Professional Documents
Culture Documents
ACT_320_Chapter_16
ACT_320_Chapter_16
L E A R N IN G O B J E C T IV E S
16 Earnings per Share
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting for the issuance, 5. Discuss the controversy involving stock
conversion, and retirement of convertible compensation plans.
securities. 6. Compute earnings per share in a simple
2. Explain the accounting for convertible capital structure.
preferred stock. 7. Compute earnings per share in a complex
3. Contrast the accounting for stock capital structure.
warrants and for stock warrants issued
with other securities.
4. Describe the accounting for stock
compensation plans under generally
accepted accounting principles.
16-1
Dilutive Securities
Convertible
Stock Options Preferred Stock
Securities
16-2 LO 1
Dilutive Securities
+
Privilege of Exchanging it for Stock
(at the holder’s option)
16-3 LO 1
Accounting for Convertible Debt
16-4 LO 1
Accounting for Convertible Debt
At Time of Issuance
Recording convertible bonds follows the method used to
record straight debt issues, with any discount or premium
amortized over the term of the debt.
16-5 LO 1
Accounting for Convertible Debt
Cash 3,960,000
Discount on Bonds Payable 40,000
Bonds Payable 4,000,000
16-6 LO 1
Accounting for Convertible Debt
At Time of Issuance
Companies use the book value method when converting
bonds.
When the debtholder converts the debt to equity, the issuing
company recognizes no gain or loss upon conversion.
16-7 LO 1
Accounting for Convertible Debt
16-8 LO 1
Accounting for Convertible Debt
Induced Conversion
Issuer wishes to encourage prompt conversion.
Issuer offers additional consideration, called a
“sweetener.”
Sweetener is an expense of the current period.
16-9 LO 1
Accounting for Convertible Debt
16-10 LO 1
Accounting for Convertible Debt
16-11 LO 1
Dilutive Securities and
L E A R N IN G O B J E C T IV E S
16 Earnings per Share
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting for the issuance, 5. Discuss the controversy involving stock
conversion, and retirement of convertible compensation plans.
securities. 6. Compute earnings per share in a simple
2. Explain the accounting for convertible capital structure.
preferred stock. 7. Compute earnings per share in a complex
3. Contrast the accounting for stock capital structure.
warrants and for stock warrants issued
with other securities.
4. Describe the accounting for stock
compensation plans under generally
accepted accounting principles.
16-12
Dilutive Securities
16-13 LO 2
Convertible Preferred Stock
Illustration: Gall Inc. issued 2,000 shares of $10 par value common
stock upon conversion of 1,000 shares of $50 par value preferred
stock. The preferred stock was originally issued at $60 per share.
The common stock is trading at $26 per share at the time of
conversion. Prepare the entry to record the conversion.
16-14 LO 2
Dilutive Securities and
L E A R N IN G O B J E C T IV E S
16 Earnings per Share
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting for the issuance, 5. Discuss the controversy involving stock
conversion, and retirement of convertible compensation plans.
securities. 6. Compute earnings per share in a simple
2. Explain the accounting for convertible capital structure.
preferred stock. 7. Compute earnings per share in a complex
3. Contrast the accounting for stock capital structure.
warrants and for stock warrants issued
with other securities.
4. Describe the accounting for stock
compensation plans under generally
accepted accounting principles.
16-15
Dilutive Securities
Stock Warrants
Warrants are certificates entitling the holder to acquire shares
of stock at a certain price within a stated period.
16-16 LO 3
Stock Warrants
16-17 LO 3
Stock Warrants
Proportional Method
Determine:
1. value of the bonds without the warrants, and
16-18 LO 3
Stock Warrants
16-19
LO 3
Stock Warrants
Cash 2,020,000
Discount on Bonds Payable 59,216
Bonds Payable 2,000,000
Paid-in Capital – Stock Warrants 79,216
16-20 LO 3
Stock Warrants
Incremental Method
Where a company cannot determine the fair value of either
the warrants or the bonds.
Use the security for which fair value can determined.
Allocate the remainder of the purchase price to the
security for which it does not know fair value.
16-21 LO 3
Stock Warrants
Allocation: Bonds
Issue price $ 2,020,000 Bond face value $ 2,000,000
Bonds 1,960,000 Allocated FMV 1,960,000
Warrants $ 60,000 Discount $ 40,000
16-22 LO 3
Stock Warrants
Cash 2,020,000
Discount on Bonds Payable 40,000
Bonds Payable 2,000,000
Paid-in Capital – Stock Warrants 60,000
16-23 LO 3
Stock Warrants
Conceptual Questions
Detachable warrants involves two securities,
a debt security,
a warrant to purchase common stock.
Nondetachable warrants
do not require an allocation of proceeds between the bonds
and the warrants,
companies record the entire proceeds as debt.
16-24 LO 3
Stock Warrants
16-25 LO 3
Stock Warrants
16-26 LO 3
Stock Warrants
16-27 LO 3
Dilutive Securities and
L E A R N IN G O B J E C T IV E S
16 Earnings per Share
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting for the issuance, 5. Discuss the controversy involving stock
conversion, and retirement of convertible compensation plans.
securities. 6. Compute earnings per share in a simple
2. Explain the accounting for convertible capital structure.
preferred stock. 7. Compute earnings per share in a complex
3. Contrast the accounting for stock capital structure.
warrants and for stock warrants issued
with other securities.
4. Describe the accounting for stock
compensation plans under generally
accepted accounting principles.
16-28
Accounting for Stock Compensation
Stock-Option Plans
Two main accounting issues:
1. How to determine compensation expense.
2. Over what periods to allocate compensation expense.
16-29 LO 4
Stock Option Plans
Determining Expense
Compensation expense based on the fair value of the
options expected to vest on the date they grant the
options to the employee(s) (i.e., the grant date).
16-30 LO 4
Stock Option Plans
16-31 LO 4
Stock Option Plans
* ($220,000 ÷ 2)
16-32 LO 4
Stock Option Plans
June 1, 2017
16-33 LO 4
Stock Option Plans
Jan. 1, 2024
* ($220,000 x 80%)
16-34 LO 4
Stock Option Plans
16-35 LO 4
Accounting for Stock Compensation
Restricted Stock
Restricted-stock plans transfer shares of stock to employees,
subject to an agreement that the shares cannot be sold,
transferred, or pledged until vesting occurs.
Major Advantages:
1. Never becomes completely worthless.
16-36 LO 4
Restricted Stock
16-37 LO 4
Restricted Stock
16-38 LO 4
Restricted Stock
16-39 LO 4
Restricted Stock
16-40 LO 4
Accounting for Stock Compensation
16-41 LO 4
Accounting for Stock Compensation
16-42 LO 4
Dilutive Securities and
L E A R N IN G O B J E C T IV E S
16 Earnings per Share
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting for the issuance, 5. Discuss the controversy involving stock
conversion, and retirement of convertible compensation plans.
securities. 6. Compute earnings per share in a simple
2. Explain the accounting for convertible capital structure.
preferred stock. 7. Compute earnings per share in a complex
3. Contrast the accounting for stock capital structure.
warrants and for stock warrants issued
with other securities.
4. Describe the accounting for stock
compensation plans under generally
accepted accounting principles.
16-43
Accounting for Stock Compensation
16-44 LO 5
Dilutive Securities and
L E A R N IN G O B J E C T IV E S
16 Earnings per Share
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting for the issuance, 5. Discuss the controversy involving stock
conversion, and retirement of convertible compensation plans.
securities. 6. Compute earnings per share in a simple
2. Explain the accounting for convertible capital structure.
preferred stock. 7. Compute earnings per share in a complex
3. Contrast the accounting for stock capital structure.
warrants and for stock warrants issued
with other securities.
4. Describe the accounting for stock
compensation plans under generally
accepted accounting principles.
16-45
Computing Earnings per Share
16-46 LO 6
Computing Earnings per Share
16-47 LO 6
EPS - Simple Capital Structure
16-48 LO 6
EPS - Simple Capital Structure
16-49 LO 6
Weighted-Average Shares Outstanding
Illustration 16-9
Illustration 16-10
16-51 LO 6
Weighted-Average Shares Outstanding
Illustration 16-12
16-53 LO 6
Dilutive Securities and
L E A R N IN G O B J E C T IV E S
16 Earnings per Share
LEARNING OBJECTIVES
After studying this chapter, you should be able to:
1. Describe the accounting for the issuance, 5. Discuss the controversy involving stock
conversion, and retirement of convertible compensation plans.
securities. 6. Compute earnings per share in a simple
2. Explain the accounting for convertible capital structure.
preferred stock. 7. Compute earnings per share in a complex
3. Contrast the accounting for stock capital structure.
warrants and for stock warrants issued
with other securities.
4. Describe the accounting for stock
compensation plans under generally
accepted accounting principles.
16-54
Computing Earnings per Share
16-55 LO 7
EPS - Complex Capital Structure
16-57 LO 7
EPS - Complex Capital Structure
16-58 LO 7
EPS - Complex Capital Structure
16-59 LO 7
EPS - Complex Capital Structure
16-60 LO 7
EPS - Complex Capital Structure
Basic 6% 10%
EPS Debentures Debentures
Basic EPS
= 2.10 Effect on EPS Effect on EPS = 1.875
= 1.80
Diluted EPS = $2.02
16-61 LO 7
EPS - Complex Capital Structure
Other Factors
The conversion rate on a dilutive security may change during
the period in which the security is outstanding. In this situation,
the company uses the most dilutive conversion rate available.
16-62 LO 7
EPS - Complex Capital Structure
Instructions
(b) Assume same facts as those for Part (a), except the 60 bonds
were issued on September 1, 2014 (rather than in 2013), and
none have been converted or redeemed.
16-63 LO 7
EPS - Complex Capital Structure
16-64 LO 7
EPS - Complex Capital Structure
Basic EPS
16-65 LO 7
EPS - Complex Capital Structure
Diluted EPS
Basic EPS
Effect on EPS = .48
= 1.29
16-66 LO 7
EPS - Complex Capital Structure
Revenues $ 17,500
Expenses 8,400
Bond interest expense (60 x $1,000 x 8% x 4/12) 1,600
Income before taxes 7,500
Income taxes (40%) 3,000
Net income $ 4,500
16-67 LO 7
EPS - Complex Capital Structure
Diluted EPS
Basic EPS
Effect on EPS = .48
= 2.25
16-68 LO 7
EPS - Complex Capital Structure
Instructions
16-69 LO 7
EPS - Complex Capital Structure
Basic EPS
16-70 LO 7
EPS - Complex Capital Structure
Diluted EPS
$1.50
Effect on
Basic EPS = 1.60 *(40,000 x 5)
EPS = 1.20
16-71 LO 7
EPS - Complex Capital Structure
Diluted EPS
$1.67
Effect on
Basic EPS = 1.60 *(40,000 x 3)
EPS = 2.00
16-72 LO 7
EPS - Complex Capital Structure
16-74 LO 7
EPS - Complex Capital Structure
Instructions
16-75 LO 7
EPS - Complex Capital Structure
Treasury-Stock Method
Proceeds if shares issued (1,000 x $8) $8,000
Purchase price for treasury shares ÷ $20
Shares assumed purchased 400
Shares assumed issued 1,000
Incremental share increase 600
16-76 LO 7
EPS - Complex Capital Structure
Diluted EPS
$40,000 + $40,000
= = $3.77
10,000 + 600 10,600
16-78 LO 7
EPS - Complex Capital Structure
Diluted EPS
$40,000 $40,000
= = $3.94
10,000 + 150 10,150
16-79 LO 7
EPS - Complex Capital Structure
Antidilution Revisited
Ignore antidilutive securities in all calculations and in computing
diluted earnings per share.
16-80 LO 7
EPS - Complex Capital Structure
16-81 LO 7
EPS - Complex Capital Structure
16-82 LO 7
Earnings per Share
Illustration 16-27
16-83 LO 7
Illustration 16-28
Earnings per
Share
16-84 LO 7