16-1 PREVIEW OF CHAPTER Intermediate Accounting 15th Edition Kieso Weygandt Warfield 16.

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  • Slide 1
  • 16-1 PREVIEW OF CHAPTER Intermediate Accounting 15th Edition Kieso Weygandt Warfield 16
  • Slide 2
  • 16-2 5.Discuss the controversy involving stock compensation plans. 6.Compute earnings per share in a simple capital structure. 7.Compute earnings per share in a complex capital structure. After studying this chapter, you should be able to: LEARNING OBJECTIVES 1. 1.Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. 2.Explain the accounting for convertible preferred stock. 3. 3.Contrast the accounting for stock warrants and for stock warrants issued with other securities. 4. 4.Describe the accounting for stock compensation plans under generally accepted accounting principles. Dilutive Securities and Earnings per Share 16
  • Slide 3
  • 16-3 Debt and equity Convertible debt Convertible preferred stock Stock warrants Accounting for compensation Dilutive Securities and Compensation Plans Computing Earnings Per Share Simple capital structure (no potentially dilutive securities exist) Complex capital structure (potentially dilutive securities exist) Dilutive Securities and Earnings Per Share EPS is an very important statistic for investors because it indicates how much net income belongs to them in a form that can compared to the price of the stock. Investors not only want to know the current real EPS, but they also want to know how far EPS would drop if all the potential shares became common stock all at once.
  • Slide 4
  • 16-4 It is not always easy to tell whether a security is debt or equity. Should companies report these instruments as a liability or equity? Debt and Equity Debt issued with stock warrants attached? Convertible bonds? Redeemable Preferred Stock?
  • Slide 5
  • 16-5 (at the holders option) Benefit of a Bond (guaranteed interest and principal) Privilege of Exchanging it for Stock Convertible bonds can be changed into other corporate securities during some specified period of time after issuance. + LO 1 Dilutive Securities Accounting for Convertible Debt
  • Slide 6
  • 16-6
  • Slide 7
  • 16-7 To raise equity capital without giving up more ownership control than necessary. Obtain debt financing at cheaper rates because of the attractive convertibility feature Two main reasons corporations issue convertibles: Accounting for Convertible Debt LO 1
  • Slide 8
  • 16-8 At Time of Issuance Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. At issuance: parallels accounting for straight debt. At issuance: parallels accounting for straight debt. At conversion: two methods: At conversion: two methods: Typically the book value of the bonds is removed and replaced with common stock, in which case no gain or loss is recorded. Typically the book value of the bonds is removed and replaced with common stock, in which case no gain or loss is recorded. Sometimes the market value of the stock is recorded, which will usually result in a gain or loss Sometimes the market value of the stock is recorded, which will usually result in a gain or loss At retirement: parallels accounting for straight debt At retirement: parallels accounting for straight debt Cost of induced conversions is a period expense. Cost of induced conversions is a period expense.
  • Slide 9
  • 16-9 Issuer wishes to encourage prompt conversion. Issuer offers additional consideration, called a sweetener. Sweetener is an expense of the current period. Accounting for Convertible Debt Induced Conversion LO 1 Induced labor uses drugs such as petocin
  • Slide 10
  • 16-10 Illustration: Miller Corporation issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Record the entry at date of issuance. LO 1 See next slide for answer Accounting for Convertible Debt Issuance
  • Slide 11
  • 16-11 Illustration: Miller Corporation issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Record the entry at date of issuance. ($4,000,000 x 99% = $3,960,000) LO 1 Issue Price = Cash3,960,000 Discount on Bonds Payable40,000 Bonds Payable4,000,000 Accounting for Convertible Debt Issuance Same as straight bonds!
  • Slide 12
  • 16-12 See next slide for answer. Illustration: Moore Corporation has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2014, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Assume Moore wanted to reduce its annual interest cost and agreed to pay the bond holders $70,000 to convert. Accounting for Convertible Debt - Conversion LO 1
  • Slide 13
  • 16-13 Bonds Payable2,000,000 Discount on Bonds Payable30,000 Common Stock (2,000 x 50 x $10)1,000,000 Paid-in Capital in Excess of Par970,000 Illustration: Moore Corporation has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2014, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Assume Moore wanted to reduce its annual interest cost and agreed to pay the bond holders $70,000 to convert. LO 1 Debt Conversion Expense70,000 Cash70,000 Accounting for Convertible Debt - Conversion
  • Slide 14
  • 16-14 Illustration: Miller Corporation issued $4,000,000 par value, 7% convertible bonds. The bonds were never converted, but later were paid off at a price of 101 when the book (carrying) value was 3,980,000. LO 1 See next slide for answer. Accounting for Convertible Debt Retirement
  • Slide 15
  • 16-15 Illustration: Miller Corporation issued $4,000,000 par value, 7% convertible bonds. The bonds were never converted, but later were paid off at a price of 101 when the book (carrying) value was 3,980,000. ($4,000,000 x 101% = $4,040,000) LO 1 Issue Price = Bonds Payable 4,000,000 Loss on retirement of bonds60,000 Discount on Bonds Payable20,000 Cash4,040,000 Accounting for Convertible Debt Retirement Same as straight bonds!
  • Slide 16
  • 16-16 5.Discuss the controversy involving stock compensation plans. 6.Compute earnings per share in a simple capital structure. 7.Compute earnings per share in a complex capital structure. After studying this chapter, you should be able to: LEARNING OBJECTIVES 1. 1.Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. 2.Explain the accounting for convertible preferred stock. 3. 3.Contrast the accounting for stock warrants and for stock warrants issued with other securities. 4. 4.Describe the accounting for stock compensation plans under generally accepted accounting principles. Dilutive Securities and Earnings per Share 16
  • Slide 17
  • 16-17 Convertible preferred stock includes an option for the holder to convert preferred shares into a fixed number of common shares. Classified as part of stockholders equity, unless mandatory redemption exists. No theoretical justification for recognizing a gain or loss when exercised so use book value method. Dilutive Securities LO 2 Convertible Preferred Stock
  • Slide 18
  • 16-18 Illustration: Gall Inc. issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share. The common stock is trading at $26 per share at the time of conversion. Prepare the entry to record the conversion. Convertible Preferred Stock LO 2 See next slide for answer.
  • Slide 19
  • 16-19 Illustration: Gall Inc. issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share. The common stock is trading at $26 per share at the time of conversion. Prepare the entry to record the conversion. Convertible Preferred Stock LO 2 Preferred Stock50,000 Paid-in Capital in Excess of Par-Preferred10,000 Common Stock (2,000 x $10)20,000 Paid-in Capital in Excess of Par-Common40,000
  • Slide 20
  • 16-20 WHATS YOUR PRINCIPLE HOW LOW CAN YOU GO? LO 2
  • Slide 21
  • 16-21 5.Discuss the controversy involving stock compensation plans. 6.Compute earnings per share in a simple capital structure. 7.Compute earnings per share in a complex capital structure. After studying this chapter, you should be able to: LEARNING OBJECTIVES 1. 1.Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. 2.Explain the accounting for convertible preferred stock. 3. 3.Contrast the accounting for stock warrants and for stock warrants issued with other securities. 4. 4.Describe the accounting for stock compensation plans under generally accepted accounting principles. Dilutive Securities and Earnings per Share 16
  • Slide 22
  • 16-22 Dilutive Securities Warrants are certificates entitling the holder to acquire shares of stock at a certain price within a stated period. Normally arises under three situations: 1.To make the security more attractive. 2.Existing stockholders have a preemptive right to purchase common stock first. 3.To executives and employees as a form of compensation (functions just like a stock option except warrants are longer-term and a not tradable on a market). LO 3 Stock Warrants
  • Slide 23
  • 16-23 Stock Warrants Issued with Other Securities Stock Warrants Basically long-term options to buy common stock at a fixed price. Generally life of warrants is five years, occasionally ten years. Proceeds allocated between the two securities. Allocation based on fair market values. Two methods of allocation: (1) proportional method (2) incremental method LO 3
  • Slide 24
  • 16-24 Stock Warrants Some times stock warrants are issued together with other securities (usually bonds) They may be: either detachable warrants, or either detachable warrants, or non-detachable warrants non-detachable warrants If warrants are detachable, value of the warrants is determined by: either the proportional method, or either the proportional method, or the incremental method. the incremental method. If warrants are non-detachable, no value allocation to warrants is made. Bond SW
  • Slide 25
  • 16-25 Detachable warrants involves two securities, a debt security, a warrant to purchase common stock. Nondetachable warrants do not require an allocation of proceeds between the bonds and the warrants, companies record the entire proceeds as debt. Conceptual Questions Stock Warrants LO 3
  • Slide 26
  • 16-26 Proportional Method Stock Warrants Determine: 1. 1.value of the bonds without the warrants, and 2. 2.value of the warrants. The proportional method allocates the proceeds using the proportion of the two amounts, based on fair values. LO 3
  • Slide 27
  • 16-27 Illustration: Margolf Corp. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market value of $40. Use the proportional method to record the issuance of the bonds and warrants. Stock Warrants LO 3
  • Slide 28
  • 16-28 Stock Warrants LO 3 Illustration: Margolf Corp. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market value of $40. Use the proportional method to record the issuance of the bonds and warrants. Cash2,020,000 Discount on Bonds Payable59,216 Bonds Payable2,000,000 Paid-in Capital Stock Warrants79,216
  • Slide 29
  • 16-29 Incremental Method Stock Warrants Where a company cannot determine the fair value of either the warrants or the bonds. Use the security for which fair value can determined. Allocate the remainder of the purchase price to the security for which it does not know fair value. LO 3
  • Slide 30
  • 16-30 Illustration: McCarthy Inc. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98. Market price of the warrants, without the bonds, cannot be determined. Use the incremental method to record issuance of the bonds and warrants. Stock Warrants LO 3
  • Slide 31
  • 16-31 Stock Warrants LO 3 Illustration: McCarthy Inc. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98. Market price of the warrants, without the bonds, cannot be determined. Use the incremental method to record issuance of the bonds and warrants. Cash2,020,000 Discount on Bonds Payable40,000 Bonds Payable2,000,000 Paid-in Capital Stock Warrants60,000
  • Slide 32
  • 16-32 LO 3
  • Slide 33
  • 16-33 Rights to Subscribe to Additional Shares Stock Right - existing stockholders have the right (preemptive privilege) to purchase newly issued shares in proportion to their holdings. Price is normally less than current price of the shares. Companies make only a memorandum entry. Stock Warrants LO 3
  • Slide 34
  • 16-34 5.Discuss the controversy involving stock compensation plans. 6.Compute earnings per share in a simple capital structure. 7.Compute earnings per share in a complex capital structure. After studying this chapter, you should be able to: LEARNING OBJECTIVES 1. 1.Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. 2.Explain the accounting for convertible preferred stock. 3. 3.Contrast the accounting for stock warrants and for stock warrants issued with other securities. 4. 4.Describe the accounting for stock compensation plans under generally accepted accounting principles. Dilutive Securities and Earnings per Share 16
  • Slide 35
  • 16-35 Stock Option - gives key employees option to purchase common stock at a given price over extended period of time. Effective compensation programs are ones that: 1. 1.Base compensation on performance. 2. 2.Motivate employees. 3. 3.Help retain executives and recruit new talent. 4. 4.Maximize employees after-tax benefit. 5. 5.Use performance criteria over which employee has control. Stock Compensation Plans Stock Warrants LO 3
  • Slide 36
  • 16-36 Compensation increased 7.7 percent for S&P 500 executives in 2011, with equity grants being the biggest sour...

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