Epstein Engineering Inc. began operations on January 5, 2016, with the issuance of 500,000 shares of $80 par common stock. The sole stockholders of Epstein Engineering Inc. are Barb Abrams and Dr. Amber Epstein, who organized Epstein Engineering Inc. With the objective of developing a new flu vaccine. Dr. Epstein claims that the flu vaccine, which is nearing the final development stage, will protect individuals against 90% of the flu types that have been medically identified. To complete the project Epstein Engineering Inc needs $25,000,000 of additional funds. The local banks have been unwilling to loan the funds because of lack of sufficient collateral and the riskiness of the business. The following is a conversation between Barb Abrams, the Cheif Executive officer of Epstien Engineering and Amber Epstien the leading Resercher.

1) Discuss the arguments for and against classifying the issuance of the $25 millions of stock as debt

2) What do you think might be a practical solution to this classification problem.

porations: Organization, Stock Transactions, and Dividends th the objective of developing flu vaccine. Dr. Epstei vaccine, which is nearing the fi development stage, w protect 90% of the flu types that have been medically identified Com Epste Engineering Inc. needs $25,000,000 of additional funds. Th been unw ng to loan the funds because of the lack of sufficient co Kiness of the b ness. anks The following is a conversation between Barb Abrams, the chief executive Epstein Engineering Inc., and Amber Epstein, the leading researcher: and Barb What are we going to do? The banks won't loan us any more money, and we complete the project. We e so close! It would be a disas got o quit now. The only thing can th additional stock. Do you have any suggestions? Amber: I guess you're right. But if the banks won't loan us any more money, how do think we can find nvestors to buy stoc you Barb ve been thinking about that. What if we promise the investors that we will pay them 5% of sales unti have received an amount equal to what they paid for the stock? Amber: What happens when we pay back the the investors get to keep the stock If they do i dilute our $25 milli Do on? ownership Barb How about, if after we pay back the $25 million, we make them turn in their stock for $120 per share one and one-half times what the paid for it, plus they would have already gotten all their money back. That's $120 profit per share for the investors a Amber: It could work. We get our money, but don't have to pay any interest, dividends, or the $80 per share until we start generating sales. At the same time, the investors could get their money back plus $120 per share profit. Barb: We'll need current financial statements for the new investors. I'll get our accountant working on them and ney to draw up a legally binding contract Contact our a the new investors. Yes, this could work. In late 2016, the attorney and the various regulatory authorities approved the new stock offering, and 312,500 shares of common stock were privately sold new investors at the stock's par of $80 In preparing financial statements for 2016, Barb Abrams and Dan Fisher, the contr for Epstein Engineering Inc., have the following conversation Dan: Barb, I've got a problem Barb: What's that, Dan? Dan Issuing common stock to raise that additional $25 million w a great idea. But Barb: But what? the common stock Dan I've got to prepare the 2016 annual financial statements, and l am not sure how to cl Barb: What do you mean It's common stock. we Dan: I'm not so sure. called the auditor and explained how are contractually obligated to pay the new holders 5% of sales until 580 per share is paid. Then, we may be obligated to pay them $120 per sha Barb; So Dan: So the aud hinks that we should classify the additional issuance of s25 on as debt, not banks. we put the $25 million on the balance sheet as debt, our agreements h the if these agreements are the banks may call in all our debt immediately. hey do that, we are in trouble. to file for don't have the cash to pay off the banks. of the $25 Discuss the arguments for and agai fying the issuance a SS on of stock as debt. ification pro think migh a prac solution to this What do you