Dilutive Securities and EPS Flashcards
What are Dilutive Securities
dilutive securities are securities that can be converted to common stock
what do dilutive securities do when they are converted or exercised?
They reduce (dilute) the earnings per share
What are the types of dilutive securities
-Convertible Debt
-Convertible Preferred Stock
-Stock Warrants
-Stock options and other compensation plans
What are convertible bonds
bonds that can be changed into other corporate securities during some specified period of time after issuance
Why would an investor be interested in convertible debt
- They have the benefit of the bond… still get interest and principal
- Privilege of Exchanging for stock at their discretion
Why would a company want to issue convertible debt
- Raise equity capital without giving up more ownership control than necessary
- Obtain debt financing at cheaper rates
How is convertible debt accounted for a time of issuance
- Like normal debt issues…
Cash
Note Payable
Premium (discount)
how is the retirement of convertible debt accounted for?
same as retiring nonconvertible debt
Note Payable
Remaining premium (discount)
Cash
How is convertible debt accounted for at the time of conversion?
-what method
-what is the method
-J.E
using the book value method, meaning they recognize no gain or loss upon conversion
Bond Payable
Premium remaining (discount)
Common stock
PIC - common stock
are any of the proceeds received on convertible bond issuance recorded as equity
NO
what does the book value method record the conversion at
the carrying amount of the bond (the book value)
What is an induced conversion?
when the issued wants to encourage conversion and offers an additional consideration called a sweetener
how is an induced conversation accounted for
the sweetener is expensed in the current period
debt conversion expense
cash
What is convertible preferred stock
when the preferred stock includes an option for the holder to convert preferred shares into fixed number of common shares
How is preferred stock classified
as a part of stockholders equity, unless mandatory redemption exists
what method is used when exercising conversion for preferred stock
book value method… no gain or loss is recognized
what happens if the par value of common stock is greater than book value of preferred stock when conversion happens
the difference goes into a retained earnings account
is the current market value relevant when recording the conversion of preferred stock
no because of the book value method the PIC of the common stock is a plug so the market values do not matter
What are stock warrants
certificates that entitles the holder to acquired shares of stock at a certain price within a stated period
what three situations do stock warrants arise under
- To make stocks more attractive (stock warrants issued with other securities)
- Existing stockholders have preemptive right to purchase common stock first
- To executive and employees as a form of compensation (stock option compensation plans)
What are stock warrants issued with other securities
long term option to buy common stock at a fixed price
how is stock warrant allocation determined
based on fair market values or relative fair value
- can either allocate using proportional method or incremental method
How does the proportional method work for stock warrants
- Need to determine standalone bond value as well as standalone warrant value and allocate based on the amounts fair value
What is the journal entry at issuance of stock warrant
Cash
Discount (or Premium) on bond payable
Bond payable
PIC- Stock warrant
