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Acct 302 > Ch. 16 > Flashcards

Ch. 16 Flashcards

1
Q

Dilutive securities

A

Convertible securities as well as options, warrants and other securities are called dilutive because they may reduce dilute earnings per share.

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2
Q

Convertible bonds

A

Can be changed into other corporate securities during some specified period of time after issuance

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3
Q

A convertible bond combines the benefits of what?

A

Bond with the privilege of exchanging it for stock holders option

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4
Q

Corporations issue convertible for 2 reasons

A
  1. One is to raise equity capital without giving up more ownership control than necessary
  2. To obtain debt financing at cheaper rates
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5
Q

Accounting for convertible debt involves reporting issues at the time of

A
  1. Issuance
  2. Conversion
  3. Retirement
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6
Q

What method is used to record the conversion?

A

Book value method

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7
Q

What do issuers do to reduce interest costs or improve its debt to equity ratio?

A

They wish to encourage prompt conversion of its convertible debt to equity securities

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8
Q

Induce conversion

A

Issuer may offer some form of additional consideration (cash, c/s) called a sweetener

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9
Q

The sweetener is reported as

A

Expense of current period

(It’s amount is the fair value of additional securities or other consideration given).

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10
Q

Companies need to recognize a gain or loss on retiring convertible debt the same way they would recognize a gian or loss on retiring a no convertible debt

A

True

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11
Q

The differences should be reported between cash acquisition price of debt and its carrying amount as what

A

In current income as gain or loss

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12
Q

Convertible preferred stock

A

Includes an option for the holder to convert preferred shares into a fixed number of common shares

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13
Q

What is the main difference between accounting for convertible bond and convertible preferred stock?

A

At the date of issue is their classification

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14
Q

Convertible bonds are considered as

A

Liabilities

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15
Q

Convertible preferreds are considered as

A

Part of stockholder equity

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16
Q

When stockholder exercise convertible preferred stock there is no justification for recognizing ?

A

Gain or loss

The company does not recognize a gain or loss when it deals with stockholders in their capacity as business owners.

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17
Q

When an excess exists in the exercise of convertible preferred stock what is the journal entry?

A

Preferred stock
Paid in capital in excess of par – preferred stock
Common stock
Paid in capital in excess of par– c/s

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18
Q

Warrants

A

Certificates entitling the holder to acquire shares of stock at a certain price within a stated period

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19
Q

When warrants are exercised what do they become?

A

Common stock and usually have a dilutive effect (reduce EPS) similar to conversion of convertible securities

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20
Q

The issuance of warrants or options to buy additional shares normally arise under 3 situations

A
  1. When issuing diff type securities, companies include warrants to make security more attractive
  2. Upon issuance of additional common stock, existing stockholders have a preemptive right to purchase common stock first and companies may issue warrants to evidence that right
  3. Companies give warrants often referred as stock options to executive and employees as a form of compensation
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21
Q

Detachable stock warrant

A

Can be detached (separated) from stock and traded as a separate security

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22
Q

A company should allocate the proceeds from sale of debt with detachable stock warrant between

A

The two securities

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23
Q

Proportional method

A

Allocates proceeds using the proportion of two amounts based on fair values

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24
Q

Incremental method

A

Used when a company cannot determine fair value of either warrants or bonds

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25
The board indicated that the issuance of bonds with detachable warrants involves 2 securities
One debt security which will remain outstanding until maturity & Other warrant to purchase common stock
26
Non detachable warrants do not acquire what
An allocation of proceeds between bonds and warrants
27
Stock right
Saves existing stockholders from suffering a dilution of voting rights without their consent It may allow them to purchase stock somewhat below its fair value
28
Warrants issued for stock rights are
Short duration
29
When do companies make only s memorandum entry?
When they issue rights to existing stockholders This indicate the number of rights issued to existing stockholders in order to ensure that the company has additional unissued stock registered for issuance in case rights are exercised
30
When holders exercise stock rights, what type of pay,met is involved?
A cash payment
31
Stock based compensation plans
Long term compensation plans attempt to develop company loyalty among key employees by giving them a proceeds of action that is an equity interest
32
Stock option
Gives key employees the option to purchase common stock at a given price over an extended period of time
33
Grant date
The dat you received the options
34
Intrinsic value method
Measures what the holder would received today if the option was immediately exercised
35
Intrinsic value
Difference between market price of stock and exercise price of the options at grant date
36
GAAP requires that companies recognize compensation cost using what method?
Fair value method
37
Stock option plans have two main accounting issues
1. How to determine compensation expense | 2. Over what periods to allocate compensation expense
38
Under fair value method, hoe is total compensation expense computed?
On fair value of options expects to vest on the date they grant options to employees (grant date)
39
How is fair value estimated?
Using option pricing models
40
Can adjustments occur after the grant date in response to subsequent changes in stock price?
No
41
When is compensation expense recognized ?
In periods in which its employee performs the service -- service period
42
What is the service period?
Time between grant date and vesting date
43
Total compensation cost is determined
At grant date and allocates it to the periods benefited to employees services
44
A under used stock option does not nullify the need to record costs of Services received from executives and attributable to stock option plan. Under GAAP a company therefore does not need to
Adjust compensation expense upon expiration of options
45
If a employee forfeits a stock option because the employee fails to satisfy a service requirement, what should a company do?
Company should adjust estimate of compensation expense recorded in the current period
46
Restricted stock plans
Transfer shares of stock to employees, subject to agreement that shares cannot be sold, transferred, or pledged until vesting occurs
47
Major advantages of restricted stock plans
1. Restricted stock never becomes completely worthless 2. Restricted stock generally results in less dilution to existing stockholders 3. Restricted stock better aligns the employees incentives with companies incentives
48
Restricted stocks follow the same general principles as accounting for stock options at date of grant. So the company determines what?
Fair value of restricted stock at date of grant (usually fair value of a share of stock) & expenses that amount over service period
49
Subsequent changes in fair value of stock are ignored for purposes of?
Computing compensation expense
50
Unearned compensation represents what ?
Cost of services yet to be performed which is not an asset
51
Employee stock purchase plans (ESPP)
Generally permit all employees to purchase stock at a discounted price for a short period time
52
Company often uses such plans to secure ?
Equity capital or to induce widespread of ownership of its common stock among employees
53
ESPP are considered compensatory unless they satisfy all 3 conditions presented below
1. Substantially all full time employees may participate on equitable basis 2. Discount from market is small. Discount does not exceed per share amount of costs avoided by not having to raise cash in a public offering. If amount of discount is 5% or less, no compensation needs to be recorded 3. Plans offer no substantive option feature
54
Companies that offer their employees a compensatory ESPP, they should record compensation expense as?
Over the service life of employees
55
When must companies fully disclose the status of their compensation plans?
At the end of periods presented
56
A company that had one or more share based payment arrangements must disclose information that enables users of financial statements to understand:
1. Nature and terms of such arrangements that existed during period and potential effects of those arrangements on shareholders 2. The effect on income statement of compensation cost arising from share based payment arrangements 3. Method of estimating fair value of goods or services recieved or fair value of equity instrument granted d during period 4. Cash flow effects resulting from share based payment arrangements
57
Earnings per share
Indicates income earned by each share of common stock
58
Companies report earnings per share only for what type of stock?
Common stock
59
EPS information is mostly on the face of what statement
Income statement
60
When is a corporation capital structure simple?
If only has common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share
61
When is a capital structure complex?
If it includes securities that could have a dilutive effect on earnings per common share
62
Weighted average number of shares outstanding
During the period constitutes the basis for per share amount reported
63
Shares issued or purchased during period effect ?
Amount outstanding
64
Companies must weight the shares by what?
Fraction of period they are outstanding
65
When stock dividends or stock splits occur, companies need to restate what?
Shares outstanding before stock dividend or split, in order to computer weighted average number of shares
66
Companies restates the issuance of stock dividend or stock split but not the issuance or repurchase of stock for cash. Why?
Bc stock split and stock dividends do not increase or decrease the net assets of the company
67
Issuance or purchase of stock for cash changes the amount of?
Net assets
68
Stock dividend or split does not change what?
Shareholders total investment, it only increases (unless it is a reverse stock split) the number of common shares representing This investment
69
What is the one problem with basic EPS computation?
It fails to recognize potential impact of a corporation dilutive securities
70
Dilutive securities can be converted into what type of stock
Common stock
71
Antidilutive securities
Securities that upon conversion or exercise increase EPS (or reduce loss per share)
72
Companies that have complex capital structures will not report diluted EPS when the securities are?
In capital structure are antidilutive
73
When companies only have antidilutive securities, what must be reported?
Basic EPS #
74
If converted method
Used to measure dilutive effects of potential conversion on EPS
75
If converted method for convertible bond assumes
1. Conversion of convertible securities at beginning of period (or @ time of issuance of security if issued during period) 2. Elimination of related interest, net of tax
76
Additional shares assumed issued increase what?
Denominator the weighted average number shares outstanding
77
Amount of interest expense, net of tax associated with those potential common shares, increase what?
Numerator -- net income
78
For diluted EPS computation in such a situation, the company will use
Most dilutive conversion rate available
79
A company includes in diluted earnings per share stock options and warrants outstanding (whether or not presently exercisable) unless they are what?
Antidilutive
80
Treasury stock method is used when
To include options and warrants and their equivalents in EPS computations
81
What does the treasury stock method assume?
That the options or warrants are exercised at the beginning of the year (or date of issue if later) and that the company uses those proceeds to purchase common stock for treasury
82
Contingent shares
Acquirer may promise to issue additional shares
83
Sometimes the company issues these contingent shares as a result of what?
Passage of time condition or upon the attainment of a certain earnings or market price level
84
If passage of time condition occurs during current year or if the company meets the earnings or market price by the end of the year, what does the company consider?
Contingent shares as outstanding for the computation of diluted EPS
85
In computing diluted EPS, a company should exclude any security that is
Antidilutive

Acct 302 (7 decks)

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