Exam 3 Study Guide(7 pages)
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Exam 3 Study Guide
- Study Guide
- Illinois State University
- Acc 232 - Intermediate Accounting II
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ACC 232 Exam # 3 Study Guide Chapters 16 & 18 Chapter 16 Dilutive securities and Earnings per share Dilutive security-security that will be converted into common stock, and increase the number of shares of common stock in calculating earnings per share. Reasons a company would issue a dilutive security: Convertible bonds - conversion is a sweetener, and would lower the interest rate that company pays on the bond. - conversion would save cash to retire bonds at maturity Convertible preferred stock - lower dividend rate because the conversion is a sweetener. Both cases - future ownership without giving ownership rights until they convert. Record a convertible bond being issued. Issue a bond for 100 that would be issued for 95 if it wasn't convertible Cash $1,000,000 Bonds payable $1,000,000 Conversion: We trade the bond for 10,000 shares of $20 par value stock with a fair market value of $140. Bonds payable $1,000,000 Common stock $200,000 Par Paid-in capital in excess of par $800,000 over par Induced conversion - if the bond is callable, we call the bond, and the bondholders convert instead. Incentive - we will pay you $30,000 to convert Debt conversion expense $30,000 Cash $30,000 Bonds retire unconverted - usual accounting treatment Convertible preferred stock When issued: Cash $1,000,000 Preferred stock (Par) $800,000 Paid in capital preferred stock $200,000 When converted: Preferred stock $800,000 Paid in capital preferred stock $200,000 Common stock $200,000 Par Paid in capital - common stock $800,000 Stock warrants - certificate that entitles the holder to acquire shares of stock for a certain time period for a certain price. -a long term call option. Allocate the proceeds proportionally to the warrants and the bonds If the warrants can trade separately after the bonds issued, and we can establish a fair market value on the bonds and the warrants, $2,000,000 worth of bonds are issued a 101, or $2,020,000. The bonds have a FMV of 98, and the warrant have a market value or $40 X 2,000 = $80,000 The bonds by themselves have a FMV of 98 X $2,000,000, or $1,960,000. The total FMV of the transaction $1,960,000 + $80,000 = $2,040,000. The total proceeds are $2,020,0000. To the bonds $1,960,000 / $2,040,000 = 96.078% of the $2,020,000 = $1,940,784 To the warrants $80,000 / $2,040,000 = 3.922% of the $2,020,000 = $79,216 Cash $2,020,000 Discount on bonds payable $59,216 Bonds payable $2,000,000 Paid in capital - stock warrants $79,216 When the warrants are exercised, this amount goes into the common stock paid in capital If we can't establish a FMV to one of the securities, then we allocate all of the FMV to the other security, and the rest of the proceeds go to the warrants. IF the value of the bonds was 100, then Cash $2,020,000 Bonds payable $2,000,000 FMV Paid in capital - stock warrants $20,000 Plug Nondetachable warrants - the entire proceeds are recorded as debt. Stock Right - Privilege to buy the stock, typically at a price below ...
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