ACC327_CH16_Notes

ACC327_CH16_Notes - Chapter 16 Dilutive Securities and EPS...

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Chapter 16 Dilutive Securities and EPS Calculations 1. Dilutive securities - are securities that are not common stock in form but that enable their holders to obtain common stock upon exercise or conversion. The primary accounting concerns about these securities involve accounting for them at the date of issuance and the date of exercise or conversion. A. Convertible bonds - are bonds that may be converted into a specified number of common shares at the bondholders' discretion. 1. Date of issuance - convertible bonds are recorded at issuance the same as straight debt issues. a. No accounting recognition is given to the equity feature b/c the debt and equity features are mutually exclusive (i.e., one cannot exist while the other one does). 2. Date of conversion - when the bonds are converted to stock, the book value approach is used to record the conversion. a. Book value approach - the equity issuance is recorded at the book value of the bonds removed. 1. The bonds payable and any related premium or discount are removed. No gain or loss is recognized.
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2. This method is used b/c it results in the stock issuance being recorded at the book value of the bonds removed (i.e., the transaction is just a swap of creditors' equity for stockholders' equity with no gain/loss occurring). 3. Induced conversion - occurs when the company "sweetens" the conversion privilege to encourage or induce conversion by awarding cash or additional stock upon conversion. a. The sweetener should be reported as an expense of the current period in an amount equal to the fair value of the additional consideration given. 4. Retirement of convertible debt - occurs when a company retires its convertible bonds prior to their conversion or their maturity. a. The retirement is recorded the same as a retirement of straight debt (i.e., the debt and any related premium/discount are removed and the difference b/t the book value of the bonds retired and the cash paid to retire them is recorded as a gain/loss).
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b. The gain/loss on retirement will be ordinary or extraordinary, depending on the circumstances. B. Convertible preferred stock - is preferred stock (P/S) that may be converted into a specified number of common shares at the P/S holders' discretion. 1. Date of issuance - convertible P/S is recorded at issuance the same as straight (i.e., nonconvertible) P/S. 2. Date of conversion - when the P/S is converted to C/S, the book value method is used. a. Book value method - P/S along with any Add'l PIC on this P/S is removed (together these represent the book value of the convertible P/S). This BV of the P/S establishes the amount to record for the issuance of the C/S. 1. Typically, the BV of the P/S will exceed the par value of the C/S issued and Add'l PIC on C/S will be credited. 2.
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ACC327_CH16_Notes - Chapter 16 Dilutive Securities and EPS...

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