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Chapter 16: 1Q (page 873)
What is meant by a dilutive security?
Dilutive securities are financial instruments-typically warrants, stock options, convertible bonds- which increase the quantity of common shares if exercised. This then "dilutes" the earnings per share.
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Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that instead of options, Barwood granted 2,000 shares of restricted stock.
Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.
Make the necessary journal entries for:
(a) December 31, 2018. (c) March 31, 2019.
(b) January 1, 2019. (d) June 30, 2019.
Record the conversions using the book value method
Ferraro, Inc. established a stock-appreciation rights (SARs) program on January 1, 2017, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of \(20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be \)4 on December 31,2017, and $9 on December 31, 2018. Compute Ferraro’s compensation expense for 2017 and 2018.
DiCenta Corporation reported net income of \(270,000 in 2017 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of \)5 per share. DiCenta’s tax rate is 40%. Compute DiCenta’s 2017 diluted earnings per share.
Angela Corporation issues 2,000 convertible bonds at January 1, 2016. The bonds have a 3-year life, and are issued at par with a face value of \(1,000 per bond, giving total proceeds of \)2,000,000. Interest is payable annually at 6%. Each bond is convertible into 250 ordinary shares (par value of $1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 8%.
Instructions
(a) Compute the liability and equity component of the convertible bond on January 1, 2016.
(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2016.
(c) Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2019, its maturity date.
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