Asked by Chelsie Bishop on Jun 16, 2024
Verified
Financial statement users must recognize that interest expense may seriously
A) overstate the true cost of debt financing when convertible debt is used.
B) understate the true cost of debt financing when convertible debt is used.
C) impact the dividend rate.
D) impact the amount of dividend declareD.
Convertible Debt
A type of bond or loan that can be converted into a predetermined amount of the company's equity at certain times during its life, usually at the discretion of the debt holder.
Interest Expense
The cost incurred by an entity for borrowed funds over a period of time, usually expressed as an annual percentage of the principal.
Debt Financing
The process of raising capital through borrowing, typically through loans or by issuing bonds.
- Comprehend the features and the impact on accounting of convertible debt and convertible bonds.
Verified Answer
SH
Samuel HanshewJun 21, 2024
Final Answer :
B
Explanation :
Interest expense may be understated when convertible debt is used because the issuer has the option to convert the debt into equity. This means that the issuer may not be required to pay interest if the debt is converted, resulting in a lower true cost of debt financing. Therefore, financial statement users should be aware of the potential impact of convertible debt on interest expense.
Learning Objectives
- Comprehend the features and the impact on accounting of convertible debt and convertible bonds.