Exam review notes Flashcards
what are income bonds
hybrid, bonds that pay interest but only when the company has reported a certain level of earnings or operating cash flow in the year.
- principal amount is paid at maturity
- interest depends upon above statement
what are redeemable
preferred shares that have to be retired for cash at a certain time
- another hybrid, company can force the shareholder’s to receive the cash
hybrid securities or compound financial instruments
are securities that have characteristics of both debt and equity
debt shows up in earnings,
equity shows up in
retained earnings not deductible in net income
if a dividends is reported as an expense in earnings, how is it treated for tax purposes
the dividend WILL NOT be a tax deductible expense
payments on instruments that legally are debt but in substance are equity will be taxed as
tax deductible as interest even if the interest is reported as a deduction from earnings
what is perpetual debt
is a loan that never has to be repaid or is highly unlikely ever to be repaid.
there is a stated interest rate for the perpetual debt, and the corporation is obligated to pay the interest regularly, as required by the agreements with the lender
what is forced conversion
management can force conversion before maturity if the market price is higher than the conversion price of the shares. the company call the bond for cash redemption
what is convertible debt with a floating conversion price per share
convertible debt may be issued where the number of shares to be issued on conversion is not fixed by contract, but rather is based on the market value of the shares on the conversion date. the conversion option has no intrinsic value to the investor. the type of bonds has no equity component and is all debt
what is the accounting treatment for convertible debt
a convertible bond with a fixed conversion price per share has elements of both debt and equity. the liability and the equity components are treated separately.
what are stock options
give the holder the right, but not the obligation to buy shares at a fixed price at a specific point in time called the exercise date.
- most common form of derivative
why are stock options derivatives
because their value is derived solely form the value of the primary equity shares that they can be used to buy
what are warrants
another name for stock option
- stock rights that are issued a sa detachable contract with another security (usually bonds)
- detachable and trade separately
exercise price is also called the
strike price
share base payments to employees what are they
common compensation arrangements, which may be equity settled or cash settled
- including stock option plans, stock appreciation rights, phantom stock plans and restricted share units
what is vesting
no turning back
when is vesting achieved
when the employee is entitled to the compensation, regardless of other conditions
provisions: large lawsuit what do you do
use expected value
- 50 legal claims each $10,000 potential claim
30% likely to be no cost= 0
70% likely 10,000 payout
50% certainty
record: (50 x 30% x ) + (50 x 70% x 10,000)
= 350,000
provisions: small population what do you do
use most likely outcome 3 legal claims each $100,000 30% chance payout on 1 lawsuit 50% chance payout on 2 lawsuits 20% chance payout on 3 lawsuits *some payout is certain
most likely is 50%
(2 x100,000) = 200,000
and also consider cumulative probabilities
what is defeasance
may be used to engineer derecognition of a bond liability without formally repaying ti
- recognize a gain or loss
bond payable 100,000
premium on bond pay 6000 (remaining balance)
cash (cR) 92,600
gain on defea (cr) 13,4000
issuance of share capital what does this mean
of shares authorized
CBCA or articles of incorporation
- record as a memo
no par shares are issued for cash: what are the journal entries
cash 102,000
common shares 102,000
shares assigned a $1 par value: what is the journal entry
10,000 shares, cash 102,000
cash 102,000
common shares 10,000
contributed capital c.sh 92000
what are share issued on a subscriptoion basis
- shareholders sign a contract to purchase so many shares on account
- called stock subscritpons
- shares are not issued until fully paid
what are the entries for share issued on a stock subscription
- initial 120 no par c.s subscribed for $40
stock subscript. receivable c.s 4,800
stock sub rec-com.shares 4,800 - record collection
cash 1,600
stock sub rec. c.sh 1,600
c. s subscription 4,800
c. s 4,800
issue shares for land whatis the entry
land 420,000
share capital - c.s 420,000
how do you record a basket sale? what are the methods
- weighted average or proportional method
- incremental method (know all but 1)
cash (dr)
contributed capital c.s (CR)
contributed capital ps (CR)
how do you record share issue costs (2 methods)
- off set method - (More common)
- retained earnings method
- share issue costs are directly to retained earnings
- reduces common equity but
- records gross proceeds to share capital account
share issue costs offset method
entry
what is retractable
option of shareholder
what is callable redeemable
option for corp
why would a company retire shares
- to increase EPS
- provide cash flow to shareholders in lieu of dividend
- acquaire shares that appear to be undervalued
- buy out one or more particular sharehodlers and thwart takeover bids
- reduce future dividend payouts by reducing the shares outstanding
what are debits to retained earnings (decreases)
- cas and other dividends
- stock dividends
- share retirement
- share issue costs
- distributing shares form another co. (spin off)
- adjustmetns from hybrids
- error correction
- effectof change for accounting policy
what are credits (increases) to retained earnings
- earnings (if net loss, debit)
2. removal of deficit in a financial reorganization
what is appropriation and restrictions on retained earnings
to reduce the amount of retirmed earnings
- reserve
- appropriation - management decision
restriction - legal contract or corporate law
what are the different dates for dividneds
- declaration date
- record date
- ex-dividned date
how do you account for declaration date
- announces dividend declaration
- record as a liability
dividends payable
how do you account for record date
- date the list of sharehodlers of records, who will receive the dividneds is prepared
how do you account for ex-dividned date
- invetor (buyer) of shares on or after the ex-didivned date does NOT receive the dividned
- the day following the record date (some times several days prior to date of record) this is in effect
how do you account for cash dividneds (entries)
- at declrataion date:
common dividneds declared 5,000
dividends payable 5,000 - at payment date:
dividneds payable 5,000
cash 5,000
or
pref dividend payable xx
com. dividend payable xx
cash dividned pay pre xx
cash divid pay c.s xx
stock dividends what are they
- proportional distribution to shareholders of additional shares
- does not change the assets, liabilities or total shareholders’ eqyity of issuing company
0 simply increases the number of shares outstanding
what is a stock split
change in the number of shares outstanding
- no change in recorded capital accounts
what is a reverse split
- decreases the number of shares
- proportional reduction in shares
- increases the avg. book value per share
- may be used to increase market price of shares
what is substance over form
substance - how it behaves
form - title
- depends on characteristics
tax status of hybrids
- accounting classification does NOT affect the classification of an investment
- if legally it is debt (title) but in substance it is equity (interest will be tax deductible)
- if a dividned is reported as an expnse in earnings the dibvidned will NOT be a tax deductible expense
when preferred shares are classified as debt, their dividends are
reported as financing expense
- reported on i.s (dexuciton from earnings)
- NOT reported on SCE as a reduction in retained earnings
stock options what are they
sharehodlers has the right but not obligated to buy shares at a fixed price at a specified point in time (exercise date)
- most common form of derivatives
what are the journal entries for stock options
cash 18,000
contributed capital : stock rights 18,000
exercise date:
cash 400,000
contrib. capital 18,000
c. shares 418,000
expiry date:
contr. capital: stock rights 18,000
contributed capital : lapse stock rights 18,000
what are warrants
- stock rights issued at a detachable contract with another security (usually a bond)
- trade separately form the bond
- may be exercised to acquire additional shares form the corp. or allowed ot lapse on expiration date
- can be exercised without having to trade in or redeem the debt
- results in cash paid for shares
what are share based payments
- result from transactions in which an entity acquires or receives goods or services
what are share based payments to non-employees
recognized when service is rendered or goods received
rent expense 1,000
c. shares 1,000
what are share bsed payemtns to employes
issue date:
admin expense 800
contributed capital: stock rights 800
exercise date:
c ash 7,500
cont. capit stockright 800
c.shares 8,300
expiry
contr. cap stock rights 800
contr. cap: lapse of stockrights 800
what are SARS
Stock appreicaiton rights
what are the 3 main forms of derivatives
- options
- forwards
- futures
what are options
right, but not obligated to buy or sell something in future
what are forward contracts
- obligation to buy something in future
- ie currency
- fixed amount sell to bank, bank taking on the risk
what are future contracts
- obligation to buy in future
- commodities, corn wheat etc
