Dilutive Securities and EPS Flashcards
Acct 202 ch 15
Stock Warrants are…
Securities that give investors the option to purchase a company’s stock @ a specific price over a specific period
Warrants are typically included as a ________ to investors to purchase a bond issuance
Sweetener
Advantages of stock warrants
- Allows investors to share in the future growth of the company
- Can be sold in the market
- Lower interest rate
Upon exercise of the stock warrant, there is an exchange of…
Cash
When stock warrants are issued with bonds, the stock warrants can be…
Detachable or Nondetachable
If a stock warrant is detachable…
They can be sold separately from the bonds
If a stock warrant is nondetachable…
They can only be sold with the bond
Debt + Nondetachable Stock Warrants = ?
Synthetic Convertible Debt, as they share similar attributes w/ convertible bonds
Do nondetachable warrants require an allocation of the proceeds between the bonds and warrants?
No
The company should allocate the proceeds from the sale of debt w/ detachable stock warrants between…
the 2 securities (debt + detachable stock warrant)
The ability to trade detachable warrants separately from the debt allows companies to…
Better determine the fair value of the equity and debt components for the convertible security
The 2 methods to determine how much to allocate to each security are…
- Proportional
- Incremental
The ________ method is the preferred allocation method companies use
Proportional
The ______ method allocates the proceeds using the proportion of the 2 amounts based on their fair values
Proportional
The J/E to sell stock warrants
Dr Cash
Cr Paid in Capital - Stock Warrants
The J/Es to record the sale of the bonds and warrants can he shown seperately to…
Emphasize that the purchaser is buying a bond + a potential future claim on common stock in the form of a stock warrant
J/E to exercise all warrants (convert to C/S)
Dr Cash
Dr Paid in Capital - Stock Warrants
Cr Common Stock
Cr Paid in Capital in Excess - Common Stock
J/E on the date the warrant expires
Dr Paid in Capital - Stock Warrants
Cr Paid in Capital - Expired Stock warrants
Stock-based compensation plans are…
long term compensation plans meant to develop company loyalty by giving them equity interest, or a piece of the pie
Stock options are a form of stock-based compensation that allows…
Employees the option to purchase common stock @ a given price over an extended period of time
There is a _______________ over which the employee must work before they can use their stock options
Service, or vesting period
The date that the company grants a stock option to an employee is called the…
Grant date
The option exercise price is often…
equal to or slightly higher than the market price of the stock on the grant date
The compensation expense amount is usually determined on the…
Grant date
GAAP requires companies to recognize compensation cost using…
The fair value method, which determines the amount based on a measure of value of the services received
The 2 main accounting issues for stock options
- Determining compensation expense
- Allocating compensation expense over an appropriate period
A company recognizes compensation expense during…
The employee’s service period
J/E for the grant date of the stock option
N/A
J/E for an employee’s service period
Dr Compensation Expense
Cr Paid in Capital - Stock Options
J/E for an employee’s compensation expense
Dr Compensation Expense
Cr Paid in Capital - Stock Options
Compensation expense is allocated ____ over the service period
evenly
Once the service period is complete, the employee can _______ the options
Exercise, or use
J/E to exercise stock options
Dr Cash
Dr Paid in Capital - Stock Options
Cr Common Stock
Cr Paid in Capital in Excess - Common Stock
J/E on the date the stock option expires
Dr Paid in Capital - Stock options
Cr Expired Stock options
Is there an adjustment made if the compensation expense is when the options expire?
No, b/c the expense was still incurred during the service period
When an employee forefits their stock options, the company has to adjust…
the estimated compensation expense recorded in the current period
J/E to adjust compensation expense due to forefiture
Dr Paid in Capital - Stock options
Cr Compensation Expense
Dilutive securities
Securities that can be converted to common stock
Dilutive securities reduce, or dilute EPS upon…
Conversion, or exercise by the holder
The effect of dilution on EPS can be ________ unless financial statements call out their potential dilutive effect
Unexpected
When a company has a complex capital structure, it generally reports…
both basic and diluted EPS
Diluted EPS = ?
Basic EPS - impact of convertibles - impact of other dilutive securities like options and warrants
Antidilutive securities
Securities that increase EPS upon conversion (Reduces loss per share)
If a company has antidilutive securities in their complex capital structure…
They won’t report diluted EPS
The purpose of presenting both basic and diluted EPS is to…
Inform people of situations that will likely occur (basic EPS), along with worst case scenarios (diluted EPS)
If the securities are antidilutive, the chances of conversion or exercise is…
Little to none
Companies measure the dilutive effects of potential conversion on EPS using the…
If-converted method
The If-converted method assumes…
- The bond was converted @ the beginning of the period, or at time of issuance
- No interest was paid, net of tax; it’ll get added back to net income
How to find adjusted net income for the numerator of diluted EPS
Net Income for the year + Adjustments for interest net of tax
[Debenture % * principal of bond] * Time if applicable *[1 - Tax rate]
How to find adjusted weighted average number of shares for the denominator of diluted EPS
Weighted-average number of shares o/s + shares assumed to be issued
Basic EPS = ?
(Net Income - P/S Dividends) / Weighted C/S Outstanding
