Chapter 16: Dilutive Securities & Earnings per Share

Accounting for Convertible Debt

I. Time of Issuance a. Recorded as debt – not as equity b. Amortizes any discount or premium to the maturity date

II. Time of Conversion c. Book Value Method- records securities (stock) exchanged for the bond at the carrying amount (book value) of the bond d. Remove “Bonds Payable” from book e. Remove any unamortized discount (credit) or premium (debit) from book f. Record value of Common Stock at par value g. Record Paid-in-capital in Excess of Par h. No gain or loss is recognized upon conversion

Bonds Payable 1,000
Premium on Bonds Payable 50 Common Stock 100 P/C Excess of Par – Common Stock 950

III. Induced Conversion i. Issuer may wish to induce prompt conversion of debt into equity securities i. Reduce interest cost ii. Improve debt to equity ratio j. Issuer provides an incentive, “sweetener” – (cash or additional stock upon conversion) iii. Issuer reports the sweetener as Debt Conversion Expense iv. Valued based on fair value of stock or amount of additional cash given
Debt Conversion Expense 80,000
Bonds Payable 1,000,000 Common Stock 100,000 P/C Excess of Par – Common Stock 900,000 Cash 80,000

Convertible Preferred Stock

I. What is Convertible Preferred Stock? a. Option for the holder to convert preferred stock into a fixed number of common shares of stock b. Accounted for using the book value method

II. Accounting for Convertible Preferred Stock c. Debit Preferred Stock & P/C Excess of Par – Preferred Stock d. Similar to induced conversions, issuer may provide an incentive to the holder to convert from preferred to common stock --- if so, they debit Retained