(Solution) - Jillian Limited JL issued a financial instrument with the -(2025 Original AI-Free Solution)

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Academic Level: Undergrad. (yrs 3-4)

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Jillian Limited ( JL) issued a financial instrument with the following terms:
? A face value of $ 100.
? Not secured by any assets of the entity (unsecured).
? Redeemable in cash at the option of the issuer.
? Pays 5% of face value annually.
? The 5% doubles in five years (to 10%) if the financial instrument is not redeemed. In 10 years, the annual payments double again if not redeemed by that time. Other information to consider:
? Current interest rates are 4%. Rates are expected to remain stable or decline in the short to midterm.
? JL currently has a loan outstanding with the bank. Under the terms of the loan agreements, the debt- to- equity ratio may not exceed 2: 1. Currently, before accounting for the new instrument, the debt- to- equity ratio is 2: 1.
Required
Discuss how JL should account for the financial instrument on the balance sheet (debt or equity) assuming that that JL reports under U. S. GAAP.