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Chapter 16: 5Q (page 873)

Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.

Short Answer

Expert verified

(a) For the issuer, lower cash revenue cost on account of nonconvertible obligation, lead to rise in capital value over long run

(b) Gives purchaser choice to get either the face measure of obligation upon development or indicated number of offers upon change, assuming business sector benefit of basic normal stock increments over the transformation value, the buys get advantages of appreciation.

Step by step solution

01

Elaborating the value of conversion feature of convertible debt to the issuer

(a) According to the view of the issuer, the conversion element of convertible debt results about a lower cash revenue cost than on account of nonconvertible obligation. Moreover, the issuer in arranging its long-range financing might see the convertible obligation of raising value capital over the long haul. Hence, if the market worth of basic normal stock increments adequately after the issue of the obligation, investors can generally compel change of the convertible debt into common stock by calling the issue for redemption.

02

Elaborating the value of conversion feature of convertible debt to the purchaser

(b) The purchaser acquires a choice to get either the face amount of debt upon maturity or the predefined number of common shares upon conversion. On the off chance that the market worth of fundamental common stock increments over the conversion price, the buyer (either through transformation or through holding the convertible obligation containing the change choice) gets the advantages of appreciation. Then again, should the worth of the basic organization stock not increment, the buyer can in any case hope to get the head and (lower) interest.

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Most popular questions from this chapter

What date or event does the profession believe should be used in determining the value of a stock option? What arguments support this position?

(EPS with Convertible Bonds, Various Situations) In 2016, Chirac Enterprises issued, at par, 60 \(1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of \)17,500 and expenses other than interest andtaxes of $8,400 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.

Instructions

a) Compute diluted earnings per share for 2017.

b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2017 (rather than in 2016), and none have been converted or redeemed. Compute diluted earnings per share for 2017.

c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017.

(Accounting for Restricted Stock) Tweedie Company issues 10,000 shares of restricted stock to its CFO, Mary Tokar, on January 1, 2017. The stock has a fair value of \(500,000 on this date. The service period related to this restricted stock is 5 years. Vesting occurs if Tokar stays with the company until December 31, 2021. The par value of the stock is \)10. At December31, 2017, the fair value of the stock is $450,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On July 25, 2021, Tokar leaves the company. Prepare the journal entry (if any) to account for this forfeiture

(EPS with Convertible Bonds and Preferred Stock) On January 1, 2017, Crocker Company issued 10-year, \(2,000,000 face value, 6% bonds, at par. Each \)1,000 bond is convertible into 15 shares of Crocker common stock. Crocker鈥檚 net income in 2017 was \(300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

Instructions

(a) Compute diluted earnings per share for 2017.

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that \)1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company鈥檚 \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.
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