Intermediate Accounting Ch 16 Book Notes

Front 1

companies should report nonredeemable common shares as ___ on the balance sheet because ____

Back 1

equity, because the issuer has no obligation to pay dividends or repurchase te stock.

Front 2

a convertible bond has both ___ and ___ characteristics.

Back 2

debt and equity

Front 3

convertible securites as well as options, warrants, and other securities are often called ____ because upon exercise they may reduce ____

Back 3

dilutive securites; earnings per share

Front 4

___ can be changed into other corporate securites during some specified period of time after issuance

Back 4

convertible bonds

Front 5

The two reasons companies use convertible bonds is to

Back 5

raise equity captial without giving up more ownership control than necessary

and to obtain debt financing at cheaper rates

Front 6

Accounting for convertible debt involves reporting issues at what times

Back 6

issuance
conversion
retirement

Front 7

when recording convertible bonds at the date of issue companies

Back 7

do not record the proceeds as equity

amortize to maturity date discount or premium

Front 8

If converting bonds into other securities, the company uses _____ to record the conversion. This method recoreds the securities exchanged for the bond at the ______

Back 8

book value method; carrying amount of the bond

Front 9

When using the book value approach for convertible bonds, when converting debt to equity the company recognizes _____ on the conversion

Back 9

no gain or loss

Front 10

when additional incentive is offered to encourage prompt coversion of convertible debt, this is called

Back 10

induced conversion

Front 11

A induced conversion sweetner would require the following journal entries

Back 11

Debt Conversion Expense
Bonds Payable
-Common Stock
-Additional PIC
-Cash

Front 12

The debt conversion expense of an induced conversion would be classified as ___ and not ___

Back 12

an expense of the current period; a reduction of equity

Front 13

An issuance of bonds would be recorded as followed

Back 13

Cash
-premium on bonds payable
-bonds payable

Front 14

Companies should recognize diffreences between the cash aquisition price of debt and its carrying amount HOW?

Back 14

in current income as a gain or loss.

Front 15

an option for the holder to convert preferred shares into a fixed number of common shares is

Back 15

convertible preferred stock

Front 16

Convertible bonds are considered ____ where convertible preferreds (unless there is mandatory redemptions) are considered part of _____

Back 16

liability, stockholders equity

Front 17

Why do companies not recognize a gain or loss when stockholders excercise convertible preferred stock

Back 17

because a conpany does not recognize a gain or loss when it deals with stockholders in their capacity as business owners

Front 18

In accounting for the excercise of convertible preferred stock a company uses the ____.

Back 18

book value method

Front 19

In accounting for the excercise of convertible preferred stock a company makes the following journal entry

Back 19

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

Front 20

Retained earnings is debited if the par value exceeds the book value because

Back 20

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

Front 21

certificates entitling the holder to acquire shares of stock at a certain price within a stated period

Back 21

warrants

Front 22

The substantial difference between convertivle securites and stock warrants is that

Back 22

the holder has to pay a certain amount of money to obtain the shares

Front 23

The issuance of warrants or options to buy additional shares usually arises under these three situations

Back 23

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

Front 24

A company should allocate the proceeds from the sale of debt with detachable stock warrants

Back 24

between the two securities (the bond and the warrant giving the holder the right to purchase common stock at a certain price)

Front 25

The two methods of allocation available for the sale of debt with warrants are

Back 25

the proportional method
the incremental method

Front 26

When selling warrants with common stock, the following entries are made

Back 26

Cash
Paid in Captial-Stock Warrants
-Common Stock
-Paid in Captial in Excess of par

Front 27

If investors fail to excercise stock warrants, then then the following entries are made

Back 27

Paid in capital-Stock warrants
-paid in capital from expired Warrants

**The additional paid in captial reverts to the former stockholders

Front 28

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

Back 28

incremental method

Front 29

The incremental method in allocating proceeds from the sale of debt with atacchable warrants dictates that

Back 29

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

Front 30

_______ do not require an allocation of the proceeds between the bonds and the warrants because

Back 30

nondetachable warrants; the company records the entire proceeds from nondetachable warrants as debt, two separate instruments do not exist

Front 31

The book and FASB agree that companies should treat the debt and equity components in what way

Back 31

separate the debt and equity components
however, companies will continue to report convertible debt and bonds issued with nondetachable warrants.

Front 32

preemptive priveledge means

Back 32

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

Front 33

the preemptive priveledge is called

Back 33

a stock right

Front 34

when companies issue stock rights to exisiting stockholders they...

Back 34

make only a memorandum entry which indicates the number of rights issued

Front 35

when stockholders exercise stock rights they make what entries

Back 35

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

Front 36

the major reason for the decline in option expense since 2002 is

Back 36

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

Front 37

the day an employee receives stock options is called

Back 37

grant date

Front 38

Under the fair value method companies

Back 38

companies use acceptable option pricing models to value the options at the date of the grant

Front 39

FASB requires that compensation cost using

Back 39

the fair value method

Front 40

Stock option plans involve two main accounting issues

Back 40

How to determine compensation expense
Over what periods to allocate compensation expense

Front 41

When dealing with stock compensation price changes (up or down) that occur after the grant date are treated in what manner

Back 41

no adjustments are made

Front 42

Companies recognize compensation expense when?

Back 42

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

Front 43

The entries to allocate expenses of stock options are

Back 43

Compensation expense
-Paid in capital, stock options

Cash
Paid in Capital-Stock options
-common stock
-paid in capital in excess of par

Front 44

When executives fail to exercise stock options before the expiration dates they are accounted for with what ledger entries

Back 44

Paid in capital- stock options
-Paid in captial from expired stock options

Front 45

Employee stock purchase plans are considered compensatory unless

Back 45

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

Front 46

Companies that offer their employees compensatory ESPP should record the compensation expense...

Back 46

over the service life of the employees.

Front 47

Companies must fully disclose their ESPP by stating

Back 47

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

Front 48

the income earned by each share of common stock

Back 48

earnings per share

Front 49

companys report EPS for which kinds of stock?

Back 49

common stock only

Front 50

earnings per share is usually reported where?

Back 50

on the face of the income statement

Front 51

A corporations captial structure is simple if

Back 51

it consists only of common stock and NO potential common stock.

Front 52

A corporations captial structure is complex if

Back 52

it includes securites tha could have a dilutative effect on earnings per share

Front 53

__ ,___ ... are often called dilutive securites

Back 53

Convertible securites, options, and warrants

Front 54

To calculate earnings per share

Back 54

(net income-preferred dividends)/ weighted average number of shares outstanding

Front 55

companies must calculate income available to the common stockholders by

Back 55

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)

Front 56

If a company declares dividends on preferred stock and a net loss occurs, the compnay

Back 56

adds the preferred dividend to the loss for the purposes of coputing the loss per share

Front 57

If the preferred stock is cumulative and the company declares no dividend, reports what?

Back 57

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)

Front 58

The weighted average number of shares out standing is computed how?

Back 58

Calculate the number of shares by the fraction of the year that they were outstanding then add all together

Front 59

When stock dividends or stock splits occur, companies need to

Back 59

restate the shares outstanding before the stock dividend is split

Front 60

Why do companies restate the issuance of a stock dividend or stock split but not the issuance or repurchase of the stock for cash

Back 60

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

Front 61

The issuance or purchase of stock for cash changes what on the balance sheet

Back 61

the amount of net assets

Front 62

a stock dividend or split does not change the shareholders total investment, it only

Back 62

increases the number of total common shares representing the investment

Front 63

In a stock dividend or split company must____ prior to the stock dividend

Back 63

restate the shares outstanding

Front 64

Why must a company restate the shares outstanding before a stock dividend or split?

Back 64

Because those shares need to be stated on the same basis as shares issued subsequently

Front 65

When a company has a complex capital structure, it generally reports

Back 65

both basic and diluted earnings per share

Front 66

securites that upon conversion or exercise increase earnings per share,or reduce the loss per share, they are called

Back 66

antidilutive securities

Front 67

proforma EPS exclude which items

Back 67

restructuring charges, impairments of assets, R&D expendidures, stock compnesation expense

Front 68

companies measure the dilutive effects of potential coversion on EPS using the ___ method

Back 68

if converted

Front 69

The "if converted" method for a convertible bond assumes

Back 69

1) the conversion of the convertible securites is at the beginning of the period, 2) the elimination of related interest, net of tax

Front 70

in the "if converted" method for a convertible bond the additional shares assumed issued affects eps how?

Back 70

it increases the denominator

Front 71

The amount of interest expense associated with additional shares assumed issued in the if converted" method for a convertible bond affects eps how

Back 71

it increases the numerator

Front 72

If the company sold bonds at premium or discount, when calculating eps, the company must

Back 72

adjust the interest expense each peropd to account for that

Front 73

When the conversion rate on a dilutive security changes during the period in which the security is outstanding the company must

Back 73

use the most dilutive conversion rate available

Front 74

Companies use the____ method for caculating EPS when they want to include options and warrants and their equivalents in EPS computations

Back 74

Treasury stock method

Front 75

The treasury stock method assumes

Back 75

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

Front 76

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

Back 76

the weighted average nuber of shares outstanding for purposes of computing diluted earnings per share.

Front 77

If the exercise price of the option or warrant is lower than the market price of the stock _____ occurs

Back 77

dilution

Front 78

If the exercise price of the option or warrant is higher than the market price of the stock _____ occurs

Back 78

reduction of common shares which is ANTIDILUTIVE

Front 79

For both options and warrants exercise is assumed only if

Back 79

the average market price of the stock exceeds the exercise price during the reported period

Front 80

Contingent shares are counted where and when?

Back 80

They are counted in the outstanding shares computation, when calculating the diluted EPS when the contingency is met

Front 81

When the earnings of a period include irregular items a company should (where applicable)

Back 81

show per share amounts for the following:
income from continuing operations
income before extraordinary items
net income

Front 82

Complex capital structures and dual presentation of earnings per share require the following additional disclosures (in note form)

Back 82

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.

Front 83

plans that transfer shares of stock to employees with stipulations that shares cannot be sold, transfered, or pledged until vesting occurs

Back 83

restricted stock plan

Front 84

Major advantages of restricted stock plans are

Back 84

1, never becomes completely worthless
2, generally results in less dilution per share
3, better alligns the employee incentives with the companies incentives

Front 85

Unearned compnesation is the cost of services yet to be performed and it is accounted for how on the balance sheet

Back 85

NOT an asset, it is a contra-equity account in the stockholder's equity section on the balance sheet

Front 86

If an employee leaves the company before the vesting period is over, then the

Back 86

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

Front 87

a major disadvantage of many stock option plans is that

Back 87

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

Front 88

the excess of the market price of the stock at the date of exercise over a pre-established price

Back 88

Share appreciation

Front 89

Companies classify SARs as equity awards if

Back 89

at the date of excercise the holder recieves shares of stock from the company upon exercise

Front 90

Companies classify SARs as liablity awards if

Back 90

at the date of exercise the holder receives a cash payment

Front 91

A company uses this approach to record share-based liability awards

Back 91

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

Front 92

the exercise price is also called the

Back 92

strike price