CH17 Dilutives and Earnings per Share.pptVIP

Intermediate Accounting, 10th edn, Chapter 17 (Kieso et al.) Convertible Debt: Accounting Concepts Accounting for convertible debt parallels accounting for straight debt. At conversion, bonds’ basis can be: - either their book value - or their market value Cost of induced conversions is a period expense. Conversion is initiated by security holder. Gain or loss is NOT an extraordinary item Convertible Debt: FMV and Carrying value of Debt as Bases Given: One $1,000 bond, issued at $45 premium Each bond is convertible into 10 common shares of $10 par At conversion: Bond’s market value is $1,150 Premium Unamortized is $30 Share’s fair value is $115 per share. Record the conversion based on the bonds’ fair value and their carrying value. Convertible Debt: FMV and CV of Debt as Bases CONVERTIBLE Preferred Stock: Concepts Convertible preferred stock is equity, unless it is redeemable preferred stock. Conversion is an equity transaction: hence, no basis for recognizing gain or loss At conversion, book value of the preferred stock is used. See examples next slide. Convertible Preferred Stock: Example Given: 10,000 preferred shares, issued at 103: par, $100. One preferred share converts into 3 common shares, (par, $25 each.) All preferred shares are converted into common stock At conversion date, FMV of common stock: $30 per share. Journalize the conversion of preferred shares Convertible Preferred Stock: Example Debit Credit Preferred stock $1,000,000 Premium on Pref stock $ 30,000 Common stock $750,000 Common stock: Paid-in $280,000 (Conversion of preferred shares into common shares) STOCK WARRANTS: Concepts Stock warrants entitle the holder : to acquire additional shares within a stipulated period at a specified price. These holders have preemptive rights to buy shares in future issues. Stock warrants are also known as stock options. STOCK WARRANTS: Types S