QUESTIONS
1. What is meant by a dilutive security?
2. Briefly explain why corporations issue convertible securities.
3. Discuss the similarities and the differences between convertible debt and debt issued with stock warrants.
4. Bridgewater Corp. offered holders of its 1,000 convertible bonds a premium of $160 per bond to induce conversion into shares of its common stock. Upon conversion of all the bonds, Bridgewater Corp. recorded the $160,000 premium as a reduction of paid-in capital.
Comment on Bridgewater’s treatment of the $160,000 “sweetener.”
5. Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.
6. What are the arguments for giving separate accounting recognition to the conversion feature of debentures?
7. Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at $14 per share (par value $10). The company records the conversion as follows…
Discuss the propriety of this accounting treatment.
8. On July 1, 2017, Roberts Corporation issued $3,000,000 of 9% bonds payable in 20 years. The bonds include detachable warrants giving the bondholder the right to purchase for $30 one share of $1 par value common stock at any time during the next 10 years. The bonds were sold for $3,000,000. The value of the warrants at the time of issuance was $100,000. Prepare the journal entry to record this transaction.
9. What are stock rights? How does the issuing company account for them?
10. Briefly explain the accounting requirements for stock compensation plans under GAAP.
11. Cordero Corporation has an employee stock-purchase plan which permits all full-time employees to purchase 10 shares of common stock on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased and no commission is charged. Discuss whether this plan would be considered compensatory.
12. What date or event does the profession believe should be used in determining the value of a stock option? What arguments support this position?
13. Over what period of time should compensation cost be allocated?
14. How is compensation expense computed using the fair value approach?
15. What are the advantages of using restricted stock to compensate employees?
16. At December 31, 2017, Reid Company had 600,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 200,000 of which were issued on October 1, 2017. Net income for 2017 was $2,000,000, and dividends declared on preferred stock were $400,000. Compute Reid’s earnings per common share. (Round to the nearest penny.)
17. What effect do stock dividends or stock splits have on the computation of the weighted-average number of shares outstanding?
18. Define the following terms.
(a) Basic earnings per share.
(b) Potentially dilutive security.
(c) Diluted earnings per share.
(d) Complex capital structure.
(e) Potential common stock.
19. What are the computational guidelines for determining whether a convertible security is to be reported as part of diluted earnings per share?
20. Discuss why options and warrants may be considered potentially dilutive common shares for the computation of diluted earnings per share.
21. Explain how convertible securities are determined to be potentially dilutive common shares and how those convertible securities that are not considered to be potentially dilutive common shares enter into the determination of earnings per share data.
22. Explain the treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data.
23. Earnings per share can affect market prices of common stock. Can market prices affect earnings per share? Explain.
24. What is meant by the term antidilution? Give an example.
25. What type of earnings per share presentation is required in a complex capital structure?
26. How is antidilution determined when multiple securities are involved?
