
Less: Treasury shares, 16,000 ordinary shares
€5,002,490
6,060,000
32,940,000
660,000
55,000
116,300,000
(512,000)
Forty thousand ordinary stock options are outstanding to certain employees allowing
purchase of one share for every two options held at a price of €27.50 per share. These
options expire in 20X7.
The following events took place in 20X4:
a. Ordinary shares were issued to employees under the terms of existing outstanding
share options. 16,000 options were exercised when the share market value was €45.
b. Options were issued in exchange for a piece of land, appraised at €75,000. The
options allow purchase of 100,000 shares at €15 each in five years. The market value
of the shares was €46 on this date. The option was valued at €71,000 using the
Black-Scholes option pricing model. (Justify the value used in your entry.)
c. Ordinary shares, 40,000 shares, were acquired and retired at a price of €47 each.
d. Treasury shares, 10,000 shares, were acquired at a price of €44 per share.
e. A cash dividend was declared and paid. The annual dividend for the preference shares
and €1 per share for the ordinary shares were both declared and paid.
f. Preference shares, 24,000 shares, converted to ordinary shares.
g. The annual charge on the share equity 8% bonds was recorded.
h. Two-thirds of the ordinary share warrants outstanding at the beginning of the year
were exercised when the market value of the shares was €49.50; the remainder
lapsed.
i. Preference shares, 10,000 shares, were retired for €107 each.
j. Treasury shares, 20,000 shares, were sold for €32 each.
k. A 10% stock dividend was declared and issued. Treasury shares were not eligible for
the stock dividend. The board of directors decided that the stock dividend should be
valued at €30 per share. Most of the dividend was issued in whole shares; however,
41,000 fractional shares allowing acquisition of 4,100 whole shares were issued.
Required
1. Provide the journal entries for the events listed. (12 marks)
2. Assuming profit for the year was €6,200,000, calculate the closing balances in each
of the equity accounts as of December 31, 20X4. (7 marks)
Question 3 (10 marks)
a. Which of the following is not a characteristic of a derivative?
1)
2)
3)
4)
5)
A derivative is a secondary financial instrument whose value is linked to a
primary financial instrument.
A derivative is an option.
A derivative is a forward contract.
A derivative is an option and a forward contract.
all of the above
b. Which of the following defines a forward contract?
1)
2)
3)
4)
an obligation to buy something in the future
the right to sell something in the future
a debt instrument
the right to buy something in the future
c. S Corporation created a stock option plan for its two top executives. The plan
provided that each executive would receive 1,000 options, which would enable him
or her to purchase 100 shares at 75 percent of the market price on the date the options
became exercisable. The options were exercisable in two years. At the date of
granting the options, the market price of the shares was €12 per share. Which of the
following is the date of measurement for the stock option plan?
1)
2)
3)
4)
date of grant
end of the first year
end of the second year
date the employees exercise their options
d. What are derivatives?
1)
2)
3)
4)
legal contracts
promissory notes
ordinary shares
executory contracts
e. Which of the following does the IASB not require to be disclosed for stock options?
1)
2)
3)
4)
the number of shares involved
market price of the options
issue price
date of expiry
Question 4 (12 marks)
For each of the following independent cases, indicate the appropriate disclosure on the
cash flow statement. Be sure to state whether an item is classified in operating, investing,
or financing sections. Assume the use of the indirect method of presentation for the
operating section of the cash flow statement. (4 marks for each case)
Case A
Information from the December 31, 20X5, balance sheet of Riviera
Holdings is as follows:
20X5
20X4
Bonds payable
Discount on bonds payable
Ordinary stock conversion rights
€5,000,000
160,000
695,000
0
0
0
During the year, convertible bonds were issued; amortization of the
discount was €14,000 in 20X5.
Case B
Information from the December 31, 20X5, balance sheet of Baltic Mining
Corp. is as follows:
20X5
20X4
Bonds payable
Discount on bonds payable
Ordinary stock conversion rights
Ordinary shares
€5,000,000
160,000
695,000
17,000,000
€10,000,000
346,000
1,390,000
7,100,000
One-half of the bonds were converted to ordinary shares during 20X5.
Other ordinary shares were issued for cash. Amortization of the discount
was €26,000 in 20X5.
Case C
Information from the December 31, 20X5, balance sheet of Les Jouets
Joyeux is as follows:
20X5
Bonds payable
Discount on bonds payable
Ordinary stock conversion rights
Contributed capital: lapse of
conversion rights
€
20X4
0
0
0
€10,000,000
26,450
1,390,000
1,390,000
0
Bonds payable matured in the year, and they were redeemed for cash at
par.
Source: Thomas Beechy and Joan Conrod, Intermediate Accounting, Vol. 2,
First Edition (Toronto: McGraw-Hill Ryerson, 2000), Question 15-15, page 897. Adapted
with permission.
Question 5 (26 marks)
Case analysis
You have been approached by a potential investor to comment on the financial
instruments of a company in which she is considering investing. Communications
Equipment Ltd. is a small company whose shares are lightly traded on the London Stock
Exchange. Control of the ordinary shares is held by a relatively tight-knit group of
investors, who have been involved in the company since it went public. There are now
shares held outside this control block and many shareholders.
This potential investor wants to make sure she properly understands the debt and equity
obligations of the company as part of her due diligence before investing. She’s also
investigating the company’s operating results, products, and future markets. However,
she knows that you have expertise in financial matters and has come to you for an
explanation of two of the enterprise’s more complicated financial instruments. She’s
asked you to explain their nature, potential valuation problems, and financial statement
classification. She is concerned about earnings dilution and the number of ordinary
shares that might be issued in the future.
The financial instruments are described in Exhibit 1.
Required
Respond to the request.
Exhibit 1
COMMUNICATIONS EQUIPMENT LTD.
Financial Instruments
December 31, 20X5
€ 7,000,000
Demand debentures payable, 6%
Demand debentures are held by three individuals who hold ordinary shares of the
company and sit on the board of directors. There is no maturity date on the bonds.
Interest is paid annually. On demand, bonds may be converted to 149,300,000 ordinary
shares of CEL at the investor’s option, or redeemed for cash. Market interest rates were
in the range of 8% in 20X5.
Series C shares, €6
€ 12,000,000
Series C shares were issued at par value in 20X5 and are entitled to cumulative
dividends, as declared, of €6 annually. The shares have a maturity date of
October 31, 20X11. In 20X11, at the shareholders’ option, all shares may be tendered for
conversion into ordinary shares at a value of €36.25 per share. At the company’s option
at that time, the company may pay cash instead of any or all ordinary shares.
Shareholders are also entitled to dividends in arrears, if any, on conversion, in cash.
Note:
Case analysis is limited to 1,000 words. A maximum of two marks is awarded for the quality of written
communication.
Suggested solutions
Question 1 (33 marks)
Computer solution
Part (a) (16 marks)
1, 2, and 3
(3 marks each for present value, amortization schedule, and capital
charge)
FA3: LESSON 4: ASSIGNMENT QUESTION 1: PART A: SOLUTION
CGA-CANADA
DATA TABLE - Canadian Scientific Ltd. (Issuer)
€ 600,000.00
July 1, 20X2
June 30, 20X9
Maturity amount of the bonds
Issue date
Maturity date
Stated annual interest rate
Interest rate per period
Market interest rate (annual)
Interest rate per period
7.00%
7.00%
7.00%
7.00%
Interest payment dates
Number of interest periods per year
Total number of interest periods
PV of principal
PV of interest payments
Total sale price of bond, July 1, 20X2
June 30
1
7
€
€
373,650
226,350
600,000
Amortization Schedule, Issuer's Option:
Year
1
2
3
4
5
6
7
€
Beginning
Balance
226,350
200,195
172,208
142,263
110,221
75,937
39,252
€
Interest
7%
15,845
14,014
12,055
9,958
7,715
5,316
2,748
€
Payment
42,000
42,000
42,000
42,000
42,000
42,000
42,000
Capital Charge
Year
1
2
3
4
5
6
7
€
Beginning
Balance
373,650
399,805
427,792
457,737
489,779
524,063
560,748
€
Charge
7%
26,155
27,986
29,945
32,042
34,285
36,684
39,252
Equity Ending
Account
€
399,805
427,792
457,737
489,779
524,063
560,748
600,000
4. (4 marks)
On June 30, 20X4, end of second year.
Balance sheet
Long-term liabilities
Interest liability on bond ..................................................
172,208
Equity
Share equity-bond ............................................................
427,792
Income statement
Interest expense ...............................................................
14,014
Retained earnings statement
Capital charge on share equity-bond ...............................
27,986
€
Ending
Balance
200,195
172,208
142,263
110,221
75,937
39,252
0
Cash flow statement
Operating activities
Interest paid .....................................................................
(14,014)
Financing activities
Principal payment on interest liability on bond
(€399,806 – €427,792).....................................................
(27,986)
5. (3 marks)
Disclosure items
1. Terms and conditions
2. Interest rate
3. Fair value of interest liability
Part (b) (17 marks)
1, 2, and 3
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
52
53
(3 marks each for bond value vs. conversion option value, calculation
of IRR, and amortization schedule)
A
B
C
FA3: LESSON 4: ASSIGNMENT QUESTION 1: PART B: SOLUTION
CGA-CANADA
D
E
DATA TABLE - Canadian Scientific Ltd. (Investor's option)
€ 600,000.00
July 1, 20X2
June 30, 20X9
Maturity amount of the bonds
Issue date
Maturity date
Stated annual interest rate
Interest rate per period
Market interest rate (annual)
Interest rate per period
7.00%
7.00%
9.00%
9.00%
Interest payment dates
Number of interest periods per year
Total number of interest periods
Bond value
Conversion option
Total sale price of bond, July 1, 20X2
June 30
1
7
€
€
539,602
140,398
680,000
Calculation of IRR
Year
0
1
2
3
4
5
6
7
€
Annual
Cashflows
539,602
(42,000)
(42,000)
(42,000)
(42,000)
(42,000)
(42,000)
(642,000)
IRR
9%
Amortization Schedule, Investor's Option:
Year
1
2
3
4
5
6
7
Beginning
Balance
Interest Liability
€
539,602
546,166
553,321
561,120
569,621
578,887
588,987
Note: €5 has been added to cell C51 due to rounding.
€
Interest
9%
48,564
49,155
49,799
50,501
51,266
52,100
53,014
€
Payment
42,000
42,000
42,000
42,000
42,000
42,000
42,000
€
Ending
Interest
Liability
546,166
553,321
561,120
569,621
578,887
588,987
600,000
4. (4 marks)
On June 30, 20X6, end of fourth year
Balance sheet
Long-term liabilities
Bonds payable (net) .........................................................
569,621
Equity
Ordinary stock conversion rights .....................................
140,398
Income statement
Interest expense .....................................................................
50,501
Cash flow statement
Interest paid ...........................................................................
(42,000)
5. (4 marks)
a.
June 30, 20X9
Bonds payable........................................................................
Ordinary stock conversion rights ...........................................
Ordinary stock .................................................................
600,000
140,398
740,398
b.
June 30, 20X9
Bonds payable........................................................................
Cash .................................................................................
Ordinary stock conversion rights ...........................................
Contributed capital, lapse of rights ..................................
600,000
600,000
140,398
140,398
Question 2 (19 marks)
Requirement 1: 1 mark for each entry
Requirement 2: 1 mark for each account and 1 mark for the memo
Requirement 1
a. Cash [(16,000/2)  €27.50]..............................................
Ordinary shares, no-par, 8,000 shares .......................
220,000
b. Land .................................................................................
Contributed capital: ordinary share rights
outstanding.................................................................
71,000
220,000
71,000
The more reliable of the two numbers should be used. Appraisals are subjective, and
option pricing models very dependent on estimates. The two values are very close to one
another, which provides some comfort. The lower of the two values is used as the most
conservative.
c. Ordinary shares, no-par, 40,000 shares* ......................... 1,437,200
Retained earnings.............................................................
442,800
Cash (€47.00  40,000) .............................................
* €32,940,000 + €220,000/(915,000 + 8,000) = €35.93  40,000
d. Treasury shares (10,000  €44) .......................................
Cash ...........................................................................
440,000
e. Dividends, ordinary 857,000*  €1 .................................
Dividends, preference 60,000  €8 ..................................
Cash ...........................................................................
* 915,000 + 8,000 – 40,000 – 26,000 treasury shares
857,000
480,000
f. Preference shares, 24,000 shares* ...................................
Ordinary shares, 64,000 shares (24,000  8/3) ..........
* €6,060,000/60,000 = €101  24,000
2,424,000
g. Retained earnings, capital charge (€5,002,490  8%) .....
Share equity — 8% bond ...........................................
400,199
h. Contributed capital: ordinary share warrants ...................
Cash (60,000  €32.50) ...................................................
Ordinary shares, no-par, 60,000 shares* ...................
Contributed capital: lapse of warrants .......................
* €1,950,000 + €440,000
660,000
1,950,000
1,880,000
440,000
1,337,000
2,424,000
400,199
i. Preference shares (10,000  €101) .................................. 1,010,000
Contributed capital on preference share retirement (balance) 55,000
Retained earnings.............................................................
5,000
Cash (10,000  €107) ................................................
j. Cash (20,000  €32) ........................................................
640,000
Retained earnings, loss on sale of treasury shares ..........
92,400
Treasury shares* ........................................................
* €512,000 + €440,000/(16,000 + 10,000) = €36.62  20,000
k. Stock dividends, ordinary* .............................................. 3,003,000
Ordinary shares, no-par, 96,000 shares  €30 ...........
Contributed capital: ordinary share fractional
share rights 4,100  €30..........................................
* 915,000 + 8,000 – 40,000 + 64,000 + 60,000 – 6,000 treasury shares
= 1,001,000  10% = 100,100 shares  €30
2,390,000
220,000
1,070,000
732,400
2,880,000
123,000
Requirement 2
Share equity — 8% bonds (€5,002,490 + €400,199)
€5,402,689
Convertible €8, no-par preference shares
(€6,060,000 – €2,424,000 – €1,010,000)
Class A no-par ordinary shares
(€32,940,000 + €220,000 – €1,437,200 + €2,424,000
+ €2,390,000 + €2,880,000)
Ordinary share rights
Contributed capital: ordinary share fractional share rights
Contributed capital: lapse of warrants
Retained earnings
(€116,300,000 + €6,200,000 – €442,800 – €857,000 – €480,000
– €400,199 – €5,000 – €92,400 – €3,003,000)
Treasury shares (€512,000 + €440,000 – €732,400)
2,626,000
39,416,800
71,000
123,000
220,000
117,219,601
219,600
24,000 ordinary stock options are outstanding to certain employees, allowing purchase of
one share for every two options held at a price of €27.50 per share. These options expire
in 20X7.
Question 3 (10 marks)
a.
b.
c.
d.
e.
5)
1)
1)
4)
2)
Question 4 (12 marks)
(4 marks for each case)
Case A
Financing Activities
Issuance of convertible bonds (1) ........................................................... €5,447,000
Operating Activities
Add to net profit:
Non-cash expense; discount amortization .........................................
* €5,000,000 – (€234,000 + €14,000) + €695,000
Case B
Financing activities
Issuance of ordinary shares* ............................................ € 4,365,000
Operating activities
Add to net profit:
Non-cash expense; discount amortization .................
€26,000
€14,000
Note: Bond conversion is a non-cash transaction and is not included on the CFS.
* Opening ordinary shares .................................................. € 7,100,000
Bond conversion (€5,000,000 + (€1,390,000 – €695,000)
– (€346,000 – €26,000 – €160,000)) ............................... 5,535,000
As calculated .................................................................... 12,635,000
Actual............................................................................... 17,000,000
Issuance for cash .............................................................. € 4,365,000
Case C
Operating activities
Add to net profit
Non-cash expense, discount amortization ................. €
26,450
Financing
Redemption of bonds ....................................................... (€ 10,000,000)
Note:
Since the bonds were redeemed at maturity, the discount must have been amortized to zero prior to
maturity through a charge to net profit.
Question 5 (26 marks)
Case analysis solution
Overview
Communications Equipment is a public company listed on the London Stock Exchange.
Its financial statements would obviously comply with GAAP. The company is controlled
by a tightly knit group of original shareholders but now has many smaller outside
shareholders. One assumes that their degree of control is minimal.
The task in this case is to classify two financial instruments and explain any valuation
problems that would be inherent in their accounting treatment. A potential investor would
be concerned about the degrees of potential risk and dilution of earnings caused by other
financial instruments.
Issues/alternatives
1. Demand debentures payable — classification/valuation/implications
2. Series C shares — classification/valuation/implications
Analysis
1. Demand debentures payable
Legally, this is a demand debenture and thus is a liability. However, the investors can, on
demand, convert the debenture to ordinary shares, and thus there is an option embedded
in the debenture. This makes it a hybrid financial instrument. On initial recognition, a
value has to be assigned to the option and the proceeds divided between the bond
liability, including interest, and the ordinary share option. The latter is an equity account.
The division between debt and equity is normally accomplished in one of two ways. The
first way is to calculate the present value of a non-convertible bond with the same
features and compare this to the proceeds actually obtained for the convertible bond. The
proceeds above this present value are assigned to the conversion option.
In this case, valuation is particularly problematic because the debenture is a demand
debenture, due whenever the investors choose to demand payment or shares. Thus, the
time span used to calculate the present value of a comparable bond is not easily defined.
This is something that the company would have to investigate. The other major variable
in the calculation of present value is the interest rate to use. The normal reference point is
debt of similar size, term, and risk. Again, this may be very difficult to ascertain in this
case because the debentures were issued to shareholders (non-arm’s-length) and may be
so unusual that no comparable financial instrument can be identified.
From the perspective of a potential owner of ordinary shares, this financial instrument
may mean that a considerable number of ordinary shares will be issued at some time in
the future. This may dilute the earnings attributable to ordinary shareholders and their
degree of relative control. Before the shares are issued, the debentures provide the
lenders/shareholders with a guaranteed return, which the potential ordinary shareholder
would not receive.
On conversion, the market value of the ordinary shares issued is not typically recorded.
Thus, the relative wisdom of the price versus the number of shares issued is not explicitly
reported in the financial statements. From an investor’s perspective, though, it may be
interesting to understand the actions of the board of directors by making such a
comparison.
2. Series C shares
Series C shares are legally (and substantially) equity and do not pose any particular
valuation problems. In the financial statements, they are valued at their issue price. These
shares can be converted into ordinary shares, another form of equity. While the company
can extinguish the shares by paying cash if it wishes, this does not make the shares a
liability, as there is no obligation to pay cash.
Dividends, on the other hand, have to be considered a liability if they are not declared
and paid annually. They must be brought up to date at maturity and paid in cash.
Therefore, one would expect to see dividends on the retained earnings statement (whether
declared or not) and a liability for dividends in arrears recorded in the financial
statements if they are not paid annually. Valuation of this dividend obligation would
simply be the dividend times the number of shares.
Again, from the perspective of a potential investor, these shares represent a prior claim to
earnings, above the claims of the ordinary shareholders. However, this is adequately
reported by accruing the dividend obligation. Careful analysis of the financial statements
is appropriate. The series C shares themselves represent another potential obligation for
the company to issue a considerable number of ordinary shares.
As mentioned for the debentures, the market value of the ordinary shares issued is not
recorded on conversion. Thus, the relative wisdom of the price versus the number of
shares issued is not explicitly reported in the financial statements.
Conclusion
The demand debentures payable and the Series C shares are both hybrid financial
instruments, with some elements of debt and some of equity. Valuation of the debentures
is particularly problematic.
Marking key
Note:
This marking key is provided for guidance and is not intended to be a complete solution. Since there is no
right answer to a case analysis, the marking key provides for more than the maximum mark allocation. Use
considerable judgment in applying the key. Award marks for valid approach and commentary, and keep in
mind that no student will cover all the points.
Overview
Public company that complies with GAAP (½)
Control with small group (½)
Investor concerned about risk, earnings dilution, shares to be issued (1)
Maximum 2
Issues/Alternatives
Classification/valuation/implications of demand debentures and series C shares (1)
Maximum 1
Analysis
Demand debentures
Legally a liability (1)
Conversion option makes it hybrid (1)
Proceeds split between debt and option value on initial recognition (1)
Valuation with just PV of bond (1)
Valuation with PV of bond and option value, relative (1)
Investors not at arm’s-length to the company; on board (1)
PV hard to calculate: time period uncertain (1)
PV hard to calculate: interest rate unknown (1)
Conclusion: may result in large number of shares issued in the future (1)
Dilute earnings, control (1)
Now, debenture holders get guaranteed return (1)
No fair values likely recognized on conversion (1)
Other valid points (1 each)
Maximum 13
Series C shares
Shares are equity (1)
Valued at issue price, no valuation problems (½)
No liability, as option for company to pay cash is not an obligation (1)
Dividends are a liability (1)
Must be paid in cash on conversion (1)
Accrue on RE statement and as liability annually (1)
Valued at dividend amount (½)
Conclusion: Accrual fairly states claim to income (1)
Conclusion: Shares represent potential to issue shares in the future (1)
No fair values recognized on conversion (1)
Other valid points (1 each)
Maximum 8
Communication
Organization, quality of expression
0 for unacceptable communication skills
1 for weak communication skills
2 for acceptable communication skills
Maximum 2
Overall —
Maximum 26