Help
Options
Didn't know it?
click below
click below
Knew it?
click below
click below
Don't Know
Remaining cards (0)
Know
retry
shuffle
restart
0:00
Embed Code - If you would like this activity on your web page, copy the script below and paste it into your web page.
Normal Size Small Size show me how
Normal Size Small Size show me how
Chpt 16
Inted acct 2
| Question | Answer |
|---|---|
| Convertible bonds are usually converted into | Common Stocks |
| When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounted for as a(n) | Expense |
| The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be | treated as a direct reduction of retained earnings. |
| Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when? | Warrants issued with the debt securities are non detachable |
| issuers may use "sweetener" to | induce conversion of stock. The issuing company reports the sweetener as an expense of the current period. |
| Companies need to recognize a gain or loss on retiring convertible debt in the same way that they recognize a gain or loss | on retiring nonconvertible debt. |
| Companies should report differences between cash acquisition price of debt and its | carrying amount in current income as a gain or loss. |
| Convertible preferred stock | includes option for the holder to convert preferred shares into a fixed number of common shares |
| The major difference between accounting for a convertible bond and convertible preferred stock at the date of issue is their classification. | True |
| Convertible bonds are considered liabilities whereas convertible preferred (unless mandatory redemption exists) are considered part of stockholders equit. | true |
| Warrants | are certificates entitling the holder to acquire shares of stock at a certain price within a stated period. similar to conversion privilege in a convertible bond. |
| A Substantial difference between convertible securities and stock warrants is that upon exercise of the warrants, the | holder has to pay a certain amount of money to to obtain the shares |
| How many situations arises where issuance of warrants or options to buy additional shares normally occurs | 3 |
| the two methods for alloocation of fair value for detachable warrants are | 1. Proportional method 2. the Incremental method |
| Proportional Method | a value must be placed on the bonds without the warrants and then on the warrants. |
| The FASB stated that the features of a convertible security are inseparable in the sense that choices are mutually exclusive. The holder either converts the bonds or redeems them for cash, but cannot do both. | true |
| Stock right (preemptive privilege) | saves existing stockholders from suffering a dilution of voting rights without their consent. Can allow them to purchase stock somewhat below fair value. |
| The certificate representing the stock right states the number of shares the holder of the right may purchase. | |
| The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the: | aggregate fair market value of the bonds and the warrants. |
| Compensation expense resulting from a compensatory stock option plan is generally | allocated to the periods benefited by the employee's required service |
| Features of a non compensatory stock option plan | Substantially all full-time employees may participate on an equitable basis. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others. |
| The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee | Is granted the option |
| grant date | date you receive the option to purchase co. stock |
| intrinsic-value method | measures what the holder would receive today if the option was immediately exercised |
| intrinsic-value | is the difference between the market price of the stock and the exercise price of the options at the grant date. |
| fair value method | companies use acceptable option-pricing models to value the options at the date of grant. |
| GAAP requires companies to recognize compensation cost using the fair vale method. | true |
| FASB's position is that companies should base the accounting for cost of employee services on the fair value of compensation paid . | this amount is presumed to be a measure of the value of the services received. |
| Service period | time or period employee preforms service. |
| Unless other wise specified the service period is | the vesting period. |
| Vested | means to earn the rights to. |
| Under GAAP companies do not adjust compensation expense upon expiration of the option. | but does adjust if employee forfeits stock option because of failure to satisfy a service requirement. (leaves employment) |
| Restricted Stock | stock shares transferred to employees subject to an agreement that shares cannot be sold, transferred, or pledged until vesting occurs. |
| Major advantages of restricted stock plans are | 1. never becomes completely worthless 2. generally results in less dilution to existing stockholders. 3. they better align employee incentives with companies incentives. |
| Restricted stock is more of an incentive because | is essentially a stockholder and should be more interested i long-term objectives of company |
| Subsequent changes in the fair value of the stock | are ignored for purposes of computing compensation expense. |
| Unearned compensation is often called | Deferred Compensation Expense |
| A Corporation's capital structure is simple if? | It consists only common stock or includes no potential common stock that upon conversion or exercise could dilute earnings per share. |
| A capital structure is complex if it includes securities that could have a dilutive effect on earnings per common share. | true |
| Computation of earnings per share for a simple capital structure involves three things? | Net income , preferred stock dividends and weighted average number of shares outstanding. |
| To determine amount available to common stockholders | Net Income - Preferred Dividends |
| To find Earnings per Share | Net Income - Preferred Dividends/ Weighted average number of shares outstanding. |
| Preferred Dividends whether declared or cumulative must be deducted from net | Income to determine Earnings per share. |
| When stock Dividends and stock splits occur companies should | restate the shares outstanding before stock dividend or split, in order to compute weighted average number per shares. |
| Antidilutive Securities | Securities which upon conversion or exercise increase earnings per share (or reduce the loss per share) |
| Book value approach | A method used for determining the issue price of stock when bonds are converted into stock which records the stock issued using the book value of the bonds at the issue date. |
| Complex capital structure | When a corporation's capital structure includes securities that could have a dilutive effect on earnings per common share. |
| Convertible bonds | a security that combines the benefits of a bond with the privilege of exchanging it for stock at the holder's option. |
| Convertible preferred stock | Preferred stock which is convertible into common stock at the holder's option. |
| Detachable stock warrants | Warrants that can be sold separately from their bonds. |
| Diluted earnings per share | Earnings per share based on the number of common shares outstanding plus all contingent issuance of common stock that could reduce earnings per share. |
| Dilutive securities | Securities that are not common stock in form, but enable their holders to obtain common stock upon exercise or conversion. |
| Dilutives Securities examples | convertible bonds, convertible preferred stocks stock warrants and contingent shares. |
| Earnings per share | the income earned by each share of common stock. |
| Grant date | the date someone receives stock options |
| If-converted method | the method used to measure the dilutive effect of convertible securities which assumes (1) the conversion of the convertible securities begins at the beginning of the period |
| If-converted method | or at time of issuance of the security, if issued during the period, and (2) the elimination of interest, net of tax or preferred dividend. |
| Induced Conversion | When an issuer wishes to induce prompt conversion of its convertible debt to equity securities, the issuer may offer some form of additional consideration (such as cash or common stock). |
| Market value approach | A method used for determining the issue price of stock when bonds are converted into stock which records the stock issued using its market price at the issue date. |
| Nondetachable stock warrants | Warrants that cannot be sold separately from their bonds. |
| Restricted-stock plans | Stock plans that transfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred or pledged until vesting occurs. |
| ! Convertible bonds are usually convertible into a specified number of | Common shares |
| In computing earnings per share for a simple capital structure | an amount equal to the dividend that should have been declared for the current year only is subtracted from net income |
| In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. | If the exercise price of the options or warrants exceeds the average market price, the computation would be antidilutive |
| What will the numerator of the diluted EPS calculation consist of when convertible preferred stock is being included? | net income |
| Dilutive convertible securities must be used in the computation of | diluted earnings per share only |
| For stock appreciation rights, share appreciation is the excess of the market price of the stock at the date ______ over a pre-established price. | of exercise |
| An executive pays no taxes at the time of exercise in a(an) | incentive stock option plan |
| A company estimates the fair value of SARs, using an option-pricing model, for | share-based liability awards. |
| The calculation of basic and diluted earnings per share is similar between IFRS and GAAP. | true |
| With regard to recognizing stock-based compensation | IFRS and US GAAP follow the same model |
| Under IFRS, how are convertible debt recorded? | Convertible debt is separated into equity component and debt component |
| When $5,000,000 in convertible bonds are issued at par with $800,000 in value of the equity option embedded in the bond, the IFRS journal entry will include a debit of | 8000, to bonds payable and a credit to paid-in capital- convertible bonds |
| With regard to contracts that can be settled in either cash or shares | IFRS requires that share settlement must be used |
| Under IFRS, what is recorded as compensation expense for all employee share-purchase plans? | amount of discount |
| to find allocating of bonds with warrants | add fair value of Bonds + fair value of warrants. Take total and divide by cost of bond and then same for warranty |
| Convertible bonds can be changed into other corporate | Securities during some specified period of time after issuance. |
| Benefit of a convertible bond | Guaranteed interest and principal plus privilege of exchanging it for stock |
| Two main reasons corporations issue convertibles | 1. To raise equity capital without giving up more ownership control than necessary. 2. Obtain debt financing at cheaper rate. |
| Accounting for convertible debt involves reporting | 1. Issuance 2. conversion 3. retirement |
| Convertible bonds - recording follows the method used to record straight debt issues | with any discount or premium amortized over the term of the debt. |
| When convertible preferred stock is converted into common stock and the par value of the common stock exceeds the book value | of the preferred stock then retained earnings is usually debited for the difference . True |
| The proceeds from the sale of debt with nondetachable stock warrants should be allocated between the to securities. | False Non detachable warrants should be sold with the security as a complete package. |
| Non detachable warrants do not require an allocation of the proceeds between the bonds and the warrants | True |
| The FASB requires recognition of compensation cost using the fair value method. | True |
| Using fair value method, total compensation expense is computed based on the fair value of the options expected to | vest on the date the options are granted to the employees. True |
| Under the fair value method total compensation cost is computed based on the fair value of the options expected | to vest on the date the options are granted to the employee |
| The measurement date is the first date on which are know both | (1) the number of shares that an individual employee is entitled to receive and (2)the option or purchase price if any |
| In general under the fair value method compensation expense is recognized in | the periods in which the employee preforms the service - the service period. |
| A major advantage of a restricted-stock plan is that restricted stock never becomes completely worthless. | True |
| When accounting for restricted stock, a company determines the | fair value of the restricted stock at the date of grant and then expenses that amount over the service period. |
| When accounting for restricted stock, Unearned Compensation represents the cost of services | yet to be preformed which is not any asset. |
| The stock option saga is a classic example of the difficulty the FASB | faces in issuing an accounting standard. |
| In computing earnings per share, if a stock dividend occurs after the end of the year, but before the financial statements are issued | then the weighted average number of shares outstanding for the prior year ( and any other years presented in comparative form) must be restated. |
| When stock dividends or stock splits occur, computation of the weighted average | number of shares requires restatement of the shares outn standing before the stock dividend or split. |
| Diluted earnings per share indicates the dilution of earnings per share that would have occurred if all contingent | issuances of common stock that would have reduced earnings per share |
| Anti-dilutives securities are securities which upon their conversion | or exercise increase earnings per share ( or decrease the loss per share) |
| Earnings per share data are required for each of the following | Income from continuing operations, B income before extraordinary items and C net income |
| If amount of warrant or bond is not know | take purchase price - know amount = amount for unknown |
Created by:
smcdo11