Jillian Limited ( JL) issued a financial instrument with the following terms: A face value of

Question:

Jillian Limited ( JL) issued a financial instrument with the following terms:
• A of $ 100.
• Not secured by any assets of the entity (unsecured).
• Redeemable in cash at the option of the issuer.
• Pays 5% of annually.
• The 5% doubles in five years (to 10%) if the financial instrument is not redeemed. In 10 years, the annual payments double again if not redeemed by that time. Other information to consider:
• Current interest rates are 4%. Rates are expected to remain stable or decline in the short to midterm.
• JL currently has a loan outstanding with the bank. Under the terms of the loan agreements, the debt- to- equity ratio may not exceed 2: 1. Currently, before accounting for the new instrument, the debt- to- equity ratio is 2: 1.
Required
Discuss how JL should account for the financial instrument on the (debt or equity) assuming that that JL reports under U. S. GAAP.
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Face Value
Face value is a financial term used to describe the nominal or dollar value of a security, as stated by its issuer. For stocks, the face value is the original cost of the stock, as listed on the certificate. For bonds, it is the amount paid to the...