Canton Products Inc. (CP) has been in business for quite a while. Its shares trade on a
Question:
At a recent meeting with the CFO, the CEO decided to exchange the company's convertible senior subordinated notes (the old notes) for new senior subordinated notes (the new notes). The notes were held by a large institutional investor that agreed to the exchange. The old notes were convertible into 25 shares for each $1,000 note. The new notes have a net share settlement provision that requires that, upon conversion, the company will pay the holders up to $1,000 in cash for each note, plus an excess amount that would be settled in shares at a fixed conversion price (30 shares for each $1,000 note in the total consideration). The notes may only be turned in if the share price exceeds 20% of the fixed con version price.
It is now year-end and the share price is trading above the fixed conversion price but well below the 20% premium level. The note therefore cannot be turned in (i.e., converted). The CEO feels that the share price will not exceed the 20% premium for a couple of years.
Instructions
Adopt the role of the auditors and discuss the issues related to the new notes.
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Related Book For
Intermediate Accounting Volume 2
ISBN: 9781119497042
12th Canadian Edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy
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