Some financial instruments can be considered compound instruments in that they have features of both debt and shareholders’ equity. The most common example encountered in practice is convertible debt—bonds or notes convertible by the investor into common stock. A topic of debate for several years has been whether:
• View 1: Issuers should account for an instrument with both liability and equity characteristics entirely as a liability or entirely as an equity instrument depending on which characteristic governs.
• View 2: Issuers should account for an instrument as consisting of a liability component and an equity component that should be accounted for separately. In considering this question, you should disregard what you know about the current position of the FASB on the issue. Instead, focus on conceptual issues regarding the practicable and theoretically appropriate treatment, unconstrained by GAAP. Also, focus your deliberations on convertible bonds as the instrument with both liability and equity characteristics.

Required:
1. Formulate an argument in support of View 1.
2. Formulate an argument in support of View 2.