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65 Cards in this Set
- Front
- Back
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What is a convertible bond?
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A bond that combines the benefits of a bond with the priviledge of exchanging it for stock at the holders option.
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For what two reasons do corporations issue convertible bonds?
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1. To raise equity capital without giving up more ownership control than neccessary.
2. to obtain debt financing at cheaper rates. |
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Accounting for convertible debt involves reporting issues at the time of .....
------, --------, & --------. |
issuance, conversion, and retirement.
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how are convertible bonds recorded at the time of issuance?
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just like regular bonds any discount or premium is ammortized over the life of the loan.
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What method is used at the time of conversion?
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The book value method. It is also considered GAAP.
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What support is there for using the book value method at the time of conversion?
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Based on the argument that an agreement was established at the date of issuance.
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Should you record a gain or loss when you use the book value method of conversion?
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NO, when the debt is converted to equity in accordance with the preexisting contract terms, no gain or loss should be recorded.
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why might an issuer want to induce conversion?
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To reduce interest costs
To improve its debt to equity ratio |
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How might a company induce a conversion?
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With some form of additional consideration (usually cash or common stock), called a sweetner.
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How do you record a sweetner?
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As a expense of the current period at an amount equal to the fair value of the additional securities or other consideration given.
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What is the method for recording the retirement of convertible debt?
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A gain or loss on retiring convertible debt needs to be recognized in the same way as regular debt.
Differences between the cash acquisition price of debt and its carrying amount should be reported currently in income as a gain or loss. |
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What is the major difference between accounting for convertible bond and convertible preferred stock?
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covertible bonds are considered liabilities, whereas convertible preferred are considered part of stockholders equity.
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When convertible preferred stocks are exercised is a gain or loss recognized?
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No
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What method is used when convertible preferred are exercised?
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The book value method.
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What is the method for recording the retirement of convertible debt?
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A gain or loss on retiring convertible debt needs to be recognized in the same way as regular debt.
Differences between the cash acquisition price of debt and its carrying amount should be reported currently in income as a gain or loss. |
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What is the major difference between accounting for convertible bond and convertible preferred stock?
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covertible bonds are considered liabilities, whereas convertible preferred are considered part of stockholders equity.
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When convertible preferred stocks are exercised is a gain or loss recognized?
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No
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What method is used when convertible preferred are exercised?
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The book value method.
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What are warrants?
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certificates entitling the holder to acquire shares of stock at a certain price within a stated period.
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What is a big difference between convertible securities and warrants?
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upon exercise of warrants, the holder has to pay a certain amount of money to obtain the shares.
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What is the 1st situation in which warrants are issued?
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1. With bonds or preferred stock to make the sceurity more attractive
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What is the 2nd situation in which warrants are issued?
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2. to existing common stock holders before more common stock is issued.
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What is the 3rd situation in which warrants are issued?
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3. As compensation to executives and employees
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How do you determine the amount to allocate to the security and the warrants under the proportional method?
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1.Take the FMV of the Security add the FMV of the warrants= aggregate FMV
2. FMV Security/aggregate FMV multiply by price paid=amount to allocate to security 3.FMV Warrants/aggregate FMV multiply by price paid=amount to allocate to warrants. |
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What is the entry for bonds sold at a discount with warrants?
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Cash 10,000,000
discount on BP 294,118 BP 10,000,000 PIC-Stock Warrants 294,118 |
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what is the entry when stock options are exercised?
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dr. Cash (exercise Price)
dr. PIC-stock warrant (bal. from Issue) cr. Common Stock(par value) cr. PIC-in excess of par |
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What is the entry if warrants expire unexercised?
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Dr. PIC-Stock Warrants (bal.)
Cr. PIC-from expired warrants |
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What method would be used if the FMV of the bonds or warrants was undertiminable in a lump sum?
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The Incremental method
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How do you do the incremental method?
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you allocate the market value to the security that is known and the rest goes to the other
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What is the difference on FASB standing on covertible debt and debt issued with warrants?
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FASB treats convertible debt as one security and the entire proceeds are recorded as debt. Debt with warrants is treated as two securities.
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What is preemptive priviledge?
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The right of existing shareholders to purchase stock before more stock is issued. also known as stock right.
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what is the entry when stock right warrants are issued?
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there is no entry just a memorandum entry.
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what is a stock option?
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A type of warrant which gives selected employees the option to purchase common stock at a given price over an extended period of time.
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What is the grant date?
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the date you recieve your options
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What is the intrinsic value method of measuring compensation cost?
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the excess of the stock market price over the stock option price AT THE GRANT DATE.
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What is the required method for recognition of compensation cost by FASB?
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recognition of compensation cost for the fair value of stock based compensation paid to employees for their services.
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What is the fair value method of pricing stock options?
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the option value is estimated based on the many factors that determine its underlying value.
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What is the service period?
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The periods the employee performs the service.
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What is the vesting period?
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The time between the grant date and the vesting date.
UNLESS otherwise stated the service period is the vesting period. |
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What is the entry for $220,000 total compensation expense and a 2 year service period?
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dr.Compensation expense 110,000
cr.Paid in Capital-Stock Options 110,000 |
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What is the entry to record options exercised?
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DR. Cash
Dr. PIC-stock options Cr. Common Stock Cr. PIC-in excess of par |
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What is the entry to record unexercised options on the expiration date?
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Dr. PIC-Stock Options
Cr. PIC-from expired stock options |
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Do you adjust compensation expense when options expire?
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No, it was still compensation to an employee and still an expense.
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Do you adjust compensation expense when an employee leaves?
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yes, as a change in estimate
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How do you adjust compensation expense?
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dr. PIC-stock options
cr. compensation expense. |
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what is a non compensatory stock option plan?
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1. almost all full time employees may participate
2. the discount from the market price is small 3. the plan offers no substantive option feature. |
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Are non compensatory stock option plans expensed?
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No
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Earnings per share indicates...
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the income earned by each share of common stock
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Where is EPS reported?
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required on the face of the income statement below Net income
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What is a simple capital structure?
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a corporation that consists of only common stock and has no potential common stock
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What is a complex capital structure?
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If it includessecurities that could have a dilutive effect on earnings per common share
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EPS calulation for simple capital structure?
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=ni-pref dividends/weighted avg # of shares outstanding
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What is one problem with a basic EPS computation?
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It fails to recognize the potentially dilutive impact on outstanding stock when a corporation has dilutive securities.
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What are dilutive securities?
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Securities that can be converted to common stock and that upon conversion dilute EPS
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What is reported whan a corporation has a complex capital structure?
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Both a basic and a diluted eps is reported
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What is the dilutive EPS formula?
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NI-Pref Div/weighted avg shares outsatnding - impact of convertibles - impact of options, warrants, and other dilutive securities.
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Why would a company not report dilutive EPS?
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If the securities are antidilutive
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What does antidilutive mean?
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securities that upon conversion increase EPS
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What is the if converted method? (for convertible securities)
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1. the denominator is increased by the additional shares iisued
2. the numerator is increased by the amount of interest expense assoc with those convertible securities |
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Are options and warrants included in earnings per share?
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Yes as long as they are not antidilutive
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What method is used to include options and warrants in the earnings per share?
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The treasury stock method.
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Explain the treasury stock method?
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assumes the options or warrants are sold at beg of the year + the proceeds are used to purchase CS for the treasury. The incremental shares remaining are added to the weighted avg # of shares.
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In the treasury stock method what is meant by incremental shares?
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The number of shares considered issued after the proceeds from the exercise have been used to buyback shares.
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What is the formula for incremental number of shares?
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(Market price-option price/market price)* number of options=number of shares
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How do you compute dilutive Eps with multiple dilutive securities?
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1. determine the per share effect for each dilutive security
2. rank the results from most dilutive to least 3. recalculate EPS with the most dilutive, and continuing adding securities until EPS increases. |
