Question

4. Why do companies find the issuance of convertible bonds to be an attractive form of financing? Explain the rationale for this statement.

5. What is the justification for a corporation determining income for financial reporting purposes differently than the way it is determined for tax purposes?

Answer 1

1.Convertible bonds are combination of debt and equity, hence have a dual advantage. Firstly, the rate of interest on these bonds are kept lower than those bonds without conversion clause. This is because investors are ready to forego higher interest with anticipation of fruitful conversion to equity in future. Secondly, Interest though low are tax deductible unlike dividends. Lastly, they are converted into equity is future- hence, no worries of repayment or accumulating cash to make payment. Therefore, in these ways companies find the issuance of convertible bonds to be an attractive form of financing.

2.Income determined for financial purpose are based on Financial accounting and for Tax purposes based on tax accounting. Generally, taxable income is computed on cash basis, on the other hand financial accounting is based on accrual basis. Also some policies followed in accounting (Viz ammortisation, depreciation, write offs) may not be available in taxation. Taxation has some benefits (viz deduction, exemption, write offs) that may not form a part of financial accounting. Hence, to to one or many differences in way we arrive at the income under both, its justifiable that corporation determining income for financial reporting purposes does it differently than the way it is determined for tax purposes.