(Solved by Humans)-Zakin Co. recently issued $1,000,000 face value, 10%, 30-year subordinated deben- tures at 97....

Question

Zakin    Co.    recently     issued $1,000,000 face value, 10%, 30-year subordinated deben- tures at 97. The debentures are redeemable at 103 upon demand by the issuer at any date upon 30 days notice 10 years after the issue. The debentures are convertible into $10 par value common stock of the Company at the conver- sion price of $12.50 per share for each $500 or multiple thereof of the principal amount of the debentures. Required 1.      Explain how the conversion feature of convertible debt has a value to the: a.    Issuer b.   Purchaser 2.      Management of Zakin Co. has suggested that in record- ing the issuance of the debentures, it should assign a portion of the proceeds to the conversion feature. a.    What are the arguments for according separate accounting recognition to the conversion feature of the debentures?   b.   What are the arguments supporting  accounting for the convertible debentures as a single element? 3.      Assume that the company assigns no value to the conver- sion feature upon issue of the debentures. Assume fur- ther that five years after issue, debentures with a face value of $100,000 and book value of $97,500 are ten- dered for conversion on an interest payment date when the market price of the debentures is 104 and  the com- mon  stock  is  selling  at  $14  per  share and  that the Company records the conversion as follows: Bonds Payable                         100,000   Bond Discount 2,500 Common Stock 80,000 Premium on   Common Stock 17,500 Discuss the propriety of the preceding accounting treatment.