Acc 311 16,17,19

Acc 311 16,17,19 - Chapters 16,17,19 Section 1-dilutive...

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Chapters 16,17,19 1. a. Equity: nonredeemable common or preferred shares bc the issuer has no obligation to pay dividends or repurchase the stock b. Liability: an obligation to pay the holder of the common or preferred stock at some pt in the future c. Mezzanine section: on balance sheet classifies mandatory redeemable preferred stock; between debt & equity bc SEC prevented this to be equity & FASB recently stated these should be liabilities d. convertible bond, earnings per share e. Dilutive securities: 2. accounting for convertible debt a. convertible bonds: can be converted into other corporate securities during some specified period of time after issuance; benefits of bond combined w/ privileges exchanging for stock i. reasons to issue convertible bonds: 1)raise equity capital w/o giving up much ownership control 1. ex: cowants to raise 1M, common st sells for $45; to raise it the co would have to sell 222,22; by selling 1000 bonds @ 1000 par each convertible into 20 shares of stock the co could raise 1M for selling only 20K shares ii. reason 2): to obtain debt financing at cheaper rates 1. conversion privilege: entices investors to accept lower interest rate than would normally a. Ex: co issued convertible bonds that pay interest at an effective yield of 4.75%. this was much lower than issuing straight debt but for this low rate the investor receives right to buy common stock @ fixed price until bonds maturity iii. Riskiness: can become a junk bond if bought out; may need takeover protection; may be called @ par so premium is lost b. At time of issuance: method for recording convertible bonds @ the date of issue follows the method used to record straight debt issues; none of proceeds of convertible bond are recorded as equity, co amortize discount/premium to maturity date that results from issuance (do this bc its difficult to predict when conversion will occur c. At time of conversion: co uses book value method to convert bonds to other securities i. Book value method: records securities exchanged for the bond @ the carrying amt (book value) 1. argument: an agreement was established @ date of issuance to either pay stated amt of cash @ maturity or issue a stated # of shares of equity securities; when debtholder converts debt to equity, issuing co recognizes no gain or loss 2. EX: Hilton has 1K bond that is convertible to 10 shares of cm st (par $10) At the time of conversion, the unamortized prem is $50. the conversion is recorded as follows b/p 1000 prem 50 cm st 100 PIC in excess of par 950 d. Induced conversions: reasons-to reduce interest costs or improve debt-to-equity ratio i. Sweetener: some form of additional consideration (cash or common stock) to induce conversion 1. reported as an expense of the current period: the amt is the fair value of the addtl securities or other consideration
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This note was uploaded on 03/31/2008 for the course ACC 311 taught by Professor Griffin during the Fall '07 term at N.C. State.

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Acc 311 16,17,19 - Chapters 16,17,19 Section 1-dilutive...

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