1.

Dilutive securities
a. Nonredeemable common or preferred stock are NOT liabilities because the
issuer does not have an obligation to pay dividends or repurchase stock
b. Redeemable preferred stock is considered a liability because it will be purchased
back, so it is a debt
c. Dilutive securities – any financial instrument or security that gives holder the
option to convert security into common stock at some point
i. If they convert security into common stock, then there are more shares
outstanding. Thus, EPS will be decreased or diluted.
EPS = Net Income .
Common Shares Outstanding
2. Convertible bonds
a. Convertible bonds – can be changes into other corporate securities during some
specific period of time after issuance
b. Combines benefits of a bond with privilege of exchanging it for stock at holder’s
option. So, investors who purchase it want the security of a bond (guaranteed
interest and principal) PLUS added option of conversion if stock appreciates
significantly.
c. Main reasons for issuing convertible stock
i. Raise equity capital without giving up more ownership control than
necessary
ii. To obtain debt financing at cheaper rates
d. Accounting treatment at:
i. Time of issuance
1. Recognition at issuance for convertible bonds is the same for a
regular bond
Cash (Issue price)
Discount
B/P (Face value)

Cash (Issue price)

Premium
B/P (Face value)

2. It is recorded like this because it is difficult to predict when, and if

at all, bond will be converted
ii. Time of conversion
1. Bonds are retired and stock is issued
2. Book value method – issued stock is recorded equal to book value
of bonds and no gain or loss is recorded
3.
When company get smoney for exerceis price, they will buy stock in the makret and thye will
give that stock out that thye repurchased to whoever purchased stock option.