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Unformatted text preview: d be purchasing an asset that will drop in value. ID12–5 a. A hybrid security carries some of the properties of debt and some of the properties of equity. A determination must be made as to which properties dominate the characteristics of the security. If it is determined that the hybrid carries mainly equity characteritists, then it should be reported in the Stockholders’ Equity section of the Balance Sheet and should not affect the Income Statement. In either case, the hybrid security will be treated in the Financing Activities section of the Statement of Cash Flow. On the other hand, if the debt characteristics dominate, then the security should be classified as a liability on the Balance Sheet and will affect the Income Statement. c. Equity securities typically carry more risk than debt securities but consequently offer higher rates of return. If an investor was interested in accepting more risk than offered by a debt security, but required more of a return to justify that risk, then the investor might have an interest in a hybrid security. If the risk profile of a pure equity security...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.

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