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Chapter 16: 2Q (page 873)
Briefly explain why corporations issue convertible securities.
Corporations issue convertibles for two principal reasons. One is to raise equity capital without surrendering more ownership control than needed and secondly, to give convertibles is to get debt financing at less expensive rates.
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CA16-3 WRITING (Stock Warrants鈥擵arious Types) For various reasons a corporation may issue warrants to purchase shares of its common stock at specified prices that, depending on the circumstances, may be less than, equal to, or greater than the current market price. For example, warrants may be issued:
1. To existing stockholders on a pro rata basis.
2. To certain key employees under an incentive stock-option plan.
3. To purchasers of the corporation鈥檚 bonds.
Instructions
For each of the three examples of how stock warrants are used:
(a) Explain why they are used.
(b) Discuss the significance of the price (or prices) at which the warrants are issued (or granted) in relation to (1) the current market price of the company鈥檚 stock, and (2) the length of time over which they can be exercised.
(c) Describe the information that should be disclosed in financial statements, or notes thereto, that are prepared when stock warrants are outstanding in the hands of the three groups listed above
(EPS: Simple Capital Structure) At January 1, 2017, Langley Company鈥檚 outstanding shares included the following.
280,000 shares of \(50 par value, 7% cumulative preferred stock
900,000 shares of \)1 par value common stock
Net income for 2017 was \(2,530,000. No cash dividends were declared or paid during 2017. On February 15, 2018, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2017.
On April 1, 2017, 450,000 shares of common stock were sold for \)10 per share, and on October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.
Instructions
Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in March 2018.
On January 1, 2017 (the date of grant), Lutz Corporation issues 2,000 shares of restricted stock to its executives. The fair value of these shares is \(75,000, and their par value is \)10,000. The stock is forfeited if the executives do not complete 3 years of employment with the company. Prepare the journal entry (if any) on January 1, 2017, and on December 31, 2017, assuming the service period is 3 years.
Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share.
(Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction.
1. Grand Corp. issued \(20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company鈥檚 investment banker estimates they would have been sold at 95.
2. Hoosier Company issued \)20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each \(100 par value bond. At the time of issuance, the warrants were selling for \)4.
3. Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the transaction. The 11%, \(10,000,000 par value bonds were converted into 1,000,000 shares of \)1 par value common stock on July 1, 2017. On July 1, there was \(55,000 of unamortized discount applicable to the bonds, and the company paid an additional \)75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.
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