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Chapter 16 Dilutive Securities & Earnings Per Share

Chapter 16 Dilutive Securities & Earnings Per Share...

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CHAPTER 16 – Dilutive Securities & Earnings per Share [pages 794-854] LEARNING OBJECTIVES 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. *8. Explain the accounting for stock-appreciation rights plans. *9. Compute earnings per share in a complex situation. *This material is covered in an Appendix to the chapter. LECTURE OUTLINE A. Dilutive Securities: 1. not common stock 2. enable their holders to obtain common stock upon exercise or conversion 3. examples: (a) convertible bonds (b) convertible preferred stocks (c) warrants (d) contingent shares B. Convertible debt: 1. Convertible Bonds (a) Conversion feature allows a corporation to obtain equity capital without giving up more ownership control than necessary. (b) Conversion feature entices the investor to accept a lower interest rate than would normally be accepted on a straight debt issue. (c)Accounting for convertible bonds on the date of issuance follows the procedures used to account for straight debt issues. (1) Issuance: record the same as issuance of any other bond (record the face amount in the bonds payable account) 1
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(2) Record excess in a premium account if issued over par; in a discount account if issued below face. (3) Record issue costs in a deferred asset account and amortize over the life of the bond. (4) Interest dates: recorded the same as any other bond (record interest expense; amortize premium/discount, record cash/interest payable) (d) Conversion recorded using the book value approach (considered GAAP). (a) Issue price of the stock = the book value of the bond (b) No gain or loss is recorded (c) Remove the stock value of the bonds payable from the accounts (d) Replace the bonds payable accounts with the common stock issued. 2. Example: Assume that S&K Corporation has convertible bonds with a book value of $3,500 ($3,000 plus $500 unamortized premium) convertible into 120 shares of common stock ($10 par value) with a current market value of $35 per share. The journal entry to be made is as follows: Bonds Payable 3,000 Premium on Bonds Payable 500 Common Stock 1,200 Paid-in Capital in Excess of Par 2,300 a. If retired for cash, record like any other retirement of a bond. b. Induced conversions: (1) Additional consideration given to induce conversion (“sweetner”). (2) Recognized as an expense of the current period equal to the fair value of the additional securities or consideration Debt Conversion Expense 700 ($35 x 20) Common stock 200 Paid-in Capital in Excess of Par 500 (3) If retired without conversion the difference between the cash acquisition price and the carrying amount is reported on the income statement as a gain or loss.
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