A finished ACC-371 Topic 8 debt or equity research memo example, classifying two preferred series by their redemption terms under ASC 480 and showing what each classification does to leverage. Searches like "acc 371 topic 8 assignment example", "acc371 topic 8 sample" and "acc-371 topic 8 example" land here.
What a finished ACC-371 Topic 8 debt or equity research memo looks like
The memo answers one question for a controller who would prefer both series reported as equity: where does each instrument belong on the balance sheet? Figures are illustrative. Series A, $5,000,000 of 8 percent preferred that must be redeemed at $100 a share in seven years, is an unconditional obligation to transfer cash on a fixed date, so ASC 480 requires liability classification whatever the shares are called, and its $400,000 annual dividend is reported as interest cost. Series B, $3,000,000 redeemable only at the holders' option, is not mandatorily redeemable while that option is unexercised, so it stays in equity. The consequence is then stated plainly. Debt to equity moves from 1.50 before the financing, exactly at the loan covenant's ceiling, to 1.55 after it, where treating both series as equity would have shown 0.75.
How an ACC-371 Topic 8 example is structured
The memo sets both instruments' terms down in full before it consults any guidance. It opens with the question and the reader, then the terms of each series as the offering documents state them: redemption dates, who can trigger redemption, the price and the dividend rights. A guidance section names ASC 480 as the governing topic and restates, in the memo's own words, when an instrument issued in the form of shares must be classified as a liability. The analysis section applies that requirement to each series separately, setting the fixed redemption date of Series A against the holder option in Series B. A fourth section records the issuance entries and presents the Series A dividend as interest. The fifth section computes leverage under the required classification and under the one the controller wanted. Last comes the event that would move Series B into liabilities.
Terms taken from the offering documents
Redemption dates, triggers, price and dividend rights are drawn from the documents themselves, since classification turns on those terms and not on the instrument's name.
The governing topic cited once
ASC 480 is named at topic level and its requirement for shares that must be redeemed is paraphrased, so the reader sees the rule before it is applied.
A fixed date makes Series A debt
An unconditional duty to pay $100 a share in year seven is an obligation to transfer cash, so the shares are reported among liabilities.
A holder option keeps Series B in equity
Redemption depends on an event outside the company's control, the holders' choice, so the series stays in equity until that choice becomes certain.
Leverage computed under both treatments
The required classification yields debt to equity of 1.55 against a 1.50 covenant ceiling, which is why the controller's preferred presentation mattered so much.
Where marks go in ACC-371 Topic 8
Closing research memos earn or lose credit on whether the terms, not the title, decide the answer. Classifying Series A as equity because the documents call it preferred stock lets the label decide, and in this topic that is simply wrong. The mirror error puts Series B into liabilities because redemption might happen, when the guidance waits for that event to become certain. A memo that names ASC 480 without walking each series' redemption terms against it has cited the rule and skipped the application. Leaving the Series A dividend among equity distributions, once the shares are liabilities, misstates interest cost. The covenant section draws deductions when it is missing, because what classification does to leverage is the reason the arrangement was ambiguous in the first place, and a memo that ignores it answers the question without its stakes.
Get an ACC-371 Topic 8 example written to your instructions
Send the ACC-371 Topic 8 instructions, the rubric and the financing documents or case facts your section assigned. We write a custom example to them, with each instrument's terms stated, the governing Codification topic cited, every term walked against the classification requirement and the effect on leverage or covenants shown, in 24 to 48 hours. The first one costs nothing.
ACC-371 Topic 8 questions, answered
Why can shares be reported as a liability?
Because classification follows the obligation, not the legal form. A share the issuer must buy back for cash on a fixed or determinable date commits the company to transfer assets just as a bond does, and ASC 480 requires it to be reported among liabilities. Dividends on those shares are then presented as interest cost. The legal name of the instrument does not change what the company owes.
What happens to Series B if holders give notice of redemption?
Once the holders exercise their option, or redemption otherwise becomes certain, the shares become mandatorily redeemable and are reclassified to liabilities, measured at fair value with equity reduced by that amount and no gain or loss recognized. Until then the series remains in equity. Public companies face an extra step, since SEC staff guidance generally places shares redeemable outside the issuer's control between liabilities and equity.
Do lenders use the same classification in a covenant?
Not necessarily. A loan agreement defines its own terms, and some define debt to include or exclude particular instruments regardless of how GAAP presents them. The memo therefore separates the two questions: GAAP decides where Series A appears on the balance sheet, and the covenant language decides whether the ratio has been breached. Reading the agreement's definitions is part of the analysis, and the example says so.