Co X has 20 year convertible bonds on the books that are more valuable as shares then as debt. So we treat the debt as equity for leverage ratio purposes. i get that…no probs. question asks what happens: A) increase current ratio B) Decrease debnt to equity C) do nothing. I correctly chose B, however i think A is correct too. The current portion of LT debt would go away, decreasing current liab and increasing the current ratio. Book says "because the bonds are long term (20 years) there is no effect on current ratio. That doesn’t seem right to me. I’ve been burned in the past for not adjusting the current portion of LT debt. Thoughts?
Why do you think the current portion of LT debt would go away in this situation? The current portion of LT debt is the principal portion that must be paid within 1 year.
i treated it as though we were eliminating the debt from the books and treating all the debt as equity (because the conversion value is greater than the bond value). If there is no debt, there is no current portion to account for. Is the accounting adjustment ONLY made for leverage ratios? I guess that would make sense.