Dilutive Securities
Chapter 16 Section 1 - Kieso Weygandt 12th edition
Convertible Preferred Stock
converted using the book value method
same old rules regarding credit PIC debit Retained Earnings
Convertible Bonds
accounting for -same as any other debt
(1)
issue
(2)
conversion
market value method
book value method ****
(3)
extinguishment or retirement
Ex 16-1(1)
1/1/yr 01
1/1/yr 02
1/1/yr 03
1/1/yr 04
1/1/yr 05
20,000,000 Face
sold @ 95
less
coupon
19,000,000
19,159,408
19,336,934
19,534,635
19,754,806
2,159,408
2,177,525
2,197,702
2,220,171
2,245,194
2,000,000
2,000,000
2,000,000
2,000,000
2,000,000
sold @ 99
10.266%
yield
coupon
2,032,587
2,035,932
2,039,621
1,019,810
2,043,688
2,048,173
2,000,000
2,000,000
2,000,000
1,000,000
2,000,000
2,000,000
19,800,000
19,832,587
19,868,519
1/1/yr 04
1/1/yr 05
19,908,140
19,951,828
1/1/ '01Cash
discount on bond pay
Bond payable
Unamortized bond issue costs
Cash
p. 677
p. 683
10% Coupon
11.365%
yield
1/1/yr 01
1/1/yr 02
1/1/yr 03
p. 780
balance
159,408
177,525
197,702
220,171
245,194
19,159,408
19,336,934
19,534,635
19,754,806
20,000,000
12/31/ yr 01
12/31/yr 02
12/31/yr 03
12/31/yr 04
12/31/yr 05
balance
19,800,000
200,000
20,000,000
70,000
70,000
12/31/01Interest expense
2,032,587
discount on bond pay
32,587
Cash
2,000,000
Amortization expense
14,000
Unamortized bond issue costs
14,000
32,587
35,932
39,621
19,810
43,688
48,173
19,832,587
19,868,519
19,908,140
19,888,329
19,951,828
20,000,000
12/31/yr 01
12/31/yr 02
12/31/yr 03
12/31/yr 04
12/31/yr 05
2
12/31/02 Interest expense
2,035,932
discount on bond pay
35,932
Cash
2,000,000
Amortization expense
14,000
Unamortized bond issue costs
14,000
entry if bonds are retired for $19,950,000 plus interest on 6/30/yr 03
6/30/ '03 Interest expense
1,019,810
discount on bond pay
19,810
Interest payable
1,000,000
Amortization expense
7,000
Unamortized bond issue costs
7,000
6/30/ '03
Interest payable
Cash
Loss
1,000,000
35,000
Unamortized bond issue costs
1,000,000
35,000
Loss
61,671
Bond payable
20,000,000
discount on bond pay
111,671
Cash
19,950,000
each convertible bonds is converted into 20 shares of $1 PAR value common stock on 6/30/03
6/30/ '03 Interest expense
1,019,810
discount on bond pay
19,810
Interest payable
1,000,000
Amortization expense
7,000
Unamortized bond issue costs
7,000
6/30/ '03
Interest payable
1,000,000
Cash
1,000,000
Loss
35,000
Unamortized bond issue costs
35,000
Bond payable
20,000,000
discount on bond pay
111,671
Common stock
400,000
Add'l PIC
19,488,329
20 shares * 20,000 bonds *$PAR
3
Stock Warrants (stock rights stock options) -if attached
background when used
page 782
detachable v. nondetachable warrants
warrants are stock rights which may be used to satisfy stockholders pre-emptive rights
detachable warrants
allocate issue price between the
warrant and the stock
warrant and the bond
see page 783 **** porpotional method or incremental method
Ex 16-1(2) Each warrant can be exercised to purchase one share of the company’s common stock for
$20, regardless of the market price of the common stock.
Face value of bonds is $100
i.e. 200,000 bonds and warrants
issued for 98% of
FMV of warrants
Bond Payable
$20,000,000
4* 200,000
$19,600,000
800,000
18,800,000
total
warrants
Bond
Modify: At issue, similar bonds were selling for 95 and the warrants have a market value of $4.00.
The market price of the common stock was $24.00 at the time.
Ex 16-1(2) modified
market
FMV of bonds
FMV warrants
number
95%
$4.00
200,000
200,000
proportionate
FMV
19,000,000 95.96%
800,000
4.04%
19,800,000 100.00%
Cash
19,600,000
discount on bond pay
1,191,919
Bond payable
20,000,000
Add'l PIC -Warrants
791,919
19,600,000
19,600,000
18,808,081
791,919
19,600,000
this is an Owners' Equity account
4
Stock based Compensation
Compensatory stock options
expense = calculated by an Option Pricing model
@ measurement date => grant date
option price
the number of shares
the expense is allocated over the service period
3 dates
grant date
end of service period
exercise date
service period
separate issues measurement
recognition
Where does the stock come from when managers exercise their stock options and the company
issues them stock.
5
Ex 16-10 Options
11/1/07
no entry
12/31/08 Compensation expense
Add'l PIC - stock options
225,000
12/31/09 Compensation expense
Add'l PIC - stock options
225,000
1/3/10
225,000
$15 per share / 2
225,000
Cash
800,000
Add'l PIC - stock options
300,000
Common stock
200,000
Add'l PIC
900,000
executives exercise 20,000 options @ $40 / share
$40 * 20,000
$15 / share * 20,000
$10 * 20,000
Owners' Equity
Common Stock $10 PAR value 1,000,000 shares authorized,
500,000 shares issued and 420,000 outstanding
Additional capital paid in excess of PAR value
Addititonal paid in capital - stock options
Contributed capital
Retained Earnings - $3,500,000 the cost of treasury stock is restricted
less: 100,000 shares of Treasury stock at $35 cost
Owners' equity
5,000,000
33,785,000
450,000
38,235,000
6,535,000
3,500,000
41,270,000
Now let's do this slightly different than the solutions manual and pay them with Treasury Stock instead
of issuing new stock
1/3/10+
Cash
800,000
Add'l PIC - stock options
300,000
Treasury stock
700,000
Add'l PIC
400,000
executives exercise 20,000 options @ $40 / share
$40 * 20,000
$15 * 20,000
$35 * 20,000
instead of working the problem like the book, let's let the last 10,000 options expire
1/3/14
Add'l PIC - stock options
Add'l PIC expires SO
10,000 options expires
150,000
$15 * 10,000
150,000
6
Ex 16-11 Stock Options
20,000 options @ $25 per share FMV = $350,000 over a two year service period
350,000 / 20,000 = $17.50 PIC per share
1/1/08
no entry
12/31/08 Compensation expense
Add'l PIC - stock options
4/1/09
175,000
175,000
one employee with 2,000 options resigns
12/31/09 Compensation expense
Add'l PIC - stock options
for the remaining 18,000 options
140,000
140,000
please note: we take the Add'l PIC we recorded for this employee off the books
however as a change in estimate => the income state effect flows thru the current year
3/31/10 Cash
300,000
Add'l PIC - S/O
210,000
Common stock
Add'l PIC
executives exercise 12,000 options
120,000
390,000
$25 * 12,000
$17.50 * 12,000
$10 * 12,000
from Appendix A
(Stock Appreciation Rights)
Stock compensation when the measurement date is later than the grant date
employer recognizes comp expense each period from the grant date until the measure date based on
the market price at the end of the period. Comp exp is the excess of the market price over the option
price at the first year. Changes in the market price at the end of successive years result in changes in
the total estimated comp exp.
employer recognizes comp expense each period from the grant date until the measure date based on
the market price at the end of the period. Comp exp is the excess of the market price over the option
price at the first year. Changes in the market price at the end of successive years result in changes in
the total estimated comp exp.
Notice that the Comp Exp for a SAR is offset by a Liability, which is logical if the company is
going to pay out Cash for the SAR. However, if the company is going to settle in stock, then we
would credit an owners' equity account.
7
Ex 16-29 Stock Appreciation Rights
shares
12/31/04
12/31/05
12/31/06
12/31/07
12/31/08
12/31/09
5/05/10
market
less
target
30,000 *(36 -30) =
30,000 *(39 -30) =
30,000 *(45 -30) =
30,000 *(36-30)
30,000 *(48 -30) =
30,000 *(48 -30)
total
180,000
270,000
450,000
180,000
540,000
540,000
% of
service
period
requied
liability ?
cont cap ?
1/4 =
2/4 =
3/4 =
45,000
135,000
337,500
180,000
540,000
540,000
expense
45,000
90,000
202,500
< 157,500 >
360,000
12/31/04 no entry
12/31/05 Compensation expense
Liability under SAR plan
45,000
12/31/06 Compensation expense
Liability under SAR plan
90,000
12/31/07 Compensation expense
Liability under SAR plan
202,500
12/31/08 Liability under SAR plan
Compensation expense
157,500
12/31/09 Compensation expense
Liability under SAR plan
360,000
5/05/10
540,000
Liability under SAR plan
Cash
45,000
90,000
202,500
157,500
change in accounting estimate
remember for Chap 22
360,000
President Davis exercises the SARs
540,000
What if we expect the executives to purchase stock
12/31/05 Compensation expense
Add'l PIC - SAR under
45,000
12/31/06 Compensation expense
Add'l PIC - SAR
90,000
45,000
90,000
30,000 SAR's * ( 48 - 30 ) = $ 540,000 / $ 48 per share = 11,250 shares
Add'l PIC - SAR's
Common stock
Add'l PIC
540,000
11,250
528,750