You are an accountant for Taos Company, which has two items of long-term convertible debt on its balance sheet. Taos's president calls you into his office and says, "We are too leveraged. So, you remember that convertible debt we issued at the beginning of the year? Let's figure out the value of the conversion feature and assign that to equity so that we can reduce the amount we report as debt. And I have also been thinking about that convertible debt we issued at par 5 years ago. If you remember, each $1,000 bond is convertible into 25 shares. Now that our shares are trading at $70, obviously that is no longer debt. So let's classify that debt as equity now." Required: From financial reporting and ethical perspectives, discuss the issues raised by this situation.
You are an accountant for Taos Company, which has two items of long-term convertible debt on its balance sheet. Taos's president calls you into his office and says, "We are too leveraged. So, you remember that convertible debt we issued at the beginning of the year? Let's figure out the value of the conversion feature and assign that to equity so that we can reduce the amount we report as debt. And I have also been thinking about that convertible debt we issued at par 5 years ago. If you remember, each $1,000 bond is convertible into 25 shares. Now that our shares are trading at $70, obviously that is no longer debt. So let's classify that debt as equity now."
Required:
From financial reporting and ethical perspectives, discuss the issues raised by this situation.
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