convertible debt at time of issuance
DESCRIPTION
Convertible Debt at Time of Issuance. E16-1 (part 1) Cash 9,900,000 Bond discount 100,000 Bonds payable 10,000,000 Bond issue costs70,000 Cash70,000. Time of “Normal” Conversion. Text (p. 797) Carrying amount of bonds (book value): Bonds payable1,000 - PowerPoint PPT PresentationTRANSCRIPT
Convertible Debt at Time of Issuance
E16-1 (part 1)Cash 9,900,000Bond discount 100,000 Bonds payable 10,000,000
Bond issue costs 70,000 Cash 70,000
Time of “Normal” Conversion
• Text (p. 797)• Carrying amount of bonds (book value):
Bonds payable 1,000 Bond premium 50
1,050
Time of “Normal” Conversion
Bonds payable 1,000Premium on bonds payable 50
Time of “Normal” Conversion
Bonds payable 1,000Premium on bonds payable 50 Common stock (par value) 100 APIC (1,050 – 100) 950
Induced Conversions
• Involves a “sweetner”• E16-1 (part 3)
Induced ConversionsBook value of bonds: Bonds payable 10,000,000 Discount on bonds payable 55,000
9,945,000Par value of stock 1,000,000APIC 8,945,000
9,945,000
Debt conversion expense 75,000Bonds payable 10,000,000 Discount on bonds payable 55,000 Common stock 1,000,000 APIC 8,945,000 Cash 75,000
Convertible Preferred Stock
Is equity - unless mandatory redeemable Conversion is an equity transaction -- no
gain or loss recognized Book value of preferred used to record
conversion
Conv. Preferred Stock – Text P. 798
Book value of preferred:Preferred 1,000APIC – preferred 200
1,200
Preferred stock 1000APIC – preferred 200
Conv. Preferred Stock – Text P. 798
Book value of preferred:Preferred 1,000APIC – preferred 200
1,200
Preferred stock 1000APIC – preferred 200
Common stock (1,000 x $2 par) 2,000
Conv. Preferred Stock – Text P. 798
Book value of preferred:Preferred 1,000APIC – preferred 200
1,200
Preferred stock 1000APIC – preferred 200Retained earnings 800
Common stock (1,000 x $2 par) 2,000
Conv. Preferred Stock – Text P. 781
What if convertible into 400 shares of common?
Book value of preferred:Preferred 1,000APIC – preferred 200
1,200
Preferred stock 1000APIC – preferred 200
Conv. Preferred Stock – Text P. 781
What if convertible into 400 shares of common?
Book value of preferred:Preferred 1,000APIC – preferred 200
1,200
Preferred stock 1000APIC – preferred 200
Common stock (400 x $2 par) 800
Conv. Preferred Stock – Text P. 781
What if convertible into 400 shares of common?
Book value of preferred:Preferred 1,000APIC – preferred 200
1,200
Preferred stock 1000APIC – preferred 200
Common stock (400 x $2 par) 800APIC – common 400
Stock Warrants Entitle holder to acquire additional shares
• within a specified period• at a specified price
Typical uses• “Equity kicker”• Evidence of preemptive right of existing
stockholders• Stock-based compensation for executives (stock
options)
Stock Warrants (cont.)Detachable
• Proportional method (if FV of both debt and warrant determinable)
• Incremental method (if FV of both not determinable)
Nondetachable• No part of proceeds allocated to warrants
See text examples pp. 800-801
Stock Warrants (cont.) Allocated to warrants:
300,000/10,200,000 x 10,000,000 = 294,118 Allocated to bonds:
9,900,000/10,200,000 x 10,000,000 = 9,705,88210,000,000
Cash 9,705,882Discount on bonds payable 294,118
Bonds payable 10,000,000
Cash 294,118APIC - stock warrants 294,118
Stock Warrants (cont.) What if proceeds = $9,700,000? Allocated to warrants:
300,000/10,200,000 x 9,700,000 = 285,294 Allocated to bonds:
9,900,000/10,200,000 x 9,700,000 = 9,414,7069,700,000
Cash 9,414,706Discount on bonds payable 585,294
Bonds payable 10,000,000
Cash 285,294APIC - stock warrants 285,294
Stock Compensation Plans
Stock option plans:• incentive plans [qualified for tax purposes] • non-qualified plans
Stock appreciation rights Performance plans
Stock Options - Important Dates
Workstart date
Vesting date
Date optionvests –employeemust donothing else
Exercisedate
Employeeexercisesoptions
Grant date
Options are
granted toemployee
Expirationdate
Unexercisedoptionsexpire
Stock Option Plans
Accounting method• Now required - fair value method (SFAS
123R)• Previously required - intrinsic value
method (APBO 25)
Fair Value Method
Total compensation cost (TCC)• Fair value at grant date of options
expected to vest Allocate TCC over service period See page 806
Stock Appreciation Rights [SARs]
SARs are designed to mitigate employee’s cash flow problems in non-qualified plans
Employee gets a right to receive any appreciation in share value at exercise date equal to market price less a pre-established amount
Employee receives cash or stock only for the appreciation.
Stock Appreciation Rights (SARs): Example
Given: SAR program is established: January 1, 2010 SAR exercise period: any time next five years Pre-established price per SAR: $10 Number of SARs granted: 10,000 Market prices of the stock: Dec 31, 10: $ 3; Dec 31, 11: $7; Dec 31, 12: $ 5. Service period: 2 years (2010 - 2011) The SARs are held for 3 years and then exercised. Determine the compensation expense for 2010, 11, and 12.
Stock Appreciation Rights (SARs): Entries
Dec 31, 2010 Compensation Expense $15,000 Liability for SARs $15,000
Debit Credit
Dec 31, 2011 Compensation Expense $55,000 Liability for SARs $55,000
Dec 31, 2012 Liability for SARs $20,000 Compensation Expense $20,000
Dec 31, 2012 Liability for SARs $50,000 Cash $50,000
(SARs exercised end of the third year)