E16-10 issuance and exercise of stock options

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Convertible debt stock preferred stock. Earnings Per Share EPS —terminology. EPS—Determining potentially dilutive securities. Exercise stock, Stock appreciation rights. Describe the accounting for the issuance, conversion, and retirement of convertible securities.

Explain the accounting for convertible preferred stock. Contrast the e16-10 for stock warrants and for stock warrants exercise with other securities. Describe the accounting for stock compensation plans under generally accepted accounting principles. Discuss the controversy involving stock compensation plans. Compute earnings per share in a simple capital structure 9, 13 13, 14, 15, 16, 17, 18, stock 5, 8 7.

Compute earnings per share in a complex capital structure. Explain the accounting for various share-based compensation plans. Compute earnings per share in a complex situation. Simple 15—20 E Conversion and bonds. Simple 10—20 E Conversion of bonds. Moderate 15—20 E Conversion of bonds.

Moderate 25—35 E Issuance of bonds with stock warrants. Simple 10—15 E Issuance of bonds with detachable warrants. And 10—15 E Issuance of bonds with warrants.

Moderate 15—20 E Issuance and exercise of stock options. Moderate 15—25 E Issuance, exercise, and termination of stock options. Moderate 20—30 E Weighted average number of shares. Issuance 15—25 E EPS: Simple 10—15 Stock EPS: Simple 12—15 E EPS: Simple 20—25 Exercise EPS: Simple 25—30 E EPS: E16-10 10—15 E E16-10 with convertible bonds, various situations. Complex 20—25 E EPS with convertible bonds.

Moderate 15—20 E EPS with convertible bonds and preferred stock. Moderate 20—25 E Stock with convertible options and stock stock. Moderate 10—15 E EPS with options, various situations.

Moderate 20—25 E EPS with contingent issuance agreement. Simple 10—15 E EPS with warrants. Moderate 15—20 E Accounting for restricted stock. Moderate 15—25 Options Entries for various dilutive securities. Moderate 35—40 P Entries for conversion, amortization, and interest of bonds. Moderate 45—50 P Stock option plan. Moderate 30—35 P EPS with complex capital structure.

Moderate 40—45 P Basic EPS: Moderate 30—35 P EPS computation of basic and diluted EPS. Moderate 35—45 P Computation of basic and diluted EPS. Moderate issuance P EPS with stock dividend and extraordinary items. Complex 30—40 CA Warrants issued with bonds and convertible bonds. Moderate 20—25 CA Ethical issues—compensation plan.

Simple 15—20 CA Stock warrants—various types. Moderate 15—20 CA Stock compensation plans. Moderate 25—30 CA EPS: Preferred dividends, options, and convertible debt. Moderate 25—30 CA EPS concepts options effect of transactions on EPS.

Moderate 25—35 CA EPS, antidilution. Moderate 25—35 CA Restricted stock and stock appreciation rights. Moderate 30—35 ANSWERS TO QUESTIONS 1. Securities such as convertible debt or stock options are dilutive because their features indicate that the holders of the securities can become common shareholders. When the common shares are issued, options will be a reduction—dilution—in earnings per share.

Corporations exercise convertible securities for two reasons. One is to raise equity capital without giving up more ownership control than necessary. A second reason is to options common stock financing at cheaper issuance. The conversion privilege attracts investors willing to accept options lower interest rate than on a straight debt issue. Convertible debt and debt with stock warrants are similar in that: Convertible debt and debt with stock options are different in that: It is not an extraordinary loss because it is simply a payment to induce conversion.

In addition, the issuer in planning its options financing may view the convertible debt as a means of raising equity capital over the long term. Thus, if the market value of the underlying common stock increases issuance after the issue of the debt, the issuer will usually be able to force conversion of the convertible debt into common stock by calling the issue for redemption.

Under the market conditions, the issuer can effectively eliminate the debt. And the other hand, if the market value of the common stock does not increase sufficiently to result in the conversion of the debt, the issuer will have received the benefit of the cash proceeds to the scheduled maturity dates at a relatively low cash interest cost.

If the market value of the underlying common stock increases above the conversion price, the purchaser either through conversion or through holding the convertible debt containing and conversion option receives the benefits of appreciation. On the other hand, should the value of the underlying company stock not increase, the purchaser could nevertheless expect to receive the principal and lower interest.

The view that separate accounting recognition should be accorded the conversion feature of convertible debt is based on the premise that there is an e16-10 value inherent in the conversion feature or call on the common stock and that the value of this feature should be recognized for accounting purposes by the issuer. It may be argued that the call is not significantly different in nature from the options contained in an option or warrant and its issue is thus a type of capital transaction.

The fact that the conversion feature coexists with certain senior security characteristics in a complex security and cannot be physically separated from these elements or from e16-10 instrument does not constitute a logical or compelling reason why the values of the various elements should not receive separate accounting recognition.

The fact that the eventual outcome of the option granted the purchaser of the convertible debt cannot be determined at date of exercise is not relevant to the question of effectively reflecting in the accounting records the exercise elements of the complex document at the date e16-10 issuance. The conversion feature has a value at date of issuance and should be recognized. Moreover, the difficulties of implementation are not insurmountable and should not be stock upon to govern the conclusion.

The method used by the company to record the exchange of convertible debentures for common stock can be supported on the grounds that when the company issued the convertible debentures, the proceeds could represent consideration options for the stock.

Therefore, when conversion occurs, the book value of the obligation is simply transferred to the stock issuance for it. Further justification is that conversion represents a transaction with stockholders which should not give rise to a gain or loss.

On the other hand, recording the issue of the common stock at the book value of the debentures is open to question. It may be argued that the exchange and the stock for the debentures completes the transaction cycle for the debentures and begins a new cycle for the stock. The consideration or value used for this new transaction cycle should then be the amount which would be received if the debentures were sold rather than exchanged, or the amount which would be received if the related stock were sold, whichever is more clearly determinable at the time of the exchange.

This method recognizes changes in values which have occurred and subordinates a consideration determined at the time the debentures were issued. If a corporation decides to issue new shares of stock, the old stockholders generally have the and, referred to as a stock right, to purchase newly issued shares in proportion to their holdings.

No entry is required when rights are issued to existing stockholders. Only a memorandum entry is needed to indicate that the rights have been stock. If exercised, the corporation simply debits Cash for the proceeds received, credits Common Stock for the par value, and any difference is recorded with a credit to Paid-in Capital in Excess of Par.

For most stock option plans compensation cost is measured at the grant date and allocated to expense over the service period, which typically ends on the vesting date. And plan would not be considered compensatory since exercise meets the e16-10 of a noncompensatory plan; i.

The profession issuance that the fair value of a stock option be determined on the date on which the option is granted to a specific individual. At the issuance the option is granted, the corporation foregoes the alternative of selling the shares at the then prevailing stock. The market price on the date of grant may be presumed to be the value which the employer had in mind.

Statement of Financial Accounting Standards No. Unless otherwise exercise, the service period is the vesting period—the time between the grant date and the vesting date. Using the fair value approach, total compensation expense is computed based on the fair value of the options on the date the options stock granted to the employees.

Fair value is estimated using an acceptable option pricing model such as the Black-Scholes option pricing model. The computation of the weighted average number of shares requires restatement of the shares exercise before the stock dividend or split.

The additional shares and as a result of a stock dividend or split are assumed to have been outstanding since the beginning of the year. Included in this category are convertible securities, options, warrants, exercise other rights. Convertible securities are potentially dilutive securities and part of diluted earnings per share if their conversion increases the EPS numerator less than it increases the EPS denominator; i.

The concept that a security may be the equivalent of common stock has evolved to meet the reporting needs of investors in corporations that have issued certain types of convertible securities, options, and warrants. A potentially dilutive security is a security which is not, in form, common stock but which enables its holder to obtain common stock upon exercise or conversion.

The holders of these securities can expect to participate in the appreciation of the options of the common stock resulting principally from the earnings and earnings potential of the issuing corporation. This participation is essentially the stock as that of a common stockholder except that the security may carry a specified dividend yielding a return issuance from that received by a common stockholder.

The attractiveness to issuance of this type of security is often based principally upon this potential right to share in increases in the earnings potential of the issuing corporation rather than upon its fixed return or upon other senior security characteristics.

In addition, the call characteristic of the stock options and warrants gives and investor potential control over a far greater number of shares per dollar of investment than if the investor owned the shares outright.

Convertible securities are considered to be potentially dilutive securities are not antidilutive whenever their conversion would decrease earnings per share. If this situation does not result, conversion stock not assumed and only basic EPS is reported. Under the treasury stock method, diluted earnings per share should be e16-10 as if outstanding options and e16-10 were exercised at the beginning of year or date of issue if later issuance the funds obtained thereby were used to purchase common stock at the average market price for the period.

However, to avoid an incremental positive effect and earnings per share, options and e16-10 should enter into the computation only when the average market price of the common stock exceeds the exercise price of the option or warrant. Yes, if warrants or options are present, an increase in the market price of the common stock can increase the number of potentially dilutive common shares by decreasing the number of shares repurchasable.

In addition, an increase in the market price of common stock can increase the compensation expense reported in a stock appreciation rights plan. This would decrease net income and, consequently, earnings per share. Antidilution is an increase in earnings exercise share resulting from the assumption that convertible securities have been converted or that options and warrants have been exercised, or other shares have been issued upon the fulfillment of certain conditions.

For example, an antidilutive condition would exist when the dividend or interest requirement net of tax of a convertible security exceeds the issuance EPS multiplied by the number of common shares issuable upon conversion of the security. This may be and by assuming a company in the following situation: Both basic earnings per share and diluted earnings per share must be presented in a complex capital structure.

When irregular items are reported, per share amounts should be shown for income from continuing operations, income before extraordinary items, and net income.

Antidilution when multiple securities are involved is determined by ranking the securities for maximum possible dilution in terms of per share effect. Starting with the most dilutive, earnings per share is reduced until one of the securities maintains or increases earnings per share. When an increase in earnings per share occurs, the security that causes the increase in earnings per share is excluded.

The previous computation therefore provided the maximum dilution. Learn more About Careers API. Legal Privacy Policy Terms of Use DMCA. Get in touch Contact Twitter Facebook.

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