Dilutive Securities and Earnings Per Share

Dilutive Securities and Earnings Per Share - Chapter 17...

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Chapter 17 Dilutive Securities and Earnings Per Share LECTURE OUTLINE The material in this chapter can be covered in three or four class sessions. Students generally have not been exposed to the types of dilutive securities discussed in this chapter nor are they aware of the complex rules governing the calculation of EPS. A. Dilutive Securities: Securities which are not common stock in form but enable their holders to obtain common stock upon exercise or conversion. Teaching Tip Illustration 17-1 provides a numerical example of convertible bonds at date of issue and at date of conversion. Conversion is shown using both the market value and book value approaches. 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 either market value or book value approach. (1) Market value approach: Use market value of stock, if determinable. Otherwise, use market value of bonds. (a) Less-common approach (b) Any gain or loss on conversion is treated as an ordinary item. (2) Book value approach: Use book value of bonds. (a) No gain or loss recognized. d. If retired for cash, instead of converted, recorded the same as any other bond.
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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. f. Retirement of convertible debt: treat as any other debt retirement. Any gain or loss is recognized as extraordinary. 2. Accounting for convertible preferred stock: Handled at issuance and conversion in the same manner as convertible debt, but only the book value method should be used. Teaching Tip Illustration 17-2 provides a numerical example of convertible preferred stock at date of issue and at date of conversion. a. Exception: If the par value of the common stock exceeds the preferred stock's book value, the difference is debited to Retained Earnings. 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. Detachable stock warrants: can be traded separately, and therefore, have a market value. (1) Proportional method: use when value of bonds without the warrants and the value of the warrants are both known. (a) Allocate the sale price of the bonds between the bonds and
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This note was uploaded on 03/06/2011 for the course ACC 545 taught by Professor Cole during the Spring '09 term at University of Phoenix.

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Dilutive Securities and Earnings Per Share - Chapter 17...

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