Alloy, Inc., reports the following footnote related to its convertible debentures in its 2007 10-K (\$ thousands).

Required

a. How did Alloy initially account for the issuance of the \(5.375 \%\) debentures, assuming that the conversion option cannot be detached and sold separately?

b. Consider the conversion terms reported in the footnote. At what minimum stock price would it make economic sense for debenture holders to convert to Alloy common stock?

c. Use the financial statement effects template to show how Alloy accounted for the conversion of the \(5.375 \%\) debentures in 2006 . The par value of the company's stock is \(\$ 0.01\).

d. Assume that the conversion feature is valued by investors and, therefore, results in a higher initial issuance price for the bonds. What effect will the conversion feature have on the amount of interest expense and net income that Alloy reports?

e. How are the convertible debentures treated in the computation of basic and diluted earnings per share (EPS)?

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In August 2003, Alloy completed the issuance of $69,300 of 20-Year 5.375% Senior Convertible Debentures due August 1, 2023. If converted, bondholders would currently receive 29.851 shares of Alloy common for each $1,000 face amount bond. Alloy continues to be responsible for repaying the Convertible Debentues in full if they are not converted into shaes of Alloy common stock. If not previously converted to common stock, Alloy may redeem the Convertible Debentures after August 1, 2008 at 103% of their face amount from August 1, 2008 through December 31, 2008 and at declining prices to 100% in January 2011 and thereafter, with accrued interest. From August 30, 2006 through December 7, 2006, holders converted approximately $67,903 face amount of their Debentures, in accordance with their terms, into approximately 2,026,000 shares of Alloy common stock. During fiscal 2006, the Company's additional paid-in capital increased by $67,883 as a result of the conversions. At January 31, 2007, the Company had $1,397 in principal amount of outstanding Convertible Debentures. At January 31, 2007, the fair value of the Convertible Debentures was approximately $1,504, which is estimated based on quoted market prices.