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Acct 302 > Ch. 16 > Flashcards

Ch. 16 Flashcards

1
Q

Dilutive securities

A

Convertible securities as well as options, warrants and other securities are called dilutive because they may reduce dilute earnings per share.

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2
Q

Convertible bonds

A

Can be changed into other corporate securities during some specified period of time after issuance

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3
Q

A convertible bond combines the benefits of what?

A

Bond with the privilege of exchanging it for stock holders option

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4
Q

Corporations issue convertible for 2 reasons

A
  1. One is to raise equity capital without giving up more ownership control than necessary
  2. To obtain debt financing at cheaper rates
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5
Q

Accounting for convertible debt involves reporting issues at the time of

A
  1. Issuance
  2. Conversion
  3. Retirement
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6
Q

What method is used to record the conversion?

A

Book value method

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7
Q

What do issuers do to reduce interest costs or improve its debt to equity ratio?

A

They wish to encourage prompt conversion of its convertible debt to equity securities

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8
Q

Induce conversion

A

Issuer may offer some form of additional consideration (cash, c/s) called a sweetener

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9
Q

The sweetener is reported as

A

Expense of current period

(It’s amount is the fair value of additional securities or other consideration given).

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10
Q

Companies need to recognize a gain or loss on retiring convertible debt the same way they would recognize a gian or loss on retiring a no convertible debt

A

True

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11
Q

The differences should be reported between cash acquisition price of debt and its carrying amount as what

A

In current income as gain or loss

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12
Q

Convertible preferred stock

A

Includes an option for the holder to convert preferred shares into a fixed number of common shares

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13
Q

What is the main difference between accounting for convertible bond and convertible preferred stock?

A

At the date of issue is their classification

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14
Q

Convertible bonds are considered as

A

Liabilities

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15
Q

Convertible preferreds are considered as

A

Part of stockholder equity

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16
Q

When stockholder exercise convertible preferred stock there is no justification for recognizing ?

A

Gain or loss

The company does not recognize a gain or loss when it deals with stockholders in their capacity as business owners.

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17
Q

When an excess exists in the exercise of convertible preferred stock what is the journal entry?

A

Preferred stock
Paid in capital in excess of par – preferred stock
Common stock
Paid in capital in excess of par– c/s

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18
Q

Warrants

A

Certificates entitling the holder to acquire shares of stock at a certain price within a stated period

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19
Q

When warrants are exercised what do they become?

A

Common stock and usually have a dilutive effect (reduce EPS) similar to conversion of convertible securities

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20
Q

The issuance of warrants or options to buy additional shares normally arise under 3 situations

A
  1. When issuing diff type securities, companies include warrants to make security more attractive
  2. Upon issuance of additional common stock, existing stockholders have a preemptive right to purchase common stock first and companies may issue warrants to evidence that right
  3. Companies give warrants often referred as stock options to executive and employees as a form of compensation
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21
Q

Detachable stock warrant

A

Can be detached (separated) from stock and traded as a separate security

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22
Q

A company should allocate the proceeds from sale of debt with detachable stock warrant between

A

The two securities

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23
Q

Proportional method

A

Allocates proceeds using the proportion of two amounts based on fair values

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24
Q

Incremental method

A

Used when a company cannot determine fair value of either warrants or bonds

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25
Q

The board indicated that the issuance of bonds with detachable warrants involves 2 securities

A

One debt security which will remain outstanding until maturity

&

Other warrant to purchase common stock

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26
Q

Non detachable warrants do not acquire what

A

An allocation of proceeds between bonds and warrants

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27
Q

Stock right

A

Saves existing stockholders from suffering a dilution of voting rights without their consent

It may allow them to purchase stock somewhat below its fair value

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28
Q

Warrants issued for stock rights are

A

Short duration

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29
Q

When do companies make only s memorandum entry?

A

When they issue rights to existing stockholders

This indicate the number of rights issued to existing stockholders in order to ensure that the company has additional unissued stock registered for issuance in case rights are exercised

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30
Q

When holders exercise stock rights, what type of pay,met is involved?

A

A cash payment

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31
Q

Stock based compensation plans

A

Long term compensation plans attempt to develop company loyalty among key employees by giving them a proceeds of action that is an equity interest

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32
Q

Stock option

A

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

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33
Q

Grant date

A

The dat you received the options

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34
Q

Intrinsic value method

A

Measures what the holder would received today if the option was immediately exercised

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35
Q

Intrinsic value

A

Difference between market price of stock and exercise price of the options at grant date

36
Q

GAAP requires that companies recognize compensation cost using what method?

A

Fair value method

37
Q

Stock option plans have two main accounting issues

A
  1. How to determine compensation expense

2. Over what periods to allocate compensation expense

38
Q

Under fair value method, hoe is total compensation expense computed?

A

On fair value of options expects to vest on the date they grant options to employees (grant date)

39
Q

How is fair value estimated?

A

Using option pricing models

40
Q

Can adjustments occur after the grant date in response to subsequent changes in stock price?

A

No

41
Q

When is compensation expense recognized ?

A

In periods in which its employee performs the service – service period

42
Q

What is the service period?

A

Time between grant date and vesting date

43
Q

Total compensation cost is determined

A

At grant date and allocates it to the periods benefited to employees services

44
Q

A under used stock option does not nullify the need to record costs of Services received from executives and attributable to stock option plan. Under GAAP a company therefore does not need to

A

Adjust compensation expense upon expiration of options

45
Q

If a employee forfeits a stock option because the employee fails to satisfy a service requirement, what should a company do?

A

Company should adjust estimate of compensation expense recorded in the current period

46
Q

Restricted stock plans

A

Transfer shares of stock to employees, subject to agreement that shares cannot be sold, transferred, or pledged until vesting occurs

47
Q

Major advantages of restricted stock plans

A
  1. Restricted stock never becomes completely worthless
  2. Restricted stock generally results in less dilution to existing stockholders
  3. Restricted stock better aligns the employees incentives with companies incentives
48
Q

Restricted stocks follow the same general principles as accounting for stock options at date of grant. So the company determines what?

A

Fair value of restricted stock at date of grant (usually fair value of a share of stock) & expenses that amount over service period

49
Q

Subsequent changes in fair value of stock are ignored for purposes of?

A

Computing compensation expense

50
Q

Unearned compensation represents what ?

A

Cost of services yet to be performed which is not an asset

51
Q

Employee stock purchase plans (ESPP)

A

Generally permit all employees to purchase stock at a discounted price for a short period time

52
Q

Company often uses such plans to secure ?

A

Equity capital or to induce widespread of ownership of its common stock among employees

53
Q

ESPP are considered compensatory unless they satisfy all 3 conditions presented below

A
  1. Substantially all full time employees may participate on equitable basis
  2. Discount from market is small. Discount does not exceed per share amount of costs avoided by not having to raise cash in a public offering. If amount of discount is 5% or less, no compensation needs to be recorded
  3. Plans offer no substantive option feature
54
Q

Companies that offer their employees a compensatory ESPP, they should record compensation expense as?

A

Over the service life of employees

55
Q

When must companies fully disclose the status of their compensation plans?

A

At the end of periods presented

56
Q

A company that had one or more share based payment arrangements must disclose information that enables users of financial statements to understand:

A
  1. Nature and terms of such arrangements that existed during period and potential effects of those arrangements on shareholders
  2. The effect on income statement of compensation cost arising from share based payment arrangements
  3. Method of estimating fair value of goods or services recieved or fair value of equity instrument granted d during period
  4. Cash flow effects resulting from share based payment arrangements
57
Q

Earnings per share

A

Indicates income earned by each share of common stock

58
Q

Companies report earnings per share only for what type of stock?

A

Common stock

59
Q

EPS information is mostly on the face of what statement

A

Income statement

60
Q

When is a corporation capital structure simple?

A

If only has common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per common share

61
Q

When is a capital structure complex?

A

If it includes securities that could have a dilutive effect on earnings per common share

62
Q

Weighted average number of shares outstanding

A

During the period constitutes the basis for per share amount reported

63
Q

Shares issued or purchased during period effect ?

A

Amount outstanding

64
Q

Companies must weight the shares by what?

A

Fraction of period they are outstanding

65
Q

When stock dividends or stock splits occur, companies need to restate what?

A

Shares outstanding before stock dividend or split, in order to computer weighted average number of shares

66
Q

Companies restates the issuance of stock dividend or stock split but not the issuance or repurchase of stock for cash. Why?

A

Bc stock split and stock dividends do not increase or decrease the net assets of the company

67
Q

Issuance or purchase of stock for cash changes the amount of?

A

Net assets

68
Q

Stock dividend or split does not change what?

A

Shareholders total investment, it only increases (unless it is a reverse stock split) the number of common shares representing This investment

69
Q

What is the one problem with basic EPS computation?

A

It fails to recognize potential impact of a corporation dilutive securities

70
Q

Dilutive securities can be converted into what type of stock

A

Common stock

71
Q

Antidilutive securities

A

Securities that upon conversion or exercise increase EPS (or reduce loss per share)

72
Q

Companies that have complex capital structures will not report diluted EPS when the securities are?

A

In capital structure are antidilutive

73
Q

When companies only have antidilutive securities, what must be reported?

A

Basic EPS #

74
Q

If converted method

A

Used to measure dilutive effects of potential conversion on EPS

75
Q

If converted method for convertible bond assumes

A
  1. Conversion of convertible securities at beginning of period (or @ time of issuance of security if issued during period)
  2. Elimination of related interest, net of tax
76
Q

Additional shares assumed issued increase what?

A

Denominator the weighted average number shares outstanding

77
Q

Amount of interest expense, net of tax associated with those potential common shares, increase what?

A

Numerator – net income

78
Q

For diluted EPS computation in such a situation, the company will use

A

Most dilutive conversion rate available

79
Q

A company includes in diluted earnings per share stock options and warrants outstanding (whether or not presently exercisable) unless they are what?

A

Antidilutive

80
Q

Treasury stock method is used when

A

To include options and warrants and their equivalents in EPS computations

81
Q

What does the treasury stock method assume?

A

That the options or warrants are exercised at the beginning of the year (or date of issue if later) and that the company uses those proceeds to purchase common stock for treasury

82
Q

Contingent shares

A

Acquirer may promise to issue additional shares

83
Q

Sometimes the company issues these contingent shares as a result of what?

A

Passage of time condition or upon the attainment of a certain earnings or market price level

84
Q

If passage of time condition occurs during current year or if the company meets the earnings or market price by the end of the year, what does the company consider?

A

Contingent shares as outstanding for the computation of diluted EPS

85
Q

In computing diluted EPS, a company should exclude any security that is

A

Antidilutive

Acct 302 (7 decks)

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