ch 16 EPS - Ch. 16 Dilutive Securities And Earnings Per...

Info iconThis preview shows pages 1–3. Sign up to view the full content.

View Full Document Right Arrow Icon
1 Ch. 16 Dilutive Securities And Earnings Per Share. 1. Dilutive Securities. Securities that are not common stock in form but enable their holders to obtain common stock upon exercise to conversion. 1) Convertible bonds. Bonds that can be converted to common stocks. Thus, these bonds combine the benefit of bonds with the privilege of exchanging them for stocks at the holder's option. a. At time of issuance, recorded the same as straight bonds. b. At interest dates, recorded the same as straight bonds. c. when retired for cash, instead of converted, recorded the same as straight bonds. d. At time of conversion. - what is the value of the stock exchanged for the bond? a) Market value approach: - Recording the stock issued at the market value of the stock or bond. - Compare the carrying value of the bond with the market value to recognize loss or gain on redemption of b/p. - the gain or loss is not an extraordinary item. E.g. 100 shares of common stock with $10 par value issued upon the conversion of bonds having a book value of $2,200 (the par value is $2,000 and unamortized premium is $200). the market price of the stock is $30 per share. B/P 2,000 Premium on B/P 200 Loss on redemption of B/P 800 C/S 1,000 Paid-in capital in excess 2,000 b) Book value approach. - Recording the stock issued at the book value (the carrying value) of the bond. - Therefore, no gain or loss. E.g. take the same example as that for market value approach.
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
2 B/P 2,000 Premium on B/P 200 C/S 1,000 Paid-in capital in excess of par 1,200 e. Induced conversions. - Additional considerations used to induce conversion should be reported as an expense. E.g. take the previous example and in addition, the bond issuing company agrees to pay the bondholder an additional $500 in cash. Using book value approach, Debt conversion expense* 500 B/P 2,000 Premium on B/P 200 C/S 1,000 Paid-in capital in excess of par 1,200 Cash 500 * Not an extra-ordinary expense. 2) Convertible preferred stock. Treated in the same manner as convertible bonds at conversion, but only the book value method can be used. 3) Stock warrants. Certificates entitling the holder to acquire shares of stock at a certain price within a stated period. a. Stock warrants issued with other securities. a) Securities issued with non-detachable warrants:
Background image of page 2
Image of page 3
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 8

ch 16 EPS - Ch. 16 Dilutive Securities And Earnings Per...

This preview shows document pages 1 - 3. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online