Minicase-8 - Essay Example

Comments (0) Cite this document
14, all convertible bonds should be classified in the liabilities section of the balance sheet. The value of the option to convert into equity was not separated from the liability component because it was then recognized that the separation of the liability…
Download full paperFile format: .doc, available for editing
GRAB THE BEST PAPER98.2% of users find it useful
Read TextPreview

Extract of sample "Minicase-8"

Changes in Accounting for Debt How do current generally accepted accounting principles for convertible bonds differ from the rule proposed in therelated exposure draft?
Under APB Opinion No. 14, all convertible bonds should be classified in the liabilities section of the balance sheet. The value of the option to convert into equity was not separated from the liability component because it was then recognized that the separation of the liability and equity component of the convertible debt is not an easy task. In addition, the two components were not considered independent from each other.
Under the exposure draft or ED, the liability and the equity components of a convertible bond should be separated and classified accordingly. However, under the ED, only those conversion options that “establish an ownership relationship will be classified as equity” (ED-FI, p. 4). This means that, once converted, the shares are not redeemable and that the holder bears the risk of the changes in the market value of the issuer’s shares of stock. If the option does not meet this criterion, the entire convertible bond will be classified as liability.
2. How does SFAS 145 change accounting for early extinguishment of debt? Do the changes take into account different economic reasons for early payment of debt?
Prior to the issuance of SFAS 145, the standard used to account for early extinguishment of debt was FASB Statement No. 4, Reporting Gains and Losses from Extinguishment of Debt. Under Statement No. 4, the gains or losses realized from the early settlement of debt should be shown as part of the company’s extraordinary items in its income statement. This classification is required regardless of the reason behind the early settlement.
Under SFAS 145, gains or losses from early extinguishment of debt can now be classified as part of the income or loss from continuing operations in the income statement; provided that early extinguishments of debts are part of the recurring transactions for the issuer. However, if such early extinguishments of debts are unusual or are infrequent transactions, the gains or losses realized from such early extinguishments should still be classified as extraordinary items in the income statement. The change was made because FASB recognized that early payments of debt have become part of the risk management strategy of certain companies. Such transactions are now also viewed as recurring financing activities that an entity can utilize to manage its interest rate risk. FASB also thinks that this change is consistent with the definition of unusual or extraordinary transactions under APB Opinion No. 30 and will reduce the frequency of using the caption “extraordinary items” in the income statement.
3. What effect does SFAS 145 have on the income statement and balance sheet?
The requirement of SFAS 145 related to the classification of gains or losses from early extinguishment of debt affects the income statement classification of the entity. If the entity’s early extinguishment of debt is a normal occurrence then the gain or loss will be reclassified from extraordinary item to income from continuing operations. This will affect calculation of the earnings per share of the entity for continuing operations and for extraordinary items. Such a requirement, however, will not affect the entity’s balance sheet.
The second major change made by SFAS 145 is the accounting for the changes in the lease terms (both for capital and operating leases), which should be the same as the accounting for sale-leaseback transactions. This requirement affects the balance sheet of the original lessee if this lessee becomes a guarantor. The original lessee, who becomes the guarantor under the revised lease agreement, is required to recognize a guarantee obligation in the liabilities section of its balance sheet. Thus, the amount of the total liabilities of the original lessee will change with the removal of the original obligation and the recognition of the guarantee obligation. However, with the modification in the lease terms, the related asset is removed from the balance sheet, resulting to a decrease in total assets.
4. Do you believe that SFAS 145 will lead to more relevant and useful information regarding early payment of debt? Explain your answer.
Yes, the requirement under SFAS 145 for the early payment of debt will lead to more relevant and useful information. For one, it is consistent with the definition of extraordinary items under APB Opinion No. 30 (i.e., unusual and infrequent in nature), thus, there is no more confusion on how the term “extraordinary” will be applied for this type of transaction and the frequency of using this type of classification will be reduced. For another, SFAS 145 also shows recognition of the fact that early extinguishment of debt is now a normal occurrence, a part of a company’s interest risk management, and should therefore be shown as part of the normal operations of the company.
SFAS 145’s change in the classification of the gains or losses from the early payment of debt can also help financial statement users to “better distinguish transactions that are part of an entitys recurring operations from those that are unusual or infrequent” (Reinstein, par. 4). It will also enable the creditor - banks to determine if the companies are following or violating their debt covenants, which are usually focused on normal operations, because gains or losses from early payments of debts that are frequently done by the entity are now seen as part of the continuing operations of the entity.
Alan Reinstein (September 2003). SFAS No. 145: New Rules for Extinguishing Debt and Capital Leases: Some Implications for the Banking Community: What Will the AICPA Come Up with Next;and What Does It All Mean to You? (RMAs Ongoing Series Looks at Implications for Bankers). The RMA Journal, Retrieved March 4, 2009 from
Financial Accounting Standards Board (April 2002). Statement of Financial Accounting Standards No. 145: Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Retrieved March 4, 2009 from
Financial Accounting Standards Board (2000). Exposure Draft: Accounting for Financial Instruments with Characteristics of Liabilities, Equity, or Both. Retrieved March 3, 2009 from Read More
Cite this document
  • APA
  • MLA
(“Minicase-8 Essay Example | Topics and Well Written Essays - 500 words”, n.d.)
Retrieved from
(Minicase-8 Essay Example | Topics and Well Written Essays - 500 Words)
“Minicase-8 Essay Example | Topics and Well Written Essays - 500 Words”, n.d.
  • Cited: 0 times
Comments (0)
Click to create a comment or rate a document


Analysis 8

...?Juvenile Offenders and Criminal Justice Introduction This paper would first elaborate about the history and evolution of the juvenile justice system. It (paper) would then go on to focus on the related current state of affairs where, countless juvenile offenders are being tried in criminal courts, owing to intensity of the concerned crimes. After that, the focus would move on to having an understanding about the possible outcomes, when young criminals are dealt with in regular law courts. These outcomes are in relation to both the juveniles and also the overall society. History and evolution of the juvenile justice system The juvenile justice system came into existence during the initial phase of the twentieth century, based... Offenders and ...
3 Pages(750 words)Essay


...Running Head: Minicase Mini Case for Module of the of the of the . Mini case for Module a. Draw time lines for (1) a $100 lump sum cash flow at the end of Year 2, (2) an ordinary annuity of $100 per year for 3 years, and (3) an uneven cash flow stream of -$50, $100, $75, and $50 at the end of Years 0 through 3(Ehrhardt & Brigham, 2006). 0 1 2 year | | | lump sum 100 cash flow 0 1 2 3 | | | | annuity 100 100 100 0 1 2 3... Head: Minicase Mini Case for Module...
8 Pages(2000 words)Scholarship Essay


...Running Head: Mini case Module Six Mini Case of the of the of the . Module Six MiniCase a. What is capital budgeting (Ehrhardt & Brigham, 2006) Capital budgeting is the process of analyzing projects and deciding whether they should be included in the capital budget or not. This process is of fundamental importance to the success or failure of the firm as the fixed asset investment decisions chart the course of a company for many years into the future. In the process, managers firstly estimate the cash flows, then they assess the risk associated with the cash flows, then they determine the cost of capital. Finally, managers evaluate the cash flows, and then decide which projects to include in the capital budget. b. What...
11 Pages(2750 words)Essay


...Running Head: minicase Module Five Mini Case of the of the of the . Module Five Mini Case a. Describe briefly the legal rights and privileges of common stockholders (Ehrhardt & Brigham, 2006). Common stockholders are owners of the company, though of a very small part. As they own the company, they have the right to vote and elect the board of directors. Secondly they have the preemptive right, i.e. the right to buy any additional shares issued by the company. b. (1) Write out a formula that can be used to value any stock, regardless of its dividend pattern (Ehrhardt & Brigham, 2006). = (2) What is a constant growth stock How are constant growth stocks valued (Ehrhardt & Brigham, 2006) Constant growth stocks are stocks...
6 Pages(1500 words)Essay

Minicase-10(Managerial Accounting)

...EMPLOYEE STOCK OPTIONS Question No Explain in detail what are employee stock options and restricted stock? Employee Stock Options (ESOP) is a call option where the option writer is the company. Call option is an agreement that gives an investor the right but not the obligation to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. The option buyer would make profit if the price of the underlying asset increases. The premium in case of ESOP is sacrificed in lieu of the future services to be rendered by the employees during the vesting period and lock in period, if any. Thus ESOP is a right but not an obligation to purchase certain number of shares of the company at a pre-determined...
2 Pages(500 words)Essay


...Part A What is meant by the term ‘Distribution Policy’? Distribution Policy refers to the policies set down by the firms in regards to the levelsof distribution, the forms of distribution and also the stability of distribution. This has been defined by the term as “A corporate policy outlining how messages and data can be shared and distributed throughout the various divisions and departments of the company. A companys distribution policy can also affect how documents are filed” (Business Dictionary, 2009). 2. The terms “irrelevance,” “bird-in-the-hand,” and “tax preference” have been used to describe three major theories regarding the way dividend payouts affect a firm’s value. Explain what these terms mean, and briefly describe... A What is ...
4 Pages(1000 words)Essay

Module 8

...Marketing Extending Our Field to China. In the international markets, the trend and use of automobiles varies considerably acrossdifferent cultures. The research conducted on the Chinese market is with the intention to expand the sale of vehicles to that region. There were several trends that will need to be analysed to understand their purchase and use of cars (Shukia, 2008). The first behaviour to be analysed is their attraction to brand names. It has been observed that the Chinese hold high value to the brand of the car they purchase. This surpasses the need to consider the practicality or fuel consumption, this behaviour is different from what is observed in other countries, like the United States, where cost saving... Extending Our Field ...
2 Pages(500 words)Research Paper


...Topic 8 Introduction Essentially linear programming is a mathematical technique used for optimization of objective functions. It is normally subjected to linear equality and linear inequality constraints. The optimal value is the maximum (largest) and minimum (smallest) value of an objective function (Kathleen, 2001). The collection of values that give the optimal value constitutes an optimal solution. These variables are called decision variables or constraints. Question one: Objective functions It is not possible for the two objective functions to give similar optimal values (Kathleen, 2001). For instance, take the constraints for X1= 1 and X2= 2. It is observable that, the objective functions give the following...
1 Pages(250 words)Assignment

MIS Minicase

... Developing potentially highly profitable new systems technologies that are based primarily on intangible benefitsThe determination of intangible benefits from information systems has its genesis from the distinction between goods and services. However business organizations still grapple with the valuation of tangibles financially. When properly evaluated, intangibles can tip the scale in favor of new systems technologies and lead to profitability. The income accounting conventions used in the determination of asset value, profit, savings and investments assume that tangible, material goods constitute wealth. It does not take into consideration that the world economy is changing and that many high profit yielding investments... Developing...
3 Pages(750 words)Essay


...Insert of E- Commerce: CK-E-LINK Company The business world has been undergoing serious changes regarding the competition on the various goods and services offered at different levels. Online business strategies are now the most convenient and robust way most businesses are going. E- Commerce reduces time wastage by the customers through the elimination of long waiting queues during service. This paper will examine the strategies for market development and product promotion through internet service provision for the CK-E- LINK Company, dealing in Chinese and Korean foods, clothing, and accessories operating and expanding. The paper will examine the eight stages of market development for e- businesses and explain how the company... of E-...
2 Pages(500 words)Research Paper
sponsored ads
We use cookies to create the best experience for you. Keep on browsing if you are OK with that, or find out how to manage cookies.

Let us find you another Essay on topic Minicase-8 for FREE!

Contact Us