Chapter_16_Notes

Chapter_16_Notes - Chapter 16 Dilutive Securities and EPS...

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Chapter 16 – Dilutive Securities and EPS This chapter discusses how to account for items that have both debt and equity characteristics. Dilutive securities dilute EPS upon exercise or conversion. Convertible Bonds It combines the benefits of a bond with the privilege of exchanging it for stock at the holder’s option. Conversion option entices investor to accept a lower interest rate, so the issuer saves money. Need to account for three things: 1. issuance 2. conversion 3. retirement Issuance: follow process in Ch.14 and amortize accordingly to maturity or until converted. Conversion: assume XYZ, Inc. has $100,000 worth of bonds that are convertible into 1,000 shares of $10 par value C/S. On the conversion date, there was an unamortized premium of $12,437. Record the entry. Induced Conversions: sometimes companies include sweeteners to induce people to convert quickly. These sweeteners are expensed upon conversion. Chapter 16 Notes 1
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Assume XYZ, Inc. issued $100,000 par value convertible bonds convertible into 10,000 shares of $1 par value C/S. To entice bondholders to convert, they agree to pay an additional $7,000 if they will convert. FASB indicated that when an issuer makes an additional payment to encourage conversion, the payment is for a service and should be expensed. Retirement of convertible debt is handled the same as nonconvertible debt. See Ch.14. Chapter 16 Notes 2
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Convertible Preferred Stock P/S that includes an option to convert P/S into a fixed number of C/S. Use BV method which debits P/S and APIC-P/S and credits C/S. The difference, if any, is a debit to RE or a credit to APIC-C/S. Assume XYZ, Inc. issued 1,000 shares of $10 par value C/S upon conversion of 1,000 shares of $5 par value P/S that was originally issued for a $500 premium. Stock Warrants Warrants are certificates entitling the holder to acquire shares of stock at a certain price within a stated period. This is similar to the conversion privilege in that they have a dilutive effect on EPS. Difference is that upon exercise of the warrants, the holder has to pay a set sum of money to obtain the shares. Why do companies attach stock warrants? Usually have 5-10 year life. Chapter 16 Notes 3
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Assume XYZ, Inc. sells one share of stock with a detachable stock warrant for $25. The warrant gives the holder the right to buy one share in the next five years for $28. The price of the stock the day before the sale was $21, suggesting a price for the warrant of $4 (i.e., $25 sales price - $21 stock price). After one month, they exercise the warrant when the stock was selling for $32. Assuming the par value of the stock is $10, record all entries. Chapter 16 Notes
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Chapter_16_Notes - Chapter 16 Dilutive Securities and EPS...

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