Chapter 16 - Dilutive Securities and EPS Flashcards
Why do companies issue convertible debt?
To obtain financing at a cheaper interest rate
IFRS requires that the issuer of convertible debt record the liability and equity components (together/separately).
Separately
Convertible bonds are usually converted into _____.
Common stock
When convertible debt is retired, a (gain/loss/either/neither) is recognized.
Either
When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounting for as a(n) ____.
Expense
The conversion of preferred stock into common requires that any excess of the par value of common shares issued over the carrying amount of the preferred being converted should be treated as __________.
A reduction of retained earnings
Are gains or losses recorded in the accounting for the conversation of preferred stock to common stock?
No
What is the numerator of the diluted EPS calculation when convertible preferred stock is included?
Net income
Do nondetachable warrants require an allocation of the proceeds between the bonds and the warrants?
No
When bonds are issued with detachable stock warrants, and the fair market value is known for both securities, the price is allocated between the two securities using the _____ method.
(incremental, proportional)
Proportional
The treasury stock method applies to which securities?
Stock options
Stock warrants
The conversion of preferred stock is recorded by the ____ method.
Book value
Detachable stock warrants outstanding should be classified as ____.
(Contingent liabilities, prepaid expenses, reductions of capital contributed in excess of par value, paid-in capital)
Paid-in capital
Are warrants issued to give existing stockholders a preemptive right to purchase stock?
Yes
Are warrants issued to provide compensation to executives?
Yes
Are warrants issued to give bondholders the preemptive right to purchase additional stock?
No
The proceeds from the sale of debt with warrants should be allocated based on the aggregate _____ of the bonds and the warrants.
Fair market value
What method does the FASB prefer in accounting for stock-based compensation?
Fair value method
When bonds are issued with detachable warrants, is an allocation of the sale proceeds necessary?
Yes
When bonds are issued with nondetachable warrants, is an allocation of the sales proceeds necessary?
No
Compensation expense from a compensatory stock option plan is generally:
Allocated to the periods benefited
Recognized in the period of exercise
Recognized in the period of the grant
Allocated to the periods benefited
In computing earnings per share, _____ and _____ are treated as if they had occurred at the beginning of the year.
Stock dividends
Stock splits
Do stock dividends or stock splits affect the net assets of the company?
No
What is the formula for computing EPS?
(Net income - Preferred dividends) / Weighted Average Number of Shares Outstanding
A company with a complex capital structure calculates both ___ and ____ EPS.
Basic, Diluted
Are diluted earnings per share reported if the securities included are antidilutive?
No
What are antidilutive securities?
Those with the potential to increase earnings per share
If the exercise price of stock warrants exceeds the average market price, are the warrants dilutive or antidilutive?
Antidilutive
When preferred stock is cumulative and dividends aren’t declared in the current year, what is the adjustment to net income when computing EPS?
The dividend that should have been declared for the current year is deducted from net income
