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 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 1,000

Premium on bonds payable 50

Time of “Normal” Conversion

Bonds payable 1,000

Premium on bonds payable 50

Common stock (par value) 100

APIC (1,050 – 100) 950

Induced Conversions

• Involves a “sweetner”• E16-1 (part 3)

Induced Conversions

Book 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 StockConvertible 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. 798Conv. 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. 798Conv. 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. 798Conv. 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. 781Conv. 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. 781Conv. 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. 781Conv. 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 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.)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.)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 = 9,705,882

10,000,000

Cash 9,705,882Discount on bonds payable 294,118

Bonds payable 10,000,000

Cash 294,118APIC - stock warrants 294,118

Stock Warrants (cont.)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 PlansStock Compensation Plans

Stock option plans:• incentive plans [qualified for tax purposes] • non-qualified plans

Stock appreciation rights Performance plans

Stock Options - Important DatesStock 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]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)