Cutting Edge Med (Cutting Edge or the Company) is an early-stage research and development medical device company. Cutting Edge has no current products in the marketplace but is in the final stages of going to market with the Heart Valve System. All preliminary trials have been approved by the FDA, and the Company is in the final trial; once the final trial is complete, the Company will present the product to the FDA for final approval. If approved by the FDA, the Heart Valve System will revolutionize the way medical professionals repair heart valve defects.

Bio Repair, a SEC registrant, is a biological medical device company that focuses on the development of implantable biological devices, surgical adhesives, and biomaterials. Bio Repair could benefit from the approval of the Heart Valve System since it has a supplementary device that could be used in tandem with the Heart Valve System.

As part of a financing strategy to support its operations, Cutting Edge sold Bio Repair $3.5 million of Series A Preferred Shares (the Shares) of the Company with a par value of $1 per Share. The transaction was completed on November 30, 2011. As part of the Series A Preferred Stock purchase agreement, Bio Repair has the following rights:

Board Rights As the holder of the preferred stock, Bio Repair is entitled to appoint one member to the Companys board of directors (the Board). In addition, Bio Repair has the right to appoint an observer to receive all information provided to the Board and to be present at meetings of the Board.

Mandatory Conversion Right The Shares will be converted to the Companys common stock upon execution of an initial public offering (IPO) that nets at least $50 million in proceeds.

Contingent Redemption Right The Shares will be redeemed for par value on the fifth anniversary of the date of purchase conditioned upon the event that Cutting Edge has not obtained FDA approval for the Heart Valve System.

Additional Protective Rights Bio Repair has the right to limit future equity and debt issuances as well as the right to participate in future funding rounds to protect its investment percentage.

Right of First Refusal and Co-Sale Rights Bio Repair has the right of first refusal to purchase and right of co-sale on sale of shares by identified key holders of Cutting Edges shares.

The Company is a calendar year-end company. The Company plans to go through an IPO in the near future and Cutting Edges management (Management) has begun to think about how it may record its transactions in accordance with the applicable U.S. GAAP for public registrants. Currently, Cutting Edge prepares financial statements to comply with the covenants of its outstanding debt, but such financial statements are not required to be filed with the SEC. Cutting Edge is not required to comply with SEC regulations when preparing financial statements and currently has not elected to do so.

QUESTION 1

A contract that requires one contractual party to transfer cash to a second contractual party is a financial instrument within the meaning of ASC 480-10.

True

False

QUESTION 2

The purpose of ASC 480-10 is to require certain freestanding financial instruments that might otherwise be booked as liabilities to instead be booked as equity.

True

False

QUESTION 3

The Series A Preferred shares issued by Cutting Edge Med constitute a freestanding financial instrument within the meaning of ASC 480-10.

True

False

QUESTION 4

Assume that the Series A Preferred shares issued by Cutting Edge Med are mandatorily redeemable. How would the shares be booked by Cutting Edge at the time of issuance?

		As equity
		As as liability
		As revenue
		None of the above

QUESTION 5

At November 30, 2011, the Series A Preferred shares issued by Cutting Edge Med are required to be booked as a liability by operation of ASC 480-10-25-4.

True

False

QUESTION 6

At November 30, 2011, the Series A Preferred shares issued by Cutting Edge Med are required to be booked as a liability by operation of ASC 480-10-25-8.

True

False

QUESTION 7

At November 30, 2011, the Series A Preferred shares issued by Cutting Edge Med are required to be booked as a liability by operation of ASC 480-10-25-14.

True

False

QUESTION 8

ASC 480-10-S99-1 applies to Cutting Edge Med, and it will prohibit Cutting Edge Med from reporting the Series A Preferred shares under the caption Stockholders Equity on the 12/31/2011 balance sheet.

True

False

QUESTION 9

Assume the following addition to case facts: At the end of Year 4 (i.e., November 30, 2015), Cutting Edge is still in the process of filing for FDA approval; however the clinical testing and administrative process for filing for the FDA approval have taken much longer than initially anticipated. In addition, the trial results have been worrisome because of certain post-surgery issues that have been experienced by patients who received the Heart Valve System. The Company has determined that it is certain the product will not receive FDA approval by end of Year 5. Choose the best answer below

		At December 31, 2015, the Series A Preferred shares must be reported on the Cutting Edge Med balance sheet as a liability by operation of ASC 480-10-25-4.
		At December 31, 2015, the Series A Preferred shares must be reported on the Cutting Edge Med balance sheet as a liability by operation of ASC 480-10-25-5.
		At December 31, 2015, the Series A Preferred shares must be reported on the Cutting Edge Med balance sheet as a liability by operation of ASC 480-10-25-7.
		None of the above