Terms in this set (89)
shouldd covertible securities be reported as a liability or equity?
Should preferred stock be reported as debt or equity?
why is preferred stock equity?
because there is no obligation to py back like liability
how is non-detachable warrant classifed?
as all liability
how is a detachable warrant classiffed?
as a liability and equity
What is the first benefit of convertible bond to bond holder?
What is the 2nd benefit of convertible bond to bond holder?
priviledge of Exchanging it for Stock
1st main reason corporations issue convertibles
desire to raise equity capital without giving up more ownership than necessary
2nd main reason corporations issue convertibles
to obtain common stock financing at cheaper rates
How is convertible debt recorded at time of issuance
as straight debt issue
What method is used for conversion of bonds
the book value method
When the debt holder converts the debt to equity the issuing company recognizes no gain or loss upon conversion or do they recognize the loss ?
they recognize no gain or loss upon conversion
What is a "sweetner" aka
induced conversion/ additional consideration
Is a "sweetner" capatilized or expensed for the period
a sweetner is an expense of the period
What is the journal entry for a "sweetner" of 70 k
debit conversion expense 70k and credit cash 70k
What is retirement of convertible debt the same as
retiring debt that is not convertible
When accounting for the retirement of convertible bonds, should the difference between the acquisition price and the carrying amount be reported as a gain or loss on the income statement or should no gain or loss be recognized
the difference should be reported as gain or loss in the income statement
What is convertible preferred stock
includes an option for the holder to convert preferred shares into a fixed number of common shares.
How is convertible preferred stock classified, debt or equity
Upon the conversion of convertible preferred stock, is a gain or loss recognized
What method is used for conversion of preferred stock
the book value method
certificates entitling the holder to acquire shares of stock at a certain price within a stated period
Stock options normally arise to
make security more attractive
Evidence of preemptive right is due to stock warrant or stock options
T/F, stock warrants cannot be used for employee compensation
false, they can be used as compensation to employees
How are detachable warrants allocated
between the two securities
How is allocation based for detachable stock warrants
fair market value
What are the two methods for allocation of detachable bonds
the proportional method and the incremental method
When do u use the proportional method for detachable stock warrants
if you know the fair market value for the security and warrant
When do u use the incremental method for detachable stock warrants
if you don't know the market value of 1 of the securities.
The proportional method allocates
the proceeds using the proportion of the two amounts, based on fair values.
When is the incremental method used for stock warrants
where a company cannot determine the fair value of either the warrants or the bonds.
What are the two securities associated with a detachable warrant
a debt security and a warrant to purchase common stock
How are nodetachable warrants allocated
no allocation...record the entire proceeds as debt.
existing stockholders have the right to purchase newly issued shares in proportion to their holdings.
How do companies account for stock rights?
they make only a memorandum entry
rights to subscribe to additional shares
The price of stock warrants Is normally more than the current market rate T/F:
False they are normally less than current market value.
Stock compensation plans (Stock options)
gives key employees option to purchase stock at a given price over extended period of time
Effective compensation programs base compensation on what
Effective compensation programs motivate or demotivate employees
Are effective compensation programs used to retain executives and recruit new talent
What is one major benefit from a stock option for the employee
maximize employees after-tax benefit
I using a performance criteria to score performance in which employee has control effective
Yes very effective.
The new FASB standard requires companies to recognized compensation cost using
the fair value method
Under the fair-value-method for employee compensation
companies use acceptable option-pricing models to value the options at the date of the grant.
Determining expense for stock compensation
compensation expense is vested under the fair value method on the date options are granted to employees.
How is compensation expense allocated for stock options
over the periods in which employees perform the service aka the service period.
What is the journal entry for stock options at the grant date
transfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred, or pledged until vesting occurs.
What is major advantage of restricted stock
never becomes completely worthless
Another major advantage of restricted stock is that it results in less or more dilution to existing stockholders?
Less dilution to existing stockholders
Does restricted stock not align employee incentive with company incentives
no it does
Employee Stock-Purchase Plans (ESPPs)
Employee Stock-Purchase Plans (ESPPs)
generally permit all employees to purchase stock at a discounted price for a short period of time.
ESPP's are condidered compensatory unless they satisfy 3 conditions..Substantially...
all full-time employees may participate on an equitable basis is a requirement for what
ESPP's are condidered compensatory unless they satisfy 3 conditions..The discount
from market is small
ESPP's are condidered compensatory unless they satisfy 3 conditions..The plan
offers no substantive option feature.
Disclosure of compensation plans
company with one or more based payment arrangement must disclose.
What 4 things must be disclosed if a company has 1 or more share-based pymt arrangements
Nancy Eats My Cow.
For Disclosure of Compensation expense what does Nancy stand for
Nature and terms of such arrangements.
For Disclosure of Compensation expense what does Eats stand for
the effect on the income statement of compensation cost.
For Disclosure of Compensation expense what does My stand for
The method of estimating the fair value of the goods or services received, or the fair value of the equity instrument granted.
For Disclosure of Compensation expense what does Cow stand for
The cash flow effects
Why was their considerable opposition to the fair value of approach for stock options
because it could result in substantial. Previously unrecognized compensation expense.
What is a good argument for the fair value approach when used for valuation of stock options
the need for greater transparency in financial reporting.
Earnings per share
indicates the income earned by each share of common stock.
What kind of stock do companies report EPS on
How should companies report EPS on the income stmt when intermediated components of income appear
eps for each component.
only common stock, no potentially dilutive securities
potentially dilutive securities are present
the ability to influence the EPS in a downward direction.
The Numerator or EPS
subtracts the current year preferred stock dividend from net income to arrive at income available to common stockholders.
In EPS calculation preferred dividends are subtracted on what kind of preferred stock
cumulative preferred stock, whether declared or not.
Weighted Average Number of Shares
companies must weigh the shares by the fraction of the period they are outstanding.
WASO Calc....Stock Dividend or stock splits
companies need to restate the shares outstanding before the stock dividend or split.
Complex capital structures exists when a business has
convertivle securities, options, warrants, or other rights that upon conversion or exercise could dilute earnings per share.
Do companies report Diluted EPS and Basic or just one
both are reported
included the effect of all potential dilutive common shares that were outstanding during the period.
Companies will not report diluted EPS if
the securities in their capital structure are anti-dilutive.
If converted method is used for what type of securities
The If-converted method assumes that conversion takes place
at the beginning of the period and the elimination of related interest, net of tax.
The method used to measure the effects of conversion of options and warrants
treasury stock method
The treasury stock method assumes
a company exercise the options or warrants at the beginning of the year and that it uses those proceeds to purchase common stock for the treasury.
The first step in computing dilute earnings per share
determine, for each dilutive security, the per share effect assuming exercise/ conversion.
The 2nd step in computing diluted earnings per share
rank the results from step 1 from smallest to largest earnings per share.
The 3rd step in computing diluted earnings per share
Beginning with the earnings per share based upon the weighted average of common shares outstanding, recalculate earnings per share by adding the smallest per share effects from step 2. Continue this process as long as each recalculated earnings per share is smaller than the previous amount.
A company should show per share amounts for
income from continuing operations, income before extraordinary items, and net income.
Per share amounts for discontinued operation or an extraordinary item should be presented
on the face of the income statement or in the notes.