ACC 302: Final Exam Flashcards Review, Ch. 15

Book Value Method

When the debtholder converts the debt to equity, the issuing company recognizes no gain or loss. Does not change current ratio, decreases debt to assets ratio.

Value of Convertible Debt

Value of debt component + Value of Equity Component

Issuance of Convertible Debt (Equation)

Dr. Cash
Dr./Cr. Discount/Premium on Bonds Payable
Cr. Bonds Payable

Conversion of Convertible Bond

Dr. Bonds Payable
Dr. Premium / Cr. Discount
Cr. Common Stock (Bonds x shares per bond x price)
Cr. Paid-in Capital in Excess of Par- Common Stock

Conversion of Convertible Preferred Stock

Dr. Convertible Preferred Stock
Dr. PICIEOP- Preferred Stock (Shares x(Original Price-Par Value))
Cr. Common Stock (Par Value x Price)
Cr. PICIEOP- Common Stock (Dr. -Cr.)

Synthetic Convertible Debt

Debt +Nondetachable Stock Warrants

Proportional Method Pt. 1

FV of Bonds (Price x Discounted price)
FV of Warrants (Sales x Warrant price)
Aggregate FV: FV of Warrants +FV of Bonds

Proportional Method Pt. 2

Allocated to Bonds: ((FV of Bonds/Aggregate FV) x Selling Price)
Allocated to Warrants ((FV of Warrants)/Aggregate FV) x Selling Price)

Proportional Method Pt. 3

Dr. Cash (Allocated to bonds)
Dr. Discount on BP (BP - Allocated to Bonds.)
Cr. Bonds Payable

Proportional Method Pt. 4

Dr. Cash (Allocated to Warrants)
Cr. Paid-in Captial- Stock Warrants

Can be combined into one entry with proportional method.

Incremental Method

Used by lump-sum security purchases. Uses the security it can determine FV for. Remainder allocated to the other security.

Incremental Method Example

Lump Sum Receipt- 10,000,000
Allocated to Warrants-300,000
Resulting Allocation to Bonds- 9,700,000

Dr. Cash 10,000,000
Dr. Discount on BP 300,000
Cr. Bonds Payable 10,000,000
Cr. PIC- Stock Warrants 300,000

If-Converted Method

Assumes conversion occurred at the beginning of the period or the time of issuance, and the elimination of related interest, net of tax.

Basic earnings per share

Net Income -Preferred Dividends / Weighted-Average Shares Outstanding

Diluted Earnings Per Share

Net Income -Preferred Dividends / Weighted-Average Shares Outstanding -Impact of Convertibles -Impact of Options, Warrants, and Other Securities.