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
