Chapter 16 Lecture Notes

Chapter 16 Lecture Notes - 1 Debt and equity Convertible...

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Unformatted text preview: 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 2 1. Descr ibe the accounting for the issuance, conver sion, and r etir ement of conver tible secur ities. 2. Explain the accounting for conver tible pr efer r ed stock. 3. Contr ast the accounting for stock war r ants and for stock war r ants issued with other secur ities. 4. Descr ibe the accounting for stock compensation plans under gener ally accepted accounting pr inciples. 5. Discuss the contr over sy involving stock compensation plans. 6. Compute ear nings per shar e in a simple capital str uctur e. 7. Compute ear nings per shar e in a complex capital Learning Objectives 3 Should companies report these instruments as a liability or equity . Debt and Equity Stock Options Convertible Securities Preferred Stock 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 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 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 7 I ssuer wishes to encour age pr ompt conver sion. I ssuer offer s additional consider ation, called a sweetener . Sweetener is an expense of the per iod. Accounting for Convertible Debt I nduced Conver sion: 8 Recognized the same way as r etir ing str aight debt issue. Differ ence between the acquisition pr ice and car r ying amount should be r epor ted as gain or loss in the income statement. Accounting for Convertible Debt Retir ement of Conver tible Debt 9 Convertible preferred stock is equity, unless it is redeemable preferred stock. Conversion is an equity transaction: hence, no gains or losses are recognized. If converted, valuation is based on the book value of the preferred stock. If the par value of the common stock issued exceeds the book value of the preferred stock, Retained Earnings is debited for the difference....
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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 - 1 Debt and equity Convertible...

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