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AC306 Chapter 16 Final Exam

Terms in this set (48)

convertible debt
allows the holder of the debt to change the instrument into another security

ex: convertible bonds allow the bondholder to exchange (convert) the bonds for shares of stock
what does the conversion feature do to the bond?
adds value to the bond issuance, increases the selling price and lowers the effective interest rate
what is an advantage of a convertible bond over a regular bond?
when a company is prospering the bonds can be converted which allows the investor to receive dividends and benefit from increasing stock values
what is used for the stock issue price at the time of conversion?
the book value of the bonds
what is not recorded at the time of conversion?
gain or loss
induced conversions
when an incentive (sweetener) such as cash or additional common stock is offered to encourage conversion
why would the issuer of convertible preferred stock offer an incentive?
to reduce interest costs or decrease its debt to equity ratio
how is the incentive/sweetener recorded?
debit: bond conversion expense
credit: cash
stock warrants
give the holder the right to acquire common shares at a specific price within a particular time period
what happens if stock warrants are exercised?
they become common stock and have a dilutive effect on EPS
stock options
warrants issued as compensation to executives and employees
detachable warrants
-can be sold or traded separately from stock
-issuance of bonds with warrants should be allocated to both bonds (bonds payable) and equity (paid-in-capital- stock warrants)
methods to record stock warrants
-proportional (when fair value of both the bond without the warrant and the fair value of the bond with the warrant can be determined)
-incremental (when one of the fair values cannot be determined)
what are the forms of stock compensation plans?
-issuance of actual stock shares
-options to purchase shares
why has the use of stock options that grant the holder the ability to purchase stock at a specified price decreased?
-concerns that it encourages manipulation of income and accounting numbers in order to increase share price
-standard issued by the FASB that increased the compensation expense companies must recognize for stock-option compensation
stock option plans
options issued to employees to purchase stock at a specific price for some period of time
vesting period
-starts with the grant date and ends with the vesting date
-the time during which the recipients of stock option plans must remain employed by the company before they can exercise options
grant date
-the date the options are given to employees
-no adjustments in stock price can occur after this date
vesting date
the date when all restrictions have lapsed
service period
-the period over which the employee performs the service related to the option compensation granted
-period generally equals the vesting period
exercise price
the purchase price of the stock that is equal to the FMV of the stock at the date of option grant
how is compensation expense recognized?
total FMV as of the grant date of all the options that are expected to vest
compensation expense journal entries
-debit: compensation expense
-credit: paid-in-capital- stock options
what happens when an employee fails to meet the option grant service requirement?
the compensation expense must be reversed then adjusted for forfeited options
exercise of options journal entry
-debit: cash (options exercised x share price on grant date)
-debit: paid-in-capital-stock options (to reverse expense for options now being exercised)
-credit: common stock (options exercised x par value)
-credit: paid-in capital- excess of par (remainder)
treatment of expiration of unexercised options
transfer the remaining paid in capital from "paid-in capital- stock options" to "paid-in capital- expired stock options"
how is the compensation expense of restricted stock determined?
determined by FMV of the same unrestricted stock
restricted stock date of grant journal entry
-debit: unearned compensation (granted shares x market price)
-credit: common stock (granted shares x par value)
-credit: paid-in capital in excess of par- common stock
restricted stock compensation expense journal entry
-debit: compensation expense
-credit: unearned compensation
potential common shares
securities that may become common stock if exercised or converted
what do potential common shares do to EPS?
dilute EPS if exercised or converted
basic eps=
(net income- preferred dividends)/ weighted average number of shares
why must preferred dividends be subtracted from net income when calculating EPS?
EPS is a measure of earnings per COMMON share
what has to be restated in regards to stock dividends/split?
all shares outstanding and EPS for all periods prior to the split
net income per share=
income from continuing operations+ income from discontinued operations
income from continuing operations=
EPS
income from discounting operations=
total net income from discontinuing operations/ weighted average shares
treatment issued shares
add
treatment of reacquired shares
subtract
treatment of stock dividends
multiply --> add
reissued shares
add
stock split
multiply
what does diluted EPS for convertible securities adjust for?
the effects of any interest or dividends that would have been paid if not converted
diluted EPS=
(net income+ adjustment for interest- preferred dividends)/ weighted average number of shares
why are any dividends related to convertible preferred stock not subtracted in the diluted EPS calculation?
if the preferred stock was converted to common stock, the dividends would not be paid
proceeds in exercised=
options exercisable common shares x exercise price
# of treasury shares=
proceeds/ market price
incremental shares=
options exercisable common shares- treasury shares
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