Course Notes Chapter 16

Course Notes Chapter 16 - Dilutive Securities and Dilutive...

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Chapter 16-1 Dilutive Securities and Earnings Dilutive Securities and Earnings Per Share Per Share Chapter 16 Chapter 16
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Chapter 16-2 Accounting for Convertible Debt Accounting for Convertible Debt What are convertible securities? In general – they are accounted for as the original security without considering the conversion option (what’s wrong with this? Why does FASB use this methodology?).
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Chapter 16-3 Festus Inc. issued $5,000,000 (5,000 bonds) par value, 4% convertible Festus Inc. issued $5,000,000 (5,000 bonds) par value, 4% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. they would have sold for 95. Journal entry at date of issuance: Accounting for Convertible Debt Accounting for Convertible Debt
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Chapter 16-4 At Time of Conversion Accounting for Convertible Debt Accounting for Convertible Debt Companies use the book value method when converting bonds. Book value method – reverse out the current book value of the debt, plug APIC, market values do not matter
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Chapter 16-5 Festus Inc. has outstanding 5,000, $1,000 bonds, each convertible into 100 Festus Inc. has outstanding 5,000, $1,000 bonds, each convertible into 100 shares of $0.01 par value common stock. The bonds are converted on shares of $0.01 par value common stock. The bonds are converted on December 31, 2008, when the unamortized discount is $45,000 and the December 31, 2008, when the unamortized discount is $45,000 and the market price of the stock is $21 per share. (would you have made this market price of the stock is $21 per share. (would you have made this conversion?) conversion?) Journal entry at conversion: Accounting for Convertible Debt Accounting for Convertible Debt
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Chapter 16-6 Induced conversion – how do you think they should account for it? Is it an asset, liability, revenue, or expense (or something else)? Retirement – easy if you remember how to do it for debt (i.e. it is the same treatment). Accounting for Convertible Debt Accounting for Convertible Debt
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Chapter 16-7 So: Why do firms issue convertible debt? Why do investors purchase it? Accounting for Convertible Debt Accounting for Convertible Debt
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Chapter 16-8 Convertible preferred stock is considered part of stockholders’ equity. Use book value method (no option recognition, conversion plugs to APIC, stock price is irrelevant). If par value of CS>par value of PS, then debit R/E (some states don’t allow this) Convertible Preferred Stock Convertible Preferred Stock Convertible preferred stock includes an option for the holder to convert preferred shares into a fixed number of common shares.
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Chapter 16-9 Certificates entitling the holder to acquire shares of stock at a Certificates entitling the holder to acquire shares of stock at a certain price within a stated period (sounds a lot like… certain price within a stated period (sounds a lot like… ________). ________). Normally arise:
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Course Notes Chapter 16 - Dilutive Securities and Dilutive...

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