Chapter 16 (Dilutive securities and earnings per share)

Chapter 16 (Dilutive securities and earnings per share) - 1...

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Unformatted text preview: 1 Debt and equity Convertible debt Convertible preferred stock Stock warrants Stock compensation plans Dilutive Securities and Earnings Per Share Dilutive Securities and Compensation Plans Computing Earnings Per Share Simple capital structure Complex capital structure 2 (at the holders option) Benefit of a Bond (guaranteed interest) Privilege of Exchanging it for Stock Bonds which can be converted into other corporate securities are called convertible bonds. + Accounting for Convertible Debt 3 Desire to raise equity capital without giving up more ownership control than necessary. Less number of shares may be required at the time of debt conversion than when the same amount is raised through direct stock issue in the market at the prevailing market price. Conversion privilege entices investors to buy bond at a lower interest rates compared to the straight bond leading to cheaper cost of financing for a company. The company will be able to sell bonds at a higher price as a result of lower market yield. Two main reasons for issuing convertibles: Accounting for Convertible Debt 4 Convertible bonds recorded as straight debt issue with any discount or premium amortized over the term of the debt. EX: Gall Inc. issued $5,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Cash 4,950,000 Bonds payable 5,000,000 Journal entry at date of issuance: Discount on bonds payable 50,000 ($5,000,000 x 99% = $4,950,000) Accounting for Convertible Debt 5 Before conversion, the accounting for convertible bonds follow the same process as in case of straight bonds. At Time of Conversion Accounting for Convertible Debt Companies use the book value method when converting bonds. Carrying value of the bond is the basis which is arrived at by considering the unamortized discount or premium and unamortized bond issue costs, if any. When the debt holder converts the debt to equity, the issuing company recognizes no gain or loss upon conversion. 6 EX : Yuen Corp. has outstanding 1,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2008, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Bonds payable 1,000,000 Common stock (50,000 x $10) 500,000 Journal entry at conversion Discount on bonds payable 30,000 Additional paid-in capital 470,000 Accounting for Convertible Debt 7 Issuer wishes to encourage prompt conversion. Issuer offers additional consideration, called a sweetener [form of additional payment to bondholders]. Sweetener [Debt conversion expense] is an expense of the period in which the conversion takes place....
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This note was uploaded on 10/07/2010 for the course ACC 5115 taught by Professor Mitra during the Spring '10 term at Wayne State University.

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Chapter 16 (Dilutive securities and earnings per share) - 1...

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