ch16 study !!!!!!!

ch16 study !!!!!!! - CHAPTER 16 Dilutive Securities and...

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CHAPTER 16 Dilutive Securities and Earnings Per Share LEARNING OBJECTIVES 1. Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. Explain the accounting for convertible preferred stock. 2. Contrast the accounting for stock warrants and stock warrants issued with other securities. 3. Describe the accounting for stock compensation plans under generally accepted accounting principles. 4. Explain the controversy involving stock compensation plans. 5. Compute earnings per share in a simple capital structure. 6. Compute earnings per share in a complex capital structure. 1
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LECTURE OUTLINE A. Dilutive Securities: Securities which are not common stock in form but enable their holders to obtain common stock upon exercise or conversion. 1. Accounting for convertible debt: A convertible bond combines the benefits of a bond with the privilege of exchanging it for stock at the holder's option. a. Issuance: recorded the same as issuance of any other bond. b. Interest dates: recorded the same as any other bond. c. Conversion recorded using the book value approach. Under this approach, the stock value of the bonds payable is removed from the accounts and is replaced by the common stock issued. d. If retired for cash, instead of converted, recorded the same as the retirement of any other bond. e. Induced conversions: Additional consideration given to induce conversion should be recognized as an expense of the current period. (1) The conversion inducement is recorded as an expense of the current period. A sweetener is paid to the bond holders to entice them to convert. The issuer is trying to reduce annual debt expense. Debt Conversion Expense 1,000 Bonds Payable 10,000 Premium on bonds payable 500 Common Stock 5,000 PIC in excess of par 5,000 Cash 1,000 2
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2. Accounting for convertible preferred stock: Handled at issuance and conversion in the same manner as convertible debt. a. Exception: If the par value of the common stock exceeds the preferred stock's book value, the difference is debited to Retained Earnings. 100 Shares of Preferred stock were converted to 100 shares of $15 common stock (note: exception exceeds book value) Preferred Stock 10,000 Premium on Preferred Stock 1,000 Retained Earnings 4,000 Common Stock 15,000 3. Accounting for stock warrants: entitles holder to acquire shares of stock at a certain price within a stated periods. a. Normally issued as: (1) an "equity kicker" to make another security more attractive. (2) a pre-emptive right to purchase additional shares given to existing shareholders. (3) compensation to executives and employees. b.
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ch16 study !!!!!!! - CHAPTER 16 Dilutive Securities and...

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