Chapter 16: Q6IFRS (page 895)
What are the arguments for giving separate accounting recognition to the conversion feature of debentures?
There is an inborn economic value in a conversion feature.
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Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that instead of options, Barwood granted 2,000 shares of restricted stock.
E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.
Instructions
(a) Are the warrants dilutive?
(b) Compute basic earnings per share.
(c) Compute diluted earnings per share.
(Warrants Issued with Bonds and Convertible Bonds) Incurring long-term debt with an arrangement whereby lenders receive an option to buy common stock during all or a portion of the time the debt is outstanding is a frequent corporate financing practice. In some situations, the result is achieved through the issuance of convertible bonds; in others, the debt instruments and the warrants to buy stock are separate.
Instructions
(a) (1) Describe the differences that exist in current accounting for original proceeds of the issuance of convertible bonds and of debt instruments with separate warrants to purchase common stock.
(2) Discuss the underlying rationale for the differences described in (a)(1) above.
(3) Summarize the arguments that have been presented in favor of accounting for convertible bonds in the same manner as accounting for debt with separate warrants.
(b) At the start of the year, Huish Company issued \(18,000,000 of 12% bonds along with detachable warrants to buy 1,200,000 shares of its \)10 par value common stock at \(18 per share. The bonds mature over the next 10 years, starting one year from date of issuance, with annual maturities of \)1,800,000. At the time, Huish had 9,600,000 shares of common stock outstanding. The company received $20,040,000 for the bonds and the warrants. For Huish Company, 12% was a relatively low borrowing rate. If offered alone, at this time, the bonds would have sold in the market at a 22% discount. Prepare the journal entry (or entries) for the issuance of the bonds and warrants for the cash consideration received.
EXCEL (Stock-Option Plan) Berg Company adopted a stock-option plan on November 30, 2016, that provided that 70,000 shares of \(5 par value stock be designated as available for the granting of options to officers of the corporation at a price of \)9 a share. The market price was \(12 a share on November 30, 2017.
On January 2, 2017, options to purchase 28,000 shares were granted to president Tom Winter—15,000 for services to be rendered in 2017 and 13,000 for services to be rendered in 2018. Also on that date, options to purchase 14,000 shares were granted to vice president Michelle Bennett—7,000 for services to be rendered in 2017 and 7,000 for services to be rendered in 2018. The market price of the stock was \)14 a share on January 2, 2017. The options were exercisable for a period of one year following the year in which the services were rendered. The fair value of the options on the grant date was \(4 per option.
In 2018, neither the president nor the vice president exercised their options because the market price of the stock was below the exercise price. The market price of the stock was \)8 a share on December 31, 2018, when the options for 2017 services lapsed.
On December 31, 2019, both president Winter and vice president Bennett exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share.
Instructions
Prepare the necessary journal entries in 2016 when the stock-option plan was adopted, in 2017 when options were granted, in 2018 when options lapsed, and in 2019 when options were exercised.
CA16-5 (EPS: Preferred Dividends, Options, and Convertible Debt) “Earnings per share” (EPS) is the most featured, single financial statistic about modern corporations. Daily published quotations of stock prices have recently been expanded to include for many securities a “times earnings” figure that is based on EPS. Stock analysts often focus their discussions on the EPS of the corporations they study.
Instructions
(a) Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.
(b) One of the technical procedures applicable in EPS computations is the “treasury-stock method.” Briefly describe the circumstances under which it might be appropriate to apply the treasury stock method.
(c) Convertible debentures are considered potentially dilutive common shares. Explain how convertible debentures are handled for purposes of EPS computations.
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