CRITICAL THINKING QUESTION Please read the case study below on the differences between equity and liabilities. Decide...

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Accounting

CRITICAL THINKING QUESTION
Please read the case study below on the differences between equityand liabilities. Decide whether the Class A common (ie. ordinary)shares may be disclosed as part of shareholders’ equity. Explainthe application of relevant passages from AASB 132 and theConceptual Framework to the Class A Common Shares, making specificconnections between wording in in the standards and framework withthe features of the shares.

Using the AREA framework, do you agree or disagree with theclassification of the Class A shares as equity? In your answerrefer to relevant accounting standards.

ANALYSE: (30-50 words)
- Identify the issue and why it matters. Determine what you need tofind out.

RESEARCH: (200-250 words)
- Present relevant facts and evidence, or issues.
EVALUATE & ANSWER: (200-250 words)
- Provide your opinion of the themes or issues you haveidentified, justified by the evidence you have gathered andevaluated.
Cast study adapted from Gunderson, K.E. (2013) Distinguishingbetween Liabilities and Equity; Two Mini-Cases for ImprovingStudents’ Critical Thinking Skills in Intermediate FinancialAccounting, Journal of the International Academy for Case Studies,19(3), 51-62.

It was Friday afternoon, and Neil Danford, a new staff accountantat Extua Corporation, had mixed feelings about the memo he justreceived from the controller of Extua Corporation. Next week hewould begin working on a project that could have an immediateimpact on the financial position Extua would report to investorsand other outside parties. While he was proud to be given such animportant assignment, he considered it a bit advanced given that hehad only been with Extua Corporation for six months.

Neil was surprised by the esteem his superiors had for him. Acircumspect person, Neil felt the other new staff accountants atExtua, who were socially outgoing, would surpass him in climbingthe corporate ladder. But his superiors seemed to like hisdemeanor, and they would sometimes stop by his cubicle to chat,speaking to him as an equal, an intimacy they did not share withthe other college graduates.

This new project involved classification of a special type ofcommon stock Extua issued to acquire a company that had previouslybeen one of Extua’s suppliers. Negotiations resulted in an agreedprice of $5 million, and the previous owners accepting Class Acommon shares as payment for their company. Further details aboutthese shares, and other aspects of Extua’s financial structure, areas follows:

At December 31st, 2016 Extua Corporation has various forms of debtoutstanding including secured bank loans and debentures. Extua hasno preferred stock, but has two types of common shares outstanding,Class C and Class A. There are one hundred million shares of ClassC common stock outstanding. Each share entitles the holder to onevote on ballot items at the company’s annual meeting. The sharesare transferable without restriction and are actively traded on theAustralian Stock Exchange. In addition, Extua had the followingClass A Common shares outstanding:

$5 million - Class A Common Stock (100,000 shares of $50 pershare)
The shares are non-voting, do not share in dividends, but haveliquidation rights at par with the Class C common shares. Theshares were issued 1 December 2016 and are subject to mandatoryredemption on 1 December 2018 at $57.245 per share, or a total of$5,724,500. The shares will be accreted to their redemption valueusing the effective interest method. The company may, at itsoption, pay the $5.7245 million redemption amount in cash, sharesof Class C common stock (based on the market price for the commonstock at the time of redemption), or any other form ofconsideration deemed appropriate by the board of directors of thecompany.

Extua Corporation officials would like to report the Class A Commonshares in the shareholders’ equity section on the 30 June 2017balance sheet. They reason that since the stock is issued in theform of common shares, and since they may discharge theirobligation without payment of any cash, it is therefore justifiedto report these shares as part of shareholders’ equity.

Answer & Explanation Solved by verified expert

3.8 Ratings (435 Votes)

In the provided scenario the problem arising to Mr Neil clearly can be stated as whether he should classify the 50 million shares worth ClassA shares as part the companys viz Extua Corporation shareholders equity or not Mere fact that such Class A equity shares are issued to the companys past suppliers and that the company does not have any preferred stock does not give it the right to form part of its capital The relevant extracts of AASB132 on Financial Instruments Presentation Para 2 5 defines an equity as An equity instrument is any contract that evidences a See Answer

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CRITICAL THINKING QUESTIONPlease read the case study below on the differences between equityand liabilities. Decide whether the Class A common (ie. ordinary)shares may be disclosed as part of shareholders’ equity. Explainthe application of relevant passages from AASB 132 and theConceptual Framework to the Class A Common Shares, making specificconnections between wording in in the standards and framework withthe features of the shares.Using the AREA framework, do you agree or disagree with theclassification of the Class A shares as equity? In your answerrefer to relevant accounting standards.ANALYSE: (30-50 words)- Identify the issue and why it matters. Determine what you need tofind out.RESEARCH: (200-250 words)- Present relevant facts and evidence, or issues.EVALUATE & ANSWER: (200-250 words)- Provide your opinion of the themes or issues you haveidentified, justified by the evidence you have gathered andevaluated.Cast study adapted from Gunderson, K.E. (2013) Distinguishingbetween Liabilities and Equity; Two Mini-Cases for ImprovingStudents’ Critical Thinking Skills in Intermediate FinancialAccounting, Journal of the International Academy for Case Studies,19(3), 51-62.It was Friday afternoon, and Neil Danford, a new staff accountantat Extua Corporation, had mixed feelings about the memo he justreceived from the controller of Extua Corporation. Next week hewould begin working on a project that could have an immediateimpact on the financial position Extua would report to investorsand other outside parties. While he was proud to be given such animportant assignment, he considered it a bit advanced given that hehad only been with Extua Corporation for six months.Neil was surprised by the esteem his superiors had for him. Acircumspect person, Neil felt the other new staff accountants atExtua, who were socially outgoing, would surpass him in climbingthe corporate ladder. But his superiors seemed to like hisdemeanor, and they would sometimes stop by his cubicle to chat,speaking to him as an equal, an intimacy they did not share withthe other college graduates.This new project involved classification of a special type ofcommon stock Extua issued to acquire a company that had previouslybeen one of Extua’s suppliers. Negotiations resulted in an agreedprice of $5 million, and the previous owners accepting Class Acommon shares as payment for their company. Further details aboutthese shares, and other aspects of Extua’s financial structure, areas follows:At December 31st, 2016 Extua Corporation has various forms of debtoutstanding including secured bank loans and debentures. Extua hasno preferred stock, but has two types of common shares outstanding,Class C and Class A. There are one hundred million shares of ClassC common stock outstanding. Each share entitles the holder to onevote on ballot items at the company’s annual meeting. The sharesare transferable without restriction and are actively traded on theAustralian Stock Exchange. In addition, Extua had the followingClass A Common shares outstanding:$5 million - Class A Common Stock (100,000 shares of $50 pershare)The shares are non-voting, do not share in dividends, but haveliquidation rights at par with the Class C common shares. Theshares were issued 1 December 2016 and are subject to mandatoryredemption on 1 December 2018 at $57.245 per share, or a total of$5,724,500. The shares will be accreted to their redemption valueusing the effective interest method. The company may, at itsoption, pay the $5.7245 million redemption amount in cash, sharesof Class C common stock (based on the market price for the commonstock at the time of redemption), or any other form ofconsideration deemed appropriate by the board of directors of thecompany.Extua Corporation officials would like to report the Class A Commonshares in the shareholders’ equity section on the 30 June 2017balance sheet. They reason that since the stock is issued in theform of common shares, and since they may discharge theirobligation without payment of any cash, it is therefore justifiedto report these shares as part of shareholders’ equity.