Chapter 16-1. Chapter 16-2 C H A P T E R 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield.

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<ul><li>Slide 1</li></ul><p>Chapter 16-1 Slide 2 Chapter 16-2 C H A P T E R 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Slide 3 Chapter 16-3 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. 5. 5.Discuss the controversy involving stock compensation plans. 6. 6.Compute earnings per share in a simple capital structure. 7. 7.Compute earnings per share in a complex capital structure. Learning Objectives Slide 4 Chapter 16-4 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 Complex capital structure Dilutive Securities and Earnings Per Share Slide 5 Chapter 16-5 Should companies report these instruments as a liability or equity. Debt and Equity Stock Options Convertible Securities Preferred Stock Slide 6 Chapter 16-6 (at the holders option) Benefit of a Bond (guaranteed interest) Privilege of Exchanging it for Stock Bonds which can be converted into other corporate securities are called convertible bonds. + Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Slide 7 Chapter 16-7 Desire to raise equity capital without giving up more ownership control than necessary. Obtain common stock financing at cheaper rates. Two main reasons corporations issue convertibles: Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Slide 8 Chapter 16-8 At Time of Issuance Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Convertible bonds recorded as straight debt issue, with any discount or premium amortized over the term of the debt. Slide 9 Chapter 16-9 BE16-1: KC Inc. 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. Cash3,960,000 Bonds payable4,000,000 Journal entry at date of issuance: Discount on bonds payable40,000 ($5,000,000 x 99% = $4,950,000) Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Slide 10 Chapter 16-10 At Time of Conversion Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Companies use the book value method when converting bonds. When the debt holder converts the debt to equity, the issuing company recognizes no gain or loss upon conversion. Slide 11 Chapter 16-11 BE16-2: Yuen Corp. 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, 2010, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Bonds payable2,000,000 Common stock (2,000 x 50 x $10) 1,000,000 Journal entry at conversion: Discount on bonds payable30,000 Additional paid-in capital970,000 Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Slide 12 Chapter 16-12 Issuer wishes to encourage prompt conversion. Issuer offers additional consideration, called a sweetener. Sweetener is an expense of the period. Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Induced Conversion Slide 13 Chapter 16-13 BE16-2: Yuen Corp. has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. Assume Yuen wanted to reduce its annual interest cost and agreed to pay the bond holders $70,000 to convert. Bonds payable2,000,000 Common stock (2,000 x 50 x $10) 1,000,000 Journal entry at conversion: Discount on bonds payable30,000 Additional paid-in capital970,000 Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Debt conversion expense 70,000 Cash70,000 Slide 14 Chapter 16-14 Recognized same as retiring debt that is not convertible. Difference between the acquisition price and carrying amount should be reported as gain or loss in the income statement. Accounting for Convertible Debt LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities. Retirement of Convertible Debt Slide 15 Chapter 16-15 Convertible preferred stock is considered part of stockholders equity. No gain or loss recognized when converted. Use book value method. Convertible Preferred Stock LO 2 Explain the accounting for convertible preferred stock. Convertible preferred stock includes an option for the holder to convert preferred shares into a fixed number of common shares. Slide 16 Chapter 16-16 BE16-3: 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. Preferred stock50,000 Common stock (2,000 x $10 par) 20,000 Journal entry to record conversion: Paid-in capital Preferred stock10,000 Paid-in capital Common stock 40,000 Convertible Preferred Stock LO 2 Explain the accounting for convertible preferred stock. Slide 17 Chapter 16-17 Certificates entitling the holder to acquire shares of stock at a certain price within a stated period. Normally arise: 1. 1.To make a security more attractive 2. 2.As evidence of preemptive right 3. 3.As compensation to employees Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. Slide 18 Chapter 16-18 Issued with Other Securities Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. Detachable Stock Warrants: Proceeds allocated between the two securities. Allocation based on fair market values. Two methods of allocation: (1) the proportional method and (2) the incremental method Slide 19 Chapter 16-19 Proportional Method Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. 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. Slide 20 Chapter 16-20 BE16-4: 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 21 Chapter 16-21 Cash2,020,000 Bonds payable 2,000,000 Discount on bonds payable59,216 Paid-in capital Stock warrants 79,216 BE16-4: 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 Contrast the accounting for stock warrants and for stock warrants issued with other securities. Slide 22 Chapter 16-22 Incremental Method Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. 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. Slide 23 Chapter 16-23 BE16-5: 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. The market price of the warrants, without the bonds, cannot be determined. Use the incremental method to record the issuance of the bonds and warrants. Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. Slide 24 Chapter 16-24 Cash2,020,000 Bonds payable 2,000,000 Discount on bonds payable40,000 Paid-in capital Stock warrants 60,000 Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. BE16-5: 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. The market price of the warrants, without the bonds, cannot be determined. Use the incremental method to record the issuance of the bonds and warrants. Slide 25 Chapter 16-25 Conceptual Questions Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. Detachable warrants involves two securities, a debt security, a warrant to purchase common stock. Nondetachable warrants no allocation of proceeds between the bonds and the warrants, companies record the entire proceeds as debt. Slide 26 Chapter 16-26 Rights to Subscribe to Additional Shares Stock Warrants LO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities. Stock Rights - existing stockholders have the right (preemptive privilege) to purchase newly issued shares in proportion to their holdings. Price is normally less than current market value. Companies make only a memorandum entry. Slide 27 Chapter 16-27 LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Stock Option - gives key employees option to purchase 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, and 5. 5. use performance criteria over which employee has control. Stock Compensation Plans Accounting for Stock Compensation Slide 28 Chapter 16-28 The Major Reporting Issue New FASB standard requires companies to recognize compensation cost using the fair-value method.* Under fair-value method, companies use acceptable option-pricing models to value the options at the date of grant. LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Accounting for Stock Compensation Slide 29 Chapter 16-29 Two main accounting issues: 1. 1.How to determine compensation expense. 2. 2.Over what periods to allocate compensation expense. LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Accounting for Stock Compensation Slide 30 Chapter 16-30 Determining Expense Compensation expense based on the fair value of the options expected to vest on the date the options are granted to the employee(s) (i.e., the grant date). LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Allocating Compensation Expense Over the periods in which employees perform the servicethe service period. Accounting for Stock Compensation Slide 31 Chapter 16-31 LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Accounting for Stock Compensation E16-12 On January 1, 2009, Scooby Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Scoobys $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2011, if the grantee is still employed by the company at the time of the exercise. On the grant date, Scoobys stock was trading at $25 per share, and a fair value option pricing model determines total compensation to be $450,000. On May 1, 2011, 9,000 options were exercised when the market price of Scoobys stock was $30 per share. The remaining options lapsed in 2013 because executives decided not to exercise their options. Instructions: Prepare the necessary journal entries related to the stock-option plan for the years 2009 through 2013. Slide 32 Chapter 16-32 No entry on date of grant. E16-12: Prepare the necessary journal entries related to the stock option plan for the years 2009 through 2013. LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. 1/1/09 Compensation expense225,000 Paid-in capital-stock options 225,000 12/31/09 Compensation expense225,000 Paid-in capital-stock options 225,000 12/31/10 ($450,000 x ) Accounting for Stock Compensation Slide 33 Chapter 16-33 LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Cash (9,000 x $20) 180,000 Common stock (9,000 x $5) 45,000 5/1/11 Paid-in capital-stock options 45,000 Paid-in capital-expired options 45,000 1/1/13 ($450,000 x 9,000 / 10,000 = $405,000) Paid-in capital-stock options 405,000 Paid-in capital in excess of par 540,000 ($450,000 $405,000) Accounting for Stock Compensation E16-12: Prepare the necessary journal entries related to the stock option plan for the years 2009 through 2013. Slide 34 Chapter 16-34 Restricted Stock Transfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred, or pledged until vesting occurs. Major Advantages: 1. 1.Never becomes completely worthless. 2. 2.Generally results in less dilution to existing stockholders. 3. 3.Better aligns employee incentives with company incentives. LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Accounting for Stock Compensation Slide 35 Chapter 16-35 LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles. Accounting for Stock Compensation Illustration: On January 1, 2010, Ogden Company issues 1,000 shares of restricted stock to its CEO, Christie DeGeorge. Ogdens stock has a fair value of $20 per share on January 1, 2010. Additional information is as follows. 1. 1.The service period related to the restricted stock is five years. 2. 2.Vesting occurs if DeGeorge stays with the company for a five-year period. 3. 3.The par value of the stock is $1 per share. Ogden makes the following entry on the grant date (January 1, 2010). Slide 36 Chapter 16-36 LO 4 Describe the accounting fo...</p>

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