The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharing those numbers with shareholders.” The numbers he discussed with himself were 4Q losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecast and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of the damage. Later that night he sat alone in his office, scanning the preliminary financial statements on this computer. Claude developed a plan and the next day he eagerly explained it to Susan Barr, the controller of Hunt. The plan involved $300 million in convertible bonds issued three years earlier. Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we’d issue. I think we can produce a profit. Barr: But Claude, our bondholders are not inclined to convert the bonds. Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price of converting to stock, they’ll all convert. We won’t have to pay a cent. And, since no cash will be paid, we won’t pay taxes either. Do you perceive an ethical dilemma? What would be the impact of following up on Claude’s plan? Who would benefit and who would be injured?

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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The cloudy afternoon mirrored the mood of the conference of division managers. Claude Meyer, assistant to the controller for Hunt Manufacturing, wore one of the gloomy faces that were just emerging from the conference room. “Wow, I knew it was bad, but not that bad,” Claude thought to himself. “I don’t look forward to sharing those numbers with shareholders.” The numbers he discussed with himself were 4Q losses which more than offset the profits of the first three quarters. Everyone had known for some time that poor sales forecast and production delays had wreaked havoc on the bottom line, but most were caught off guard by the severity of the damage. Later that night he sat alone in his office, scanning the preliminary financial statements on this computer. Claude developed a plan and the next day he eagerly explained it to Susan Barr, the controller of Hunt. The plan involved $300 million in convertible bonds issued three years earlier. Meyer: By swapping stock for the bonds, we can eliminate a substantial liability from the balance sheet, wipe out most of our interest expense, and reduce our loss. In fact, the book value of the bonds is significantly more than the market value of the stock we’d issue. I think we can produce a profit. Barr: But Claude, our bondholders are not inclined to convert the bonds. Meyer: Right. But, the bonds are callable. As of this year, we can call the bonds at a call premium of 1%. Given the choice of accepting that redemption price of converting to stock, they’ll all convert. We won’t have to pay a cent. And, since no cash will be paid, we won’t pay taxes either. Do you perceive an ethical dilemma? What would be the impact of following up on Claude’s plan? Who would benefit and who would be injured?

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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