Exam 1 Flashcards
FASB requires stock options, convertible bonds, preferred stock, to be reported as a _____.
liability
Convertible Bonds
can be changed into other corporate securities during specified period of time after issuance.
What are the two benefits of issuing convertible bonds?
- To raise equity capital without giving up more ownership control
- To obtain debt financing at cheaper rates
The method for recording Convertible Bonds at the date of issue is similar to the method used for ________.
straight debt issue
What value method is used to record the conversion of bonds into other securities?
book value method
Induced Conversions
additional consideration, called ‘sweetener’, expensed in current period to induce conversion
Retirement of Convertible Debt
- No proceeds attributed to conversion feature, no credit to paid-in capital acct
- Recognize gain/loss in current income
Convertible bonds are considered ______, whereas convertible preferred’s are considered part of _________.
liabilities, stockholders’ equity
Do companies recognize gain/loss when stockholders exercise convertible preferred stock?
No
Stock Warrants
certificates entitling holder to acquire shares at a certain price within period
What type of stock do Stock Warrants become?
Common stock (dilutive effect)
Existing stockholders have a preemptive right to __________.
Purchase common stock first upon additional common stock
Detachable Stock Warrant
separated from the stock and traded as separate security
What are the two methods for proceed allocation for a detachable stock warrant?
Proportional method and incremental method
Stock Right
privilege to purchase newly issued shares in proportion to their holdings, prevents dilution of voting right
What type of journal entry is made when rights are issued to stockholders?
memo
Stock compensation is what % of total compensation?
59%
Grant Date
date you receive the option
Intrinsic-Value Method
difference between market price and exercise price
Recognize compensation expense when?
period that the employees performed the service
What entry is made on the grant date for stock compensation under FV method?
no entry
If the amount of the Employee Stock Purchase Plan discount is __% or less, no compensation needs to be recorded.
5
Companies report earnings per share only for _______.
common stock
EPS Formula =
(Net Income - Preferred Divs) / Weighted-Avg Common Shares Outstanding
Are dividends in arrears included in EPS calculation?
No
When computing weighted average shares outstanding, assume the additional shares outstanding have been outstanding since _________.
the beginning of the year
What do stock dividends or stock splits do to the net assets of a company?
Nothing
What does a stock issue do to the net assets of a company?
Increase cash
A stock split or dividend does not change the _______.
shareholders total investment
Income available to common stockholders
Net Income From Continuing Operations - Preferred Dividends
Diluted EPS Formula =
EPS - Impact of Convertibles - Impact of Options, Warrants and Other Dilutive Securities
Antidiultive Securities
Upon conversion/exercise increases EPS
Likely occur vs worst-case scenario
Basic EPS vs Dilutive EPS
If-Converted Method
To measure dilutive effects of potential conversions. Assume conversion at beginning of period and elimination of related interest.
What does the If-Converted method do to EPS?
Additional shares increase the denominator (WAvgSO). Elimination of interest expense increases the numerator (NI)
Diluted EPS
includes stock options and warrants outstanding
Treasury-Stock Method
Method to include options and warrants and equivalents in EPS calculations
Treasury stock method assumes that options/warrants are exercised _______.
at the beginning of the year
If the exercise price of the option/warrant is ____ than market price, dilution occurs.
lower
If the exercise price of the option/warrant is ____ than the market price of the stock reduces common shares/
higher
If the ‘Passage of Time’ condition or ‘Certain Earnings’ condition is met, what happens to contingent shares in calculating DEPS?
They are included in the diluted EPS calculation
Can antidilutive securities be used to offset dilutive securities?
No
_____ revenue from a debt investment and _____ revenue from an equity investment.
Interest, dividend
Debt - No plans to sell
Debt - Plans to sell
Equity - Exercise control
Equity - Plans to sell
Valuation: Amortized cost, FV, Equity Method, FV
What are the 3 categories for debt investments?
Held-to-maturity, trading, and available-for-sale
Valuation:
Held-to-Maturity
Trading
Available-for-Sale
Amortized Cost, FV, FV
Only _____ securities can be classified as HTM.
debt
What type of debt security doesn’t increase volatility of reported earnings/capital?
HTM
Available-for-sale securities are recorded at ____ and records _______ in a holding account.
FV, unrealized gains/losses
Are unrealized gains and losses on debt securities included in net income?
No
Companies report trading securities at ___, with unrealized holding gains/losses reported as part of ______.
FV, net income
Debit or credit to the “FV Adjustment” account for a gain?
Debit
Realized gain on trading securities is recorded in _______.
other revenues/expenses and gains/losses
Equity securities example
common, preferred, or other capital stock
What % of ownership classifies Passive Interest, Significant Influence, and Controlling Interest?
Less than 20% 20-50%, more than 50%
What type of valuation method for Passive interest, significant influence, and controlling interest?
FV method, equity method, consolidated statements
Do equity securities have a maturity date?
No
Passive interest: Investor recognizes net income only when the investee _________.
declares cash dividends
Significant Influence: the investor originally records investment at ____, but adjusts value based on the proportionate share of _______.
cost, earnings/losses
Significant Influence Equity Method only recognizes income from ____.
dividends
What is a parent company?
A company that owns 50% or more of the subsidiary
Companies with controlling interest prepare _________.
consolidated financial statements
To recognize impairment, credit “________”.
allowance for doubtful accounts
To completely write off a receivabe after impairment, debit “_______” and credit “_______”.
allowance for doubtful accounts, accounts receivable
Does impairment change the cost basis of an HTM debt investment?
Yes
AFS Debt Investment: What is the limit for credit loss?
Amortized cost - FV
Equity Investment Impairment Loss: If FV is less than cost, the decline in value is reported thru ______.
net income
When are two goods considered one performance obligation?
when they are interdependent
Expected Value:
probability-weighted, many similar contracts with customers, discrete outcomes/probabilities
Most Likely Amount:
most likely consideration in a range of outcomes, appropriate if the contract has only two possible outcomes
Companies recognize non-cash consideration by valuing it as the ____ of what was received.
FV
What are indicators that the customer has obtained control of an asset/service?
right to payment, legal title, physical possession, risk/reward, accepted
GAAP requires issuer of convertible debt to record ______.
only the liability
Convertible bonds are usually converted into _______.
Common stock
When convertible debt is retired, ________.
either gain or loss on retirement is recognized
The issuance of warrants does NOT arise in what situation?
To give bondholders preemptive right to purchase additional stock.
Detachable stock warrants outstanding should be classified as ______.
paid-in capital
