Chapter 16 Lecture Notes with answers

Chapter 16 Lecture Notes with answers - Dilutive Securities...

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1 Debt and equity Convertible debt Convertible preferred stock Stock warrants Stock compensation plans Dilutive Securities and Earnings Per Share Dilutive Securities and Compensation Plans Computing Earnings Per Share Simple capital structure Complex capital structure
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2 1. Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. Explain the accounting for convertible preferred stock. 3. Contrast the accounting for stock warrants and for stock warrants issued with other securities. 4. Describe the accounting for stock compensation plans under generally accepted accounting principles. 5. Discuss the controversy involving stock compensation plans. 6. Compute earnings per share in a simple capital structure. 7. Compute earnings per share in a complex capital structure. Learning Objectives
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3 Should companies report these instruments as a liability or equity . Debt and Equity Stock Options Convertible Securities Preferred Stock
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4 Dilutive Securities Dilutive Securities Securities that can be converted to stock or which stock may eventually be issued to the holder Potentially decrease the ownership share of current shareholders So, important to current owners to know if dilutive securities exist and their impact on ownership
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5 At issuance: parallels accounting for straight debt. At conversion, typically the book value of the bonds is removed and replaced with common stock. Cost of induced conversions is a period expense. Conversion is initiated by security holder. Convertible Bonds: Concepts Convertible Bonds: Concepts
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6 Given: One $1,000 bond, issued at $45 premium The bond is convertible into 10 common shares of $10 par At conversion: unamortized premium is $30 Record the conversion using the book value method . Conversion of Debt: Example Conversion of Debt: Example
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7 Given: One $1,000 bond, issued at $45 premium The bond is convertible into 10 common shares of $10 par At conversion: unamortized premium is $30 Record the conversion using the book value method . Conversion of Debt: Example Conversion of Debt: Example Bonds payable       1,000 Premium on bonds payable        30       Common stock - par                100          Paid-in-cap            930
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8 Issuer wishes to encourage prompt conversion. Issuer offers additional consideration, called a “sweetener.” Sweetener is an expense of the period. Accounting for Convertible Debt Induced Conversion:
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Recognized the same way as retiring straight debt issue. Difference between the acquisition price and carrying amount should be reported as gain or loss in the income statement. Accounting for Convertible Debt
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This note was uploaded on 09/16/2011 for the course ACCOUNTING 325 taught by Professor Stubbs during the Spring '11 term at Rutgers.

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Chapter 16 Lecture Notes with answers - Dilutive Securities...

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