After completing this chapter you should be able to: Describe the accounting for the issuance, conversion, and retirement of convertible securities, explain the accounting for convertible preferred stock, contrast the accounting for stock warrants and for stock warrants issued with other securities, describe the accounting for stock compensation plans under generally accepted accounting principles...and other contents.
Trang 1Chapter 16-1
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Debt and equity Convertible debt Convertible preferred stock
Stock warrants Accounting for compensation
Dilutive Securities and Compensation Plans
Computing Earnings Per
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16-7
Desire to raise equity capital without giving up more ownership control than necessary.
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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.
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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
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16-17
Certificates entitling the holder to acquire shares of stock at a certain price within a stated period.
Trang 20Total Fair Market Value $ 2,040,000 100%
Allocation: Bonds Warrants
Issue price $ 2,020,000 $ 2,020,000 Bond face value $ 2,000,000 Allocation % 96% 4% Allocated FMV 1,940,784 Total $ 1,940,784 $ 79,216 Discount $ 59,216
Stock Warrants
Stock Warrants
LO 3
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BE165 : 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
Trang 24determined. Use the incremental method to record the issuance of the bonds and warrants.
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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.
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The Major Reporting Issue
New FASB standard requires companies to recognize compensation cost using the fairvalue method.*
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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 service—the service period.
Accounting for Stock Compensation
Accounting for Stock Compensation
Trang 31beginning January 1, 2011, if the grantee is still employed by the company at the time of the exercise. On the grant date, Scooby’s 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 Scooby’s 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 stockoption plan for the years 2009 through 2013.
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No entry on date of grant.
E1612 : Prepare the necessary journal entries related to the stock option plan for the years 2009 through 2013.
12/31/09
Paidin capitalstock options 225,000
12/31/10
($450,000 x ½)
Accounting for Stock Compensation
Accounting for Stock Compensation
Trang 33Paidin capitalstock options 80,000
Paidin capitalexpired options 80,000
1/1/13
($450,000 x 9,000 / 10,000 = $405,000)
Paidin capitalstock options 405,000
Paidin capital in excess of par 540,000
($400,000 – $320,000)
Accounting for Stock Compensation
Accounting for Stock Compensation
E1612 : Prepare the necessary journal entries related to the stock option plan for the years 2009 through 2013.
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Restricted Stock
Transfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred, or pledged until vesting occurs.
Trang 37Unearned Compensation represents the cost of services yet to be performed, which is not an asset. Unearned Compensation is reported as a component of stockholders’ equity in the balance sheet.
Trang 384,000 Ogden records compensation expense of $4,000 for each of the next four years (2011, 2012, 2013, and 2014).
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Debate over Stock Option Accounting
When first proposed, there was considerable opposition to the fairvalue approach because it could result in substantial, previously unrecognized compensation expense.
Trang 43Computing Earnings Per Share
Computing Earnings Per Share
Illustration 167
Trang 47Mar c h 1 I s s ue d a 2 0 % s to c k d ivid e nd
May 1 Ac q uir e d 10 0 ,0 0 0 s har e o f tr e as ur y s to c k
J une 1 I s s ue d a 3 f o r 1 s to c k s plit
O c to b e r 1 Re is s ue d 6 0 ,0 0 0 s har e s o f tr e as ur y s to c k
Instructions Determine the weightedaverage number of shares outstanding
as of December 31, 2010.
Trang 481,939,000
Trang 49Company reports both basic and diluted earnings per share.
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Diluted EPS – Convertible Securities
Measure the dilutive effects of potential conversion on EPS using the ifconverted method
Trang 52(a) Compute diluted earnings per share for 2011.
(b) Assume same facts as those for Part (a), except the 75 bonds were issued on
September 1, 2011 (rather than in 2010), and none have been converted or redeemed.
Trang 54Basic EPS
Trang 55+
Trang 57$5,460 4,500 =
2.13
+ +
Trang 60* (40,000 x 5)
+ +
Trang 61* (40,000 x 3)
+ +
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Diluted EPS – Options and Warrants
Measure the dilutive effects of potential conversion using the treasury stock method
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Trang 67Chapter
16-67 LO 7 Compute earnings per share in a complex capital structure.
Earnings Per ShareComplex Capital Structure
Earnings Per ShareComplex Capital Structure
TreasuryStock Method
÷
E1626 (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, 2010.
x
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Trang 70Per share amounts for a discontinued operation or an extraordinary item should be presented on the face of the income statement or in the notes.
LO 7 Compute earnings per share in a complex capital structure.
Earnings Per ShareComplex Capital Structure
Earnings Per ShareComplex Capital Structure
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Illustration 1628
Summary of EPS Computation
Summary of EPS Computation
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Under U.S. GAAP, all of the proceeds of convertible debt are recorded as longterm debt.
Under iGAAP, convertible bonds are “bifurcated”—separated into the equity component (the value of the conversion option) of the bond issue and the debt component.
Although the calculation of basic and diluted earnings per share is similar between iGAAP
and U.S. GAAP, the Boards are working to resolve the few minor differences in EPS reporting.
Other EPS differences relate to (1) the treasurystock method and how the proceeds from
extinguishment of a liability should be accounted for, and (2) how to compute the weightedaverage of contingently issuable shares.
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16-77 LO 8 Explain the accounting for stock appreciation rights plans.
SARS— ShareBased Liability Awards
Companies classify SARs as liability awards if at the date of exercise, the holder receives a cash payment. Accounting:
1 Measure the fair value of the award at the grant date and accrue compensation over the
service period.
2 Remeasure the fair value each reporting period, until the award is settled; adjust the
compensation cost each period for changes in fair value prorated for the portion of the service period completed.
3 Once the service period is completed, determine compensation expense each subsequent
period by reporting the full change in market price as an adjustment to compensation expense.
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16-81 LO 9 Compute earnings per share in a complex situation.
Illustration 16B1
Balance Sheet for Comprehensive Illustration
Trang 84LO 9 Compute earnings per share in a complex situation.
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