This research case examines the issues surrounding distinguishing debt versus equity.
Mandatory redeemable preferred stock, employee stock options, and convertible bonds may not seem to have much in common. But those three financial instruments, along with a variety of others, raise questions about how to distinguish between debt and equity instruments;
1. Why is this distinction important?
2. Why is there a problem with determining whether a particular financial instrument is a liability or equity?
3. How do you account for instruments with both debt and equity components?
4. Is an obligation to issue or repurchase stock a liability or equity?
5. What are two alternatives: to account for the instrument as entirely a liability or entirely an equity instrument?
6. What is “mezzanine†debt?
