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92 Cards in this Set

  • Front
  • Back
companies should report nonredeemable common shares as ___ on the balance sheet because ____
equity, because the issuer has no obligation to pay dividends or repurchase te stock.
a convertible bond has both ___ and ___ characteristics.
debt and equity
convertible securites as well as options, warrants, and other securities are often called ____ because upon exercise they may reduce ____
dilutive securites; earnings per share
___ can be changed into other corporate securites during some specified period of time after issuance
convertible bonds
The two reasons companies use convertible bonds is to
raise equity captial without giving up more ownership control than necessary

and to obtain debt financing at cheaper rates
Accounting for convertible debt involves reporting issues at what times
when recording convertible bonds at the date of issue companies
do not record the proceeds as equity

amortize to maturity date discount or premium
If converting bonds into other securities, the company uses _____ to record the conversion. This method recoreds the securities exchanged for the bond at the ______
book value method; carrying amount of the bond
When using the book value approach for convertible bonds, when converting debt to equity the company recognizes _____ on the conversion
no gain or loss
when additional incentive is offered to encourage prompt coversion of convertible debt, this is called
induced conversion
A induced conversion sweetner would require the following journal entries
Debt Conversion Expense
Bonds Payable
-Common Stock
-Additional PIC
The debt conversion expense of an induced conversion would be classified as ___ and not ___
an expense of the current period; a reduction of equity
An issuance of bonds would be recorded as followed
-premium on bonds payable
-bonds payable
Companies should recognize diffreences between the cash aquisition price of debt and its carrying amount HOW?
in current income as a gain or loss.
an option for the holder to convert preferred shares into a fixed number of common shares is
convertible preferred stock
Convertible bonds are considered ____ where convertible preferreds (unless there is mandatory redemptions) are considered part of _____
liability, stockholders equity
Why do companies not recognize a gain or loss when stockholders excercise convertible preferred stock
because a conpany does not recognize a gain or loss when it deals with stockholders in their capacity as business owners
In accounting for the excercise of convertible preferred stock a company uses the ____.
book value method
In accounting for the excercise of convertible preferred stock a company makes the following journal entry
Preferred stock
Paid in capital in excess of par (Premium on preferred stock)
-Common Stock
-Additional Paid in Capital (if an excess exists)

**If the par value exceeds the book value then the company debits retained earnings for the difference
Retained earnings is debited if the par value exceeds the book value because
the company has offered the preferred stockholders and additional return to facilitate their conversion to common stock, which they may charge to retained earnings OR reduce additional PIC from other sources
certificates entitling the holder to acquire shares of stock at a certain price within a stated period
The substantial difference between convertivle securites and stock warrants is that
the holder has to pay a certain amount of money to obtain the shares
The issuance of warrants or options to buy additional shares usually arises under these three situations
1) the compnay wants to make the security more attractive
2) to evidence that the existing stockholders have a preemptive right to purchase common stock first
3)to give to executives and employees as a form of compnsation
A company should allocate the proceeds from the sale of debt with detachable stock warrants
between the two securities (the bond and the warrant giving the holder the right to purchase common stock at a certain price)
The two methods of allocation available for the sale of debt with warrants are
the proportional method
the incremental method
When selling warrants with common stock, the following entries are made
Paid in Captial-Stock Warrants
-Common Stock
-Paid in Captial in Excess of par
If investors fail to excercise stock warrants, then then the following entries are made
Paid in capital-Stock warrants
-paid in capital from expired Warrants

**The additional paid in captial reverts to the former stockholders
When a compny cannot determine the fair value of either the warrants or the bonds, it applies the ___ method to allocate the proceeds from the sale of stock warrants with securities
incremental method
The incremental method in allocating proceeds from the sale of debt with atacchable warrants dictates that
the company uses the security for which it can determine the fair value, and then allocates the remainder of the purchase price to the security for which it does not know the fair value
_______ do not require an allocation of the proceeds between the bonds and the warrants because
nondetachable warrants; the company records the entire proceeds from nondetachable warrants as debt, two separate instruments do not exist
The book and FASB agree that companies should treat the debt and equity components in what way
separate the debt and equity components
however, companies will continue to report convertible debt and bonds issued with nondetachable warrants.
preemptive priveledge means
that if the directors of a corporation decide to issue new shares of stock the old stockholders can purchase newly issued shares in proportion to their holdings
the preemptive priveledge is called
a stock right
when companies issue stock rights to exisiting stockholders they...
make only a memorandum entry which indicates the number of rights issued
when stockholders exercise stock rights they make what entries
credit common stock at par value and a credit PIC in excess of par for any additional value or a debit for any amount under par
the major reason for the decline in option expense since 2002 is
Critics cited the indiscriminate use of stock options as a reason why company executives manipulated accounting numbers in a attempt to achieve higher stock price and FASB new standard will result in compnaies recording a higher expense when these options are granted
the day an employee receives stock options is called
grant date
Under the fair value method companies
companies use acceptable option pricing models to value the options at the date of the grant
FASB requires that compensation cost using
the fair value method
Stock option plans involve two main accounting issues
How to determine compensation expense
Over what periods to allocate compensation expense
When dealing with stock compensation price changes (up or down) that occur after the grant date are treated in what manner
no adjustments are made
Companies recognize compensation expense when?
In the period that the employees perform the service, the company determines the total compensation cost at the grant date and allocates it ot the periods benefited by the employee's service
The entries to allocate expenses of stock options are
Compensation expense
-Paid in capital, stock options

Paid in Capital-Stock options
-common stock
-paid in capital in excess of par
When executives fail to exercise stock options before the expiration dates they are accounted for with what ledger entries
Paid in capital- stock options
-Paid in captial from expired stock options
Employee stock purchase plans are considered compensatory unless
they satisfy ALL THREE of the following conditions

1) Substantially all full time employees may particpate in an equitable basis
2)The discount from the market is small(does not exceed the pershare amount of costs avoided by not having to raise cash in a public offering)
3)The plan offers no substantive option feature
Companies that offer their employees compensatory ESPP should record the compensation expense...
over the service life of the employees.
Companies must fully disclose their ESPP by stating
1)the nature and terms of arangements, and the potential effects on shareholders
2) The effect on the income statement
3)The method of estimating fair value
4)the cash flow effects
the income earned by each share of common stock
earnings per share
companys report EPS for which kinds of stock?
common stock only
earnings per share is usually reported where?
on the face of the income statement
A corporations captial structure is simple if
it consists only of common stock and NO potential common stock.
A corporations captial structure is complex if
it includes securites tha could have a dilutative effect on earnings per share
__ ,___ ... are often called dilutive securites
Convertible securites, options, and warrants
To calculate earnings per share
(net income-preferred dividends)/ weighted average number of shares outstanding
companies must calculate income available to the common stockholders by
subtracting dividends on preferred stock from each of the intermediate compnents of income (income from continuing operations, income from income b4 extrodinary items, and finally from net income)
If a company declares dividends on preferred stock and a net loss occurs, the compnay
adds the preferred dividend to the loss for the purposes of coputing the loss per share
If the preferred stock is cumulative and the company declares no dividend, reports what?
it subtracts (or adds) an amount equal to the dividend that it should have declared for the current year only from net income (or to the loss)
The weighted average number of shares out standing is computed how?
Calculate the number of shares by the fraction of the year that they were outstanding then add all together
When stock dividends or stock splits occur, companies need to
restate the shares outstanding before the stock dividend is split
Why do companies restate the issuance of a stock dividend or stock split but not the issuance or repurchase of the stock for cash
because stock splits and stock dividends do not increase or decrease the net assets of the company, and because of the added shares, it must restae the weighted average shares
The issuance or purchase of stock for cash changes what on the balance sheet
the amount of net assets
a stock dividend or split does not change the shareholders total investment, it only
increases the number of total common shares representing the investment
In a stock dividend or split company must____ prior to the stock dividend
restate the shares outstanding
Why must a company restate the shares outstanding before a stock dividend or split?
Because those shares need to be stated on the same basis as shares issued subsequently
When a company has a complex capital structure, it generally reports
both basic and diluted earnings per share
securites that upon conversion or exercise increase earnings per share,or reduce the loss per share, they are called
antidilutive securities
proforma EPS exclude which items
restructuring charges, impairments of assets, R&D expendidures, stock compnesation expense
companies measure the dilutive effects of potential coversion on EPS using the ___ method
if converted
The "if converted" method for a convertible bond assumes
1) the conversion of the convertible securites is at the beginning of the period, 2) the elimination of related interest, net of tax
in the "if converted" method for a convertible bond the additional shares assumed issued affects eps how?
it increases the denominator
The amount of interest expense associated with additional shares assumed issued in the if converted" method for a convertible bond affects eps how
it increases the numerator
If the company sold bonds at premium or discount, when calculating eps, the company must
adjust the interest expense each peropd to account for that
When the conversion rate on a dilutive security changes during the period in which the security is outstanding the company must
use the most dilutive conversion rate available
Companies use the____ method for caculating EPS when they want to include options and warrants and their equivalents in EPS computations
Treasury stock method
The treasury stock method assumes
that a compny excercises the options or warrants at the beginning of the year (or date of issue if later) and that it uses those proceeds to purchase common stock for the treasury
When using the treasury stock method, if the exercise price is lower than the market price of the stokc then the proceeds from exercise are insufficient to buy back all the shares. The company then adds the incremental shares remaining to
the weighted average nuber of shares outstanding for purposes of computing diluted earnings per share.
If the exercise price of the option or warrant is lower than the market price of the stock _____ occurs
If the exercise price of the option or warrant is higher than the market price of the stock _____ occurs
reduction of common shares which is ANTIDILUTIVE
For both options and warrants exercise is assumed only if
the average market price of the stock exceeds the exercise price during the reported period
Contingent shares are counted where and when?
They are counted in the outstanding shares computation, when calculating the diluted EPS when the contingency is met
When the earnings of a period include irregular items a company should (where applicable)
show per share amounts for the following:
income from continuing operations
income before extraordinary items
net income
Complex capital structures and dual presentation of earnings per share require the following additional disclosures (in note form)
1) Description of pertinant rights and privelges of various securities outstanding
2) A reconcilliation of the numerators and the denominators
3) the effect given preferred dividends in determining income available to common stockholders in computing basic EPS
4) Securites that could potentilly dilute basic EPS in the future that were excluded in the computation because they would be andtidilutive
5)effect of conversion subsequent to year-end, but before issuing statements.
plans that transfer shares of stock to employees with stipulations that shares cannot be sold, transfered, or pledged until vesting occurs
restricted stock plan
Major advantages of restricted stock plans are
1, never becomes completely worthless
2, generally results in less dilution per share
3, better alligns the employee incentives with the companies incentives
Unearned compnesation is the cost of services yet to be performed and it is accounted for how on the balance sheet
NOT an asset, it is a contra-equity account in the stockholder's equity section on the balance sheet
If an employee leaves the company before the vesting period is over, then the
employee forfits his right to the stock, and the company reverses the compensation expense already recorded
Common Stock
PIC in excess of par
-Compensation expense
-unearned compensation
a major disadvantage of many stock option plans is that
an executive must pay income tax on the difference between the market price of the stock and the option price on the DATE OF EXERCISE
the excess of the market price of the stock at the date of exercise over a pre-established price
Share appreciation
Companies classify SARs as equity awards if
at the date of excercise the holder recieves shares of stock from the company upon exercise
Companies classify SARs as liablity awards if
at the date of exercise the holder receives a cash payment
A company uses this approach to record share-based liability awards
1)Measure the fair value of the award at the grant date and accrue compensation over the service period
2) remeasure the fair value each reporting period, until the award is settled, and adjust the compensation cost each period for changes in fair market value
3, once the service period is completed determine compensation expense each subsequent period by reporting the full change in market price as an adjustment to compensation expense
the exercise price is also called the
strike price