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Chapter 16: 4Q (page 873)

Bridgewater Corp. offered holders of its 1,000 convertible bonds a premium of \(160 per bond to induce conversion into shares of its common stock. Upon conversion of all the bonds, Bridgewater Corp. recorded the \)160,000 premium as a reduction of paid-in capital. Comment on Bridgewater鈥檚 treatment of the $160,000 鈥渟weetener.鈥�

Short Answer

Expert verified

The FASB requires that the "sweetener" of $160,000 be accounted as an expense.

Step by step solution

01

Treatment of Sweetener as per the accounting norms

The issue of $160,000 "sweetener" as a premium induces the conversion of the bonds into common shares of B Corporation. The premium represents a departure from GAAP because the FASB views the transaction as the retirement of debt.

02

Discussing GAAP standards for paid-in- capital

Subsequently, the decrease in how much paid-in capital is an infringement of the GAAP standards. The top notch will diminish the conveying measure of the bonds, and the difference between the issue value of the common stock and the carrying value of the bonds shall be recognized immediately as an expense.

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Most popular questions from this chapter

All of the following are key similarities between GAAP and IFRS with respect to accounting for dilutive securities and EPS except:

(a) the model for recognizing stock-based compensation.

(b) the calculation of basic and diluted EPS.

(c) the accounting for convertible debt.

(d) the accounting for modifications of share options, when the value increases.

Where can authoritative IFRS be found related to dilutive securities, stock-based compensation, and earnings per share?

IFRS16-12 Assume the same information in IFRS16-11, except that Angela Corporation converts its convertible bonds on January 1, 2017.

Instructions

(a) Compute the carrying value of the bond payable on January 1, 2017.

(b) Prepare the journal entry to record the conversion on January 1, 2017.

(c) Assume that the bonds were repurchased on January 1, 2017, for \(1,940,000 cash instead of being converted. The net present value of the liability component of the convertible bonds on January 1, 2017, is \)1,900,000. Prepare the journal entry to record the repurchase on January 1, 2017.

Explain the treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data.

Cordero Corporation has an employee share-purchase plan which permits all full-time employees to purchase 10 ordinary shares on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased less a 10% discount. How is this discount accounted for by Cordero?
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