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.
Chapter 16-1 CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE Intermediate Accounting 13th Edition Kieso, Weygandt, and Warfield Chapter 16-2 Learning Objectives Learning Objectives 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 Discuss the controversy involving stock compensation plans Compute earnings per share in a simple capital structure Compute earnings per share in a complex capital structure Chapter 16-3 Dilutive Securities and Earnings Per Share Dilutive Securities and Earnings Per Share Dilutive Securities and Compensation Plans Debt and equity Convertible debt Convertible preferred stock Stock warrants Accounting for compensation Chapter 16-4 Computing Earnings Per Share Simple capital structure Complex capital structure Debt and Equity Debt and Equity Should companies report these instruments as a liability or equity Stock Options Chapter 16-5 Convertible Securities Preferred Stock Accounting for Convertible Debt Accounting for Convertible Debt Bonds which can be converted into other corporate securities are called convertible bonds Benefit of a Bond (guaranteed interest) + Privilege of Exchanging it for Stock (at the holder’s option) Chapter 16-6 LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities Accounting for Convertible Debt Accounting for Convertible Debt Two main reasons corporations issue convertibles: Desire to raise equity capital without giving up more ownership control than necessary Obtain common stock financing at cheaper rates Chapter 16-7 LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities Accounting for Convertible Debt Accounting for Convertible Debt At Time of Issuance Convertible bonds recorded as straight debt issue, with any discount or premium amortized over the term of the debt Chapter 16-8 LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities Accounting for Convertible Debt Accounting for Convertible Debt BE161 : 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. Journal entry at date of issuance: Cash 3,960,000 Discount on bonds payable Bonds payable 40,000 4,000,000 ($5,000,000 x 99% = $4,950,000) Chapter 16-9 LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities Accounting for Convertible Debt Accounting for Convertible Debt At Time of Conversion 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 Chapter 16-10 LO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities Balance Sheet for Comprehensive Illustration Chapter 16-82 Illustration 16B1 LO 9 Compute earnings per share in a complex situation Computation of Earnings per Share—Simple Capital Structure Illustration 16B2 Chapter 16-83 Solution on notes page LO 9 Compute earnings per share in a complex situation Diluted Earnings Per Share Steps for computing diluted earnings per share: Chapter 16-84 Determine, for each dilutive security, the per share effect assuming exercise/conversion Rank the results from step 1 from smallest to largest earnings effect per share. Beginning with the earnings per share based upon the weightedaverage of common shares outstanding, recalculate earnings per share by adding the smallest per share effects from step 2. Continue this process so long as each recalculated earnings per share is smaller than the previous amount. LO 9 Compute earnings per share in a complex situation The first step is to determine a per share effect for each potentially dilutive security Per Share Effect of Options (TreasuryStock Method), Diluted Earnings per Share Illustration 16B3 Chapter 16-85 LO 9 Compute earnings per share in a complex situation The first step is to determine a per share effect for each potentially dilutive security Per Share Effect of 8% Bonds (IfConverted Method), Diluted Earnings per Share Illustration 16B4 Chapter 16-86 LO 9 Compute earnings per share in a complex situation The first step is to determine a per share effect for each potentially dilutive security Per Share Effect of 10% Bonds (IfConverted Method), Diluted Earnings per Share Illustration 16B5 Chapter 16-87 LO 9 Compute earnings per share in a complex situation The first step is to determine a per share effect for each potentially dilutive security Per Share Effect of 10% Convertible Preferred (IfConverted Method), Diluted Earnings per Share Illustration 16B6 Chapter 16-88 LO 9 Compute earnings per share in a complex situation The first step is to determine a per share effect for each potentially dilutive security Ranking of per Share Effects (Smallest to Largest), Diluted Earnings per Share Illustration 16B7 Chapter 16-89 LO 9 Compute earnings per share in a complex situation The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of Options Illustration 16B8 The effect of the options is dilutive Chapter 16-90 LO 9 Compute earnings per share in a complex situation The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of 8% Convertible Bonds Illustration 16B9 The effect of the 8% convertible bonds is dilutive Chapter 16-91 LO 9 Compute earnings per share in a complex situation The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of 10% Convertible Bonds Illustration 16B10 The effect of the 10% convertible bonds is dilutive Chapter 16-92 LO 9 Compute earnings per share in a complex situation The next step is to determine earnings per share giving effect to the ranking Recomputation of EPS Using Incremental Effect of 10% Convertible Preferred Illustration 16B11 The effect of the 10% convertible preferred is NOT dilutive Chapter 16-93 LO 9 Compute earnings per share in a complex situation Finally, Webster Corporation’s disclosure of earnings per share on its income statement Illustration 16B12 The effect of the 10% convertible preferred is NOT dilutive Chapter 16-94 LO 9 Compute earnings per share in a complex situation Assume that Barton Company provides the following information Illustration 16B13 Barton Company Data Illustration 16B14 Basic and Diluted EPS Chapter 16-95 LO 9 Compute earnings per share in a complex situation Copyright Copyright Copyright © 2009 John Wiley & Sons, Inc. 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Compute? ?earnings? ?per? ?share? ?in a simple capital structure Compute? ?earnings? ?per? ?share? ?in a complex capital structure Chapter 1 6-3 Dilutive? ?Securities? ?and? ?Earnings? ?Per? ?Share Dilutive? ?Securities? ?and? ?Earnings? ?Per? ?Share Dilutive Securities and Compensation.. .CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE Intermediate? ?Accounting 13th Edition Kieso, Weygandt,? ?and? ?Warfield Chapter 1 6-2 Learning Objectives Learning Objectives Describe the? ?accounting? ?for the issuance, conversion,? ?and? ?retirement of convertible ... Instructions Determine the weightedaverage number of shares outstanding as of December 31, 2010 Chapter 1 6-4 7 LO 6 Compute? ?earnings? ?per? ?share? ?in a simple capital structure Earnings? ?Per? ?Share? ?Simple Capital Structure Earnings? ?Per? ?Share? ?Simple Capital Structure