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Intermediate Accounting II > Dilutive Securities and EPS > Flashcards

Dilutive Securities and EPS Flashcards

1
Q

What are Dilutive Securities

A

dilutive securities are securities that can be converted to common stock

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2
Q

what do dilutive securities do when they are converted or exercised?

A

They reduce (dilute) the earnings per share

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3
Q

What are the types of dilutive securities

A

-Convertible Debt
-Convertible Preferred Stock
-Stock Warrants
-Stock options and other compensation plans

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4
Q

What are convertible bonds

A

bonds that can be changed into other corporate securities during some specified period of time after issuance

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5
Q

Why would an investor be interested in convertible debt

A
  1. They have the benefit of the bond… still get interest and principal
  2. Privilege of Exchanging for stock at their discretion
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6
Q

Why would a company want to issue convertible debt

A
  1. Raise equity capital without giving up more ownership control than necessary
  2. Obtain debt financing at cheaper rates
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7
Q

How is convertible debt accounted for a time of issuance

A
  • Like normal debt issues…

Cash
Note Payable
Premium (discount)

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8
Q

how is the retirement of convertible debt accounted for?

A

same as retiring nonconvertible debt

Note Payable
Remaining premium (discount)
Cash

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9
Q

How is convertible debt accounted for at the time of conversion?

-what method
-what is the method
-J.E

A

using the book value method, meaning they recognize no gain or loss upon conversion

Bond Payable
Premium remaining (discount)
Common stock
PIC - common stock

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10
Q

are any of the proceeds received on convertible bond issuance recorded as equity

A

NO

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11
Q

what does the book value method record the conversion at

A

the carrying amount of the bond (the book value)

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12
Q

What is an induced conversion?

A

when the issued wants to encourage conversion and offers an additional consideration called a sweetener

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13
Q

how is an induced conversation accounted for

A

the sweetener is expensed in the current period

debt conversion expense
cash

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14
Q

What is convertible preferred stock

A

when the preferred stock includes an option for the holder to convert preferred shares into fixed number of common shares

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15
Q

How is preferred stock classified

A

as a part of stockholders equity, unless mandatory redemption exists

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16
Q

what method is used when exercising conversion for preferred stock

A

book value method… no gain or loss is recognized

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17
Q

what happens if the par value of common stock is greater than book value of preferred stock when conversion happens

A

the difference goes into a retained earnings account

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18
Q

is the current market value relevant when recording the conversion of preferred stock

A

no because of the book value method the PIC of the common stock is a plug so the market values do not matter

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19
Q

What are stock warrants

A

certificates that entitles the holder to acquired shares of stock at a certain price within a stated period

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20
Q

what three situations do stock warrants arise under

A
  1. To make stocks more attractive (stock warrants issued with other securities)
  2. Existing stockholders have preemptive right to purchase common stock first
  3. To executive and employees as a form of compensation (stock option compensation plans)
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21
Q

What are stock warrants issued with other securities

A

long term option to buy common stock at a fixed price

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22
Q

how is stock warrant allocation determined

A

based on fair market values or relative fair value

  • can either allocate using proportional method or incremental method
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23
Q

How does the proportional method work for stock warrants

A
  1. Need to determine standalone bond value as well as standalone warrant value and allocate based on the amounts fair value
24
Q

What is the journal entry at issuance of stock warrant

A

Cash
Discount (or Premium) on bond payable
Bond payable
PIC- Stock warrant

25
Q

what is the journal entry when warrants are excersised

A

Cash
PIC - Stock warrants
Common Stock
PIC- Common Stock

26
Q

what is the journal entry if none of the stock warrants are exercised

A

PIC -Stock warrants
PIC - Expired Stock warrants

27
Q

What is the incremental method in terms of stock warrants

A

a company only knows the fair value of one so they use the securities fair value that is known and back out of it to find the other value

28
Q

What do stock warrants involve

A

TWO securities

  • debt and then warrant to purchase common stock
29
Q

What are nondetachable warrants and how are they accounted for

A

warrants that cannot be separated from debt
- recorded just to debt not to equity

30
Q

What are stock rights

A

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

31
Q

what are some characteristics of stock rights

A
  • price is normally less than current price of the shares
  • company only makes a memorandum entry as they have not yet issued stock or received cash
32
Q

What is the journal entry if holders exercise a stock right

A

Cash
Common stock
PIC - Common Stock

33
Q

what is a stock option

A

part of stock compensation plan

gives employees the option to purchase stock at a given price over an extended period of time

34
Q

what is a grant date

A

date employees receive stock option

35
Q

how does FASB requiring companies to use fair value method when accounting for stock option affect the accounting

A
  1. requires recognition of stock compensation expense using the fair value on the grant date
  2. Companies use the option-pricing model to estimate fair value (like Black-Scholes)
  3. Compensation expense is allocated over service period (vesting period)
36
Q

why is it important that firms expense stock options

A

because if they didn’t, they wouldn’t recognize any compensation expense and it wouldn’t represent business correctly

37
Q

What are the two main accounting issues in stock option plans

A
  1. How to determine compensation expense
  2. What period to allocate compensation expense over
38
Q

what is the journal entry for a stock option at grant date

A

no entry

39
Q

what is the journal entry for a stock option during the vesting period

A

compensation expense (total/years of vesting)
PIC- stock options

40
Q

What is the journal entry for a stock option that is excersised

A

Cash (amount X exercises price)
PIC - Stock option
Common Stock
PIC - Common stock

41
Q

What is the journal entry for a stock option that is expired

A

PIC - stock option
PIC - expired stock option

42
Q

What are the different stock compensation plans

A
  • Stock options
  • Restricted Stock Awards and Units
43
Q

What are the two types of restricted stock

A

-Restricted stock units
- Restricted stock awards

44
Q

what are the steps to accounting restricted stock

A
  1. Determine the total compensation expense based on the fair value of the stock (units) on the grant date
  2. Recognize compensation in the periods in which the employee performs service
45
Q

what is a restricted-stock plan

A

a form of stock compensation that transfers shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred or pledged until vesting occurs.

46
Q

what is the “vesting period” in terms of restricted stock

A

time where restrictions on shares are in effect

it is the time from grant date until the end of vesting period

47
Q

what are the major advantages of a restricted-stock plan

A
  1. never becomes completely worthless
  2. generally results in less dilution to existing stockholders
  3. better aligns employee incentives with company incentives
48
Q

what is the entry at the grant date of a stock award

A

Unearned compensation expense (at entire fair value)
Common stock
PIC - common stock

49
Q

what is the unearned compensation account

A

a contra equity account that represents the cost of services yet to be performed

50
Q

what is the journal entry for forfeited stock stock awards

A

Common stock
PIC - common stock
Compensation expense - for years that it has been expensed
Remaining unearned compensation

51
Q

what is restricted stock units

A

similar to a stock award but the stock is only accounted for after employees completes vesting period

52
Q

what is the journal entry at issuance date for stock units

A

none

53
Q

what is journal entry at the end of the first year of vesting for stock units

A

compensation expense (total/ vesting)
PIC- restricted stock unit

54
Q

what is the journal entry for an expired stock unit

A

PIC - restricted stock unit
Compensation expense

55
Q
A

Intermediate Accounting II (5 decks)

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