Avenet Inc., a U.S. company, is a global provider of electronic parts, enterprise computing and storage products, and supply chain and logistics services for the electronic components industry.

The company’s 2009 annual report contained the following note:

The Financial Accounting Standards Board issued authoritative guidance which requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the debt and equity (conversion option) components of the instrument. The standard requires the convertible debt to be recognized at the present value of its cash flows discounted using the non-convertible debt borrowing rate at the date of issuance. 

The resulting debt discount from this present value calculation is to be recognized as the value of the equity component and recorded to additional paid in capital. The discounted convertible debt is then required to be accreted up to its face value and recorded as non-cash interest expense over the expected life of the convertible debt.

Required:

1. At the time this authoritative guidance was issued, Avenet had already issued $300 million of 2% Convertible Senior Debentures due in 2034. The debentures were issued at par several years earlier, and thus Avenet received the full $300 million cash at the issue date. What journal entry did Avenet make at the time to record the convertible debt issuance? How much interest expense would Avenet record each year?

2. Under the approach now required by GAAP for cash-settled convertible debt, Avenet says the debt discount to be recorded at the issue date would have been $50 million and that the nonconvertible debt borrowing rate at the date of issuance would have been 7%. What journal entry would Avenet make to record the convertible debt issuance under current GAAP? How much interest expense would Avenet record during the first full year?

3. If Avenet followed IFRS guidance rather than U.S. GAAP, which of the two accounting treatments would the company have used at the issue date?

4. Avenet decided to extinguish its 2% Convertible Subordinate Debentures just prior to adopting the new U.S. GAAP guidance (described above) for cash-settled convertible debt. Why did the company decide to retire the debt early?