III. Variable Interest Entities $(12$ points$)$

$$

Assume a Legal Entity$$s capital structure consists of the following accounts:

Short$-$term note payable

$$50,000$

Long$-$term note payable

$200,000$

Mandatorily redeemable preferred stock

$75,000$

Common stock

$20,000$

Additional paid$-$in capital

$50,000$

Retained earnings

$10,000$

Total liabilities and equity

$$405,000$

Note that FASB ASC $480($Distinguishing Liabilities from Equity$)$ requires mandatorily redeemable preferred stock to be classified as a liability for financial reporting purposes. Unless otherwise indicated, each of the following parts of this question is independent:

$3.$ What is the maximum amount of expected losses that the Legal Entity can expect to sustain if the long term note payable is convertible to common equity at the option of the holder of the note? Why? $[$Note that FASB ASC $470-20($Debt with Conversion and Other Features$)$ requires convertible debt to be classified as a liability for financial reporting purposes.$]$