chapter 16

Question 1

convertible bonds

Answer 1

can be changed into other corporate securities during some specified period of time after issuance
debt can turn into stock

Question 2

2 main reasons corporations issue convertibles

Answer 2

1. to raise equity capital without giving up more ownership control than necessary
2. obtain debt financing at cheaper rates

Question 3

at time of issuance

Answer 3

recording convertible bonds follows the method used to record straight debt issues, with any discount or premium amortized over the term of the debt

Question 4

at time of conversion

Answer 4

• use the book value method

- when turning debt to equity, the company recognizes no gain or loss up conversion

Question 5

Induced Conversion

Answer 5

Issuer offers additional consideration called a sweetener

-is an expense of the current period

Question 6

Retirement of convertible debt

Answer 6

difference between the cash acquisition price and carrying amount should be reported as gain or loss in the income statement

Question 7

Convertible preferred stoc

Answer 7

includes an option for the holder convert preferred shares into a fixed number of common shares
- classified as part of stockholders’ equity unless mandatory redemption exists

Question 8

stock option

Answer 8

gives key employees option to purchase common stock at a given price over extended period of time

Question 9

determining compensation expense

Answer 9

compensation expense based on the fair value of the options expected to vest on the date they grant the options to the emplyees

Question 10

the service period

Answer 10

recognizes compensation expense in the period in which its employee perform the service

Question 11

restricted-stock plans

Answer 11

transfer shares of stock to employees subject to an agreement that the shares can’t be sold, transferred or pledged until vesting occurs

Question 12

simple structure

Answer 12

common stock; no potentially dilutive securities

Question 13

complex structure

Answer 13

includes securities that could dilute earnings per common share

Question 14

dilutive

Answer 14

means the ability to influence the EPS in a downward direction

Question 15

contingent issue agreement

Answer 15

are issued because

1. passage of time condition or
2. upon attainment of a certain earnings or market price level

Question 16

warrants

Answer 16

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

Question 17

Why do warrants happen?

Answer 17

1. to make the security for attractive
2. Existing stockholders have a preemptive right to purchase common stock first
3. to executives and employees as a form of compensation

Question 18

detachable warrants

Answer 18

2 securities

• debt security
• a warrant to purchase common stock

Question 19

nondetachable warrants

Answer 19

• do no require an allocation of proceeds between the bonds and the warrants
• companies record the entire proceeds as debt

Question 20

stock right

Answer 20

existing stockholders have the right (preemptive privilege) to purchase newly issued shares proportion to their holdings