NeedCash, Inc., ("NeedCash"), an SEC registrant, is a development-stage company founded to design and develop advanced smart card interface technology. NeedCash's common shares are publicly traded on the U.S. OTC market. NeedCash has not generated any revenues since its inception.
In June 1998, NeedCash issued $600,000 of private placement debt ("original debt"). In November 1999, when NeedCash's stock was trading at $0.80 per share, NeedCash announced that it had reached an agreement to issue $1,000,000, 10% convertible debentures with detachable warrants to private investors (unrelated to the investors of its original debt). The issuance of the convertible debentures was contingent upon the extinguishment of the original debt.
In February 2000, NeedCash exchanged 3.49 million shares of its unissued common stock to satisfy the original debt and related accrued interest of $70,000 (it had no other financial resources to satisfy the debt and related accrued interest). On the consummation date of the debt extinguishment, the market value (trading value) of NeedCash's common stock was $3.00 per share. In February 2000, after the extinguishment of the original debt, NeedCash issued the $1,000,000 convertible debentures with detachable warrants.
The debentures are convertible at an exercise price of $1.00 per share, and the warrants allow the debenture holders to purchase 937,500 shares of NeedCash's common stock at $1.00 per share. The warrants and conversion feature are exercisable immediately and only to the extent that the individual's beneficial ownership interest in NeedCash's common stock does not exceed 9.99%.
Required:
• How and when should NeedCash account for the exchange of the private placement debt for the issuance of common stock, and what value should be assigned to the common stock issued?
• How should NeedCash record the issuance of the convertible debentures and detachable warrants?