Parsed Phrases Corporation entered into a loan agreement that contained the provision that Parsed Phrases would be required to make additional interest payments if its net income fell below a certain dollar amount. Immediately after the agreement was signed, the FASB instituted a new accounting requirement that caused Parsed's income to fall below the requirements. Absent the accounting change, Parsed would have met the income requirement.

(a) Should the pre-change or post-change income number be used to deter- mine if Parsed should pay the additional interest charge? Why or why not?

(b) Would your answer in

(a) change if Parsed had entered into a management contract that provided that the new manager would be paid a bonus based on achieving certain income levels (but, after his taking office, the accounting rules changed so that the manager could never achieve those agreed-upon income levels)?