Kế toán tài chính - Chương 16: Dilutive securities and earnings per share

C H A P T E R 16DILUTIVE SECURITIES AND EARNINGS PER SHAREIntermediate Accounting13th EditionKieso, Weygandt, and Warfield Describe the accounting for the issuance, conversion, and retirement of convertible securities.Explain the accounting for convertible preferred stock.Contrast the accounting for stock warrants and for stock warrants issued with other securities.Describe the accounting for stock compensation plans under generally accepted accounting principles.Discuss the controversy involving stock compensation plans.Compute earnings per share in a simple capital structure.Compute earnings per share in a complex capital structure.Learning ObjectivesDebt and equityConvertible debtConvertible preferred stockStock warrantsAccounting for compensationDilutive Securities and Compensation PlansComputing Earnings Per ShareSimple capital structureComplex capital structureDilutive Securities and Earnings Per ShareShould companies report these instruments as a liability or equity.Debt and EquityStock OptionsConvertible SecuritiesPreferred Stock(at the holder’s option)Benefit of a Bond (guaranteed interest)Privilege of Exchanging it for StockBonds which can be converted into other corporate securities are called convertible bonds.+Accounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.Desire to raise equity capital without giving up more ownership control than necessary.Obtain common stock financing at cheaper rates.Two main reasons corporations issue convertibles:Accounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.At Time of IssuanceAccounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.Convertible bonds recorded as straight debt issue, with any discount or premium amortized over the term of the debt.BE16-1: KC Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Cash 3,960,000 Bonds payable 4,000,000Journal entry at date of issuance:Discount on bonds payable 40,000($5,000,000 x 99% = $4,950,000)Accounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.At Time of ConversionAccounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.Companies use the book value method when converting bonds.When the debt holder converts the debt to equity, the issuing company recognizes no gain or loss upon conversion.BE16-2: Yuen Corp. has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2010, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Bonds payable 2,000,000 Common stock (2,000 x 50 x $10) 1,000,000Journal entry at conversion: Discount on bonds payable 30,000 Additional paid-in capital 970,000Accounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.Issuer wishes to encourage prompt conversion.Issuer offers additional consideration, called a “sweetener.”Sweetener is an expense of the period.Accounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.Induced ConversionBE16-2: Yuen Corp. has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. Assume Yuen wanted to reduce its annual interest cost and agreed to pay the bond holders $70,000 to convert. Bonds payable 2,000,000 Common stock (2,000 x 50 x $10) 1,000,000Journal entry at conversion: Discount on bonds payable 30,000 Additional paid-in capital 970,000Accounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.Debt conversion expense 70,000 Cash 70,000SameRecognized same as retiring debt that is not convertible.Difference between the acquisition price and carrying amount should be reported as gain or loss in the income statement.Accounting for Convertible DebtLO 1 Describe the accounting for the issuance, conversion, and retirement of convertible securities.Retirement of Convertible DebtConvertible preferred stock is considered part of stockholders’ equity.No gain or loss recognized when converted.Use book value method.Convertible Preferred StockLO 2 Explain the accounting for convertible preferred stock.Convertible preferred stock includes an option for the holder to convert preferred shares into a fixed number of common shares.BE16-3: Gall Inc. issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share. The common stock is trading at $26 per share at the time of conversion.Preferred stock 50,000 Common stock (2,000 x $10 par) 20,000Journal entry to record conversion:Paid-in capital – Preferred stock 10,000 Paid-in capital – Common stock 40,000Convertible Preferred StockLO 2 Explain the accounting for convertible preferred stock.Certificates entitling the holder to acquire shares of stock at a certain price within a stated period. Normally arise:To make a security more attractiveAs evidence of preemptive right As compensation to employeesStock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Issued with Other SecuritiesStock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Detachable Stock Warrants:Proceeds allocated between the two securities.Allocation based on fair market values. Two methods of allocation: (1) the proportional method and (2) the incremental method Proportional MethodStock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Determine:value of the bonds without the warrants, andvalue of the warrants.The proportional method allocates the proceeds using the proportion of the two amounts, based on fair values.BE16-4: Margolf Corp. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market value of $40. Use the proportional method to record the issuance of the bonds and warrants.Stock WarrantsLO 3Cash 2,020,000 Bonds payable 2,000,000Discount on bonds payable 59,216 Paid-in capital – Stock warrants 79,216BE16-4: Margolf Corp. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market value of $40. Use the proportional method to record the issuance of the bonds and warrants.Stock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Incremental MethodStock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Where a company cannot determine the fair value of either the warrants or the bonds. Use the security for which fair value can determined. Allocate the remainder of the purchase price to the security for which it does not know fair value.BE16-5: McCarthy Inc. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98. The market price of the warrants, without the bonds, cannot be determined. Use the incremental method to record the issuance of the bonds and warrants. Stock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Cash 2,020,000 Bonds payable 2,000,000Discount on bonds payable 40,000 Paid-in capital – Stock warrants 60,000Stock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.BE16-5: McCarthy Inc. issued 2,000, $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98. The market price of the warrants, without the bonds, cannot be determined. Use the incremental method to record the issuance of the bonds and warrants. Conceptual QuestionsStock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Detachable warrants involves two securities, a debt security, a warrant to purchase common stock.Nondetachable warrants no allocation of proceeds between the bonds and the warrants, companies record the entire proceeds as debt.Rights to Subscribe to Additional SharesStock WarrantsLO 3 Contrast the accounting for stock warrants and for stock warrants issued with other securities.Stock Rights - existing stockholders have the right (preemptive privilege) to purchase newly issued shares in proportion to their holdings.Price is normally less than current market value.Companies make only a memorandum entry.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Stock Option - gives key employees option to purchase stock at a given price over extended period of time.Effective compensation programs are ones that: base compensation on performancemotivate employees, help retain executives and recruit new talent,maximize employee’s after-tax benefit, and use performance criteria over which employee has control. Stock Compensation PlansAccounting for Stock CompensationThe Major Reporting IssueNew FASB standard requires companies to recognize compensation cost using the fair-value method.*Under fair-value method, companies use acceptable option-pricing models to value the options at the date of grant.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationTwo main accounting issues:How to determine compensation expense. Over what periods to allocate compensation expense.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationDetermining ExpenseCompensation expense based on the fair value of the options expected to vest on the date the options are granted to the employee(s) (i.e., the grant date).LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Allocating Compensation ExpenseOver the periods in which employees perform the service—the service period.Accounting for Stock CompensationLO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationE16-12 On January 1, 2009, Scooby Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Scooby’s $5 par value common stock at a price of $20 per share. The options were exercisable within a 2-year period beginning January 1, 2011, if the grantee is still employed by the company at the time of the exercise. On the grant date, Scooby’s stock was trading at $25 per share, and a fair value option pricing model determines total compensation to be $450,000.On May 1, 2011, 9,000 options were exercised when the market price of Scooby’s stock was $30 per share. The remaining options lapsed in 2013 because executives decided not to exercise their options.Instructions: Prepare the necessary journal entries related to the stock-option plan for the years 2009 through 2013.No entry on date of grant.E16-12: Prepare the necessary journal entries related to the stock option plan for the years 2009 through 2013.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.1/1/09Compensation expense 225,000 Paid-in capital-stock options 225,00012/31/09Compensation expense 225,000 Paid-in capital-stock options 225,00012/31/10($450,000 x ½)Accounting for Stock CompensationLO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Cash (9,000 x $20) 180,000 Common stock (8,000 x $5) 45,0005/1/11Paid-in capital-stock options 80,000 Paid-in capital-expired options 80,0001/1/13($450,000 x 9,000 / 10,000 = $405,000)Paid-in capital-stock options 405,000 Paid-in capital in excess of par 540,000($400,000 – $320,000)Accounting for Stock CompensationE16-12: Prepare the necessary journal entries related to the stock option plan for the years 2009 through 2013.Employee Stock Purchase PlansGenerally permit all employees to purchase stock at a discounted price for a short period of time.Compensatory unless it satisfies three conditions:Substantially all full-time employees participate on an equitable basis. The discount from market is small. The plan offers no substantive option feature.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationRestricted StockTransfer shares of stock to employees, subject to an agreement that the shares cannot be sold, transferred, or pledged until vesting occurs.Major Advantages:Never becomes completely worthless.Generally results in less dilution to existing stockholders.Better aligns employee incentives with company incentives.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationLO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationIllustration: On January 1, 2010, Ogden Company issues 1,000 shares of restricted stock to its CEO, Christie DeGeorge. Ogden’s stock has a fair value of $20 per share on January 1, 2010. Additional information is as follows.The service period related to the restricted stock is five years.Vesting occurs if DeGeorge stays with the company for a five-year period.The par value of the stock is $1 per share.Ogden makes the following entry on the grant date (January 1, 2010).LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationIllustration: Ogden makes the following entry on the grant date (January 1, 2010).Unearned Compensation 20,000 Common Stock (1,000 x $1) 1,000 Paid-in Capital in Excess of Par (1,000 x $19) 19,000Unearned Compensation represents the cost of services yet to be performed, which is not an asset. Unearned Compensation is reported as a component of stockholders’ equity in the balance sheet.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationIllustration: Record the journal entry at December 31, 2010, Ogden records compensation expense.Compensation expense 4,000 Unearned compensation 4,000Ogden records compensation expense of $4,000 for each of the next four years (2011, 2012, 2013, and 2014).LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Accounting for Stock CompensationIllustration: Assume that DeGeorge leaves on February 3, 2012 (before any expense has been recorded during 2012). The entry to record this forfeiture is as followsCommon Stock 1,000Paid-in Capital in Excess of Par 19,000 Compensation Expense ($4,000 x 2) 8,000 Unearned Compensation 12,000Employee Stock-Purchase Plans (ESPPs)Generally permit all employees to purchase stock at a discounted price for a short period of time. Plans are considered compensatory unless they satisfy all three conditions presented below.Substantially all full-time employees may participate on an equitable basis.The discount from market is small. The plan offers no substantive option feature.Accounting for Stock CompensationLO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Disclosure of Compensation PlansAccounting for Stock CompensationCompany with one or more share-based payment arrangements must disclose:The nature and terms of such arrangements.The effect on the income statement of compensation cost.The method of estimating the fair value of the goods or services received, or the fair value of the equity instruments granted (or offered to grant). The cash flow effects.LO 4 Describe the accounting for stock compensation plans under generally accepted accounting principles.Debate over Stock Option AccountingWhen first proposed, there was considerable opposition to the fair-value approach because it could result in substantial, previously unrecognized compensation expense.Offsetting such opposition is the need for greater transparency in financial reporting.LO 5 Discuss the controversy involving stock compensation plans.Accounting for Stock CompensationEarnings per share indicates the income earned by each share of common stock.Companies report earnings per share only for common stock.When income statement contains intermediate components of income, companies should disclose earnings per share for each component.LO 6 Compute earnings per share in a simple capital structure.Computing Earnings Per ShareIllustration 16-7LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureSimple Structure--Only common stock; no potentially dilutive securities.Complex Structure--Potentially dilutive securities are present.“Dilutive” means the ability to influence the EPS in a downward direction.LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructurePreferred Stock DividendsSubtracts the current year preferred stock dividend from net income to arrive at income available to common stockholders.Illustration 16-8Preferred dividends are subtracted on cumulative preferred stock, whether declared or not. LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureWeighted-Average Number of SharesCompanies must weight the shares by the fraction of the period they are outstanding.Stock dividends or stock splits: companies need to restate the shares outstanding before the stock dividend or split.LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureE16-16: On January 1, 2010, Chang Corp. had 480,000 shares of common stock outstanding. During 2010, it had the following transactions that affected the common stock account.Instructions Determine the weighted-average number of shares outstanding as of December 31, 2010.LO 6 Compute earnings per share in a simple capital structure.Earnings Per Share-Simple Capital StructureWeighted-Average Number of SharesLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureComplex Capital Structure exists when a business hasconvertible securities, options, warrants, or other rights that upon conversion or exercise could dilute earnings per share. Company reports both basic and diluted earnings per share.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureDiluted EPS includes the effect of all potential dilutive common shares that were outstanding during the period.Companies will not report diluted EPS if the securities in their capital structure are antidilutive.Illustration 16-17Diluted EPS – Convertible SecuritiesMeasure the dilutive effects of potential conversion on EPS using the if-converted method.This method for a convertible bond assumes: the conversion at the beginning of the period (or at the time of issuance of the security, if issued during the period), and the elimination of related interest, net of tax.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-22 (Convertible Bonds): In 2010 Buraka Enterprises issued, at par, 75, $1,000, 8% bonds, each convertible into 100 shares of common stock. Buraka had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2011. (Assume that the tax rate is 40%.) Throughout 2011, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.Instructions(a) Compute diluted earnings per share for 2011.(b) Assume same facts as those for Part (a), except the 75 bonds were issued on September 1, 2011 (rather than in 2010), and none have been converted or redeemed.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-22 (a) Compute diluted earnings per share for 2011.Calculation of Net IncomeRevenues $17,500Expenses 8,400Bond interest expense (75 x $1,000 x 8%) 6,000Income before taxes 3,100Income tax expense (40%) 1,240Net income $ 1,860LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-22 (a) Compute diluted earnings per share for 2011.When calculating Diluted EPS, begin with Basis EPS.Net income = $1,860Weighted average shares = 2,000=$.93Basic EPSLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-22 (a) Compute diluted earnings per share for 2011.When calculating Diluted EPS, begin with Basis EPS.$1,8602,000=$.57Diluted EPS+$6,000 (1 - .40)7,500Basic EPS = .93$5,4609,500=Effect on EPS = .48+LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureCalculation of Net IncomeE16-22 (b) Assume bonds were issued on Sept. 1, 2011 .LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-22 (b) Assume bonds were issued on Sept. 1, 2011 .When calculating Diluted EPS, begin with Basis EPS.$4,2602,000=$1.21Diluted EPS$2,000 (1 - .40)7,500 x 4/12 yr.$5,4604,500=Effect on EPS = .48Basic EPS = 2.13++LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureP16-8 (Variation-Convertible Preferred Stock): Prior to 2010, Barkley Company issued 40,000 shares of 6% convertible, cumulative preferred stock, $100 par value. Each share is convertible into 3 shares of common stock. Net income for 2010 was $1,200,000. There were 600,000 common shares outstanding during 2010. There were no changes during 2010 in the number of common or preferred shares outstanding.Instructions(a) Compute diluted earnings per share for 2010.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureP16-8 (a) Compute diluted earnings per share for 2010.When calculating Diluted EPS, begin with Basis EPS.Net income $1,200,000 – Pfd. Div. $240,000*Weighted average shares = 600,000=$1.60Basic EPS* 40,000 shares x $100 par x 6% = $240,000 dividendLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureWhen calculating Diluted EPS, begin with Basis EPS.600,000=$1.50Diluted EPS$240,000Basic EPS = 1.60=Effect on EPS = 1.20P16-8 (a) Compute diluted earnings per share for 2010.$1,200,000 – $240,000200,000*$1,200,000800,000*(40,000 x 5)++LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital Structure600,000=$1.67Diluted EPS$240,000Basic EPS = 1.60=Effect on EPS = 2.00P16-8 (a) Compute diluted earnings per share for 2010 assuming each share of preferred is convertible into 3 shares of common stock. $1,200,000 – $240,000120,000*$1,200,000720,000*(40,000 x 3)++LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital Structure600,000=$1.67Diluted EPS$240,000Basic EPS = 1.60=Effect on EPS = 2.00$1,200,000 – $240,000120,000*$1,200,000720,000*(40,000 x 3)AntidilutiveBasic = Diluted EPSP16-8 (a) Compute diluted earnings per share for 2010 assuming each share of preferred is convertible into 3 shares of common stock. ++Diluted EPS – Options and WarrantsMeasure the dilutive effects of potential conversion using the treasury-stock method.This method assumes: company exercises the options or warrants at the beginning of the year (or date of issue if later), and that it uses those proceeds to purchase common stock for the treasury.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-26 (EPS with Options): Zambrano Company’s net income for 2010 is $40,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2009, each exercisable for one share at $8. None has been exercised, and 10,000 shares of common were outstanding during 2010. The average market price of the stock during 2010 was $20.Instructions(a) Compute diluted earnings per share. (b) Assume the 1,000 options were issued on October 1, 2010 (rather than in 2009). The average market price during the last 3 months of 2010 was $20.Proceeds if shares issued (1,000 x $8) $8,000Purchase price for treasury shares $20Shares assumed purchased 400Shares assumed issued 1,000Incremental share increase 600LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-26 (a) Compute diluted earnings per share for 2010.Treasury-Stock Method÷LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-26 (a) Compute diluted earnings per share for 2010.When calculating Diluted EPS, begin with Basis EPS.$40,00010,000=$3.77Diluted EPS+600Basic EPS = 4.00$40,00010,600=Options+LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureTreasury-Stock Method÷E16-26 (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, 2010.xLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureE16-26 (b) Compute diluted earnings per share assuming the 1,000 options were issued on October 1, 2010.$40,00010,000=$3.94Diluted EPS150Basic EPS = 4.00$40,00010,150=Options+Contingent Issue AgreementContingent shares are issued as a result of the: passage of time or attainment of a certain earnings or market price level.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureAntidilution RevisitedIgnore antidilutive securities in all calculations and in computing diluted earnings per share.EPS Presentation and DisclosureA company should show per share amounts for: income from continuing operations, income before extraordinary items, and net income.Per share amounts for a discontinued operation or an extraordinary item should be presented on the face of the income statement or in the notes.LO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureLO 7 Compute earnings per share in a complex capital structure.Earnings Per Share-Complex Capital StructureComplex capital structures and dual presentation of EPS require the following additional disclosures in note form.Description of pertinent rights and privileges of the various securities outstanding.A reconciliation of the numerators and denominators of the basic and diluted per share computations, including individual income and share amount effects of all securities that affect EPS.The effect given preferred dividends in determining income available to common stockholders in computing basic EPS.Securities that could potentially dilute basic EPS in the future that were excluded in the computation because they would be antidilutive.Effect of conversions subsequent to year-end, but before issuing statements.LO 7 Compute earnings per share in a complex capital structure.Summary of EPS ComputationIllustration 16-27LO 7Illustration 16-28Summary of EPS ComputationUnder U.S. GAAP, all of the proceeds of convertible debt are recorded as long-term debt. Under iGAAP, convertible bonds are “bifurcated”—separated into the equity component (the value of the conversion option) of the bond issue and the debt component.Although the calculation of basic and diluted earnings per share is similar between iGAAP and U.S. GAAP, the Boards are working to resolve the few minor differences in EPS reporting.Other EPS differences relate to (1) the treasury-stock method and how the proceeds from extinguishment of a liability should be accounted for, and (2) how to compute the weighted-average of contingently issuable shares.LO 8 Explain the accounting for stock appreciation rights plans.Stock-Appreciation Rights (SARs):The company gives an executive the right to receive compensation equal to the share appreciation. Share appreciation is the excess of the market price of the stock at the date of exercise over a pre-established price. The company may pay the share appreciation in cash, shares, or a combination of both.The accounting for stock-appreciation rights depends on whether the company classifies the rights as equity or as a liability.LO 8 Explain the accounting for stock appreciation rights plans.SARS— Share-Based Equity AwardsCompanies classify SARs as equity awards if at the date of exercise, the holder receives shares of stock from the company upon exercise. holder receives shares in an amount equal to the share-price appreciation (the difference between the market price and the pre-established price). At the date of grant, the company determines a fair value for the SAR and then allocates this amount to compensation expense over the service period of the employees.LO 8 Explain the accounting for stock appreciation rights plans.SARS— Share-Based Liability AwardsCompanies classify SARs as liability awards if at the date of exercise, the holder receives a cash payment. Accounting:Measure the fair value of the award at the grant date and accrue compensation over the service period.Remeasure the fair value each reporting period, until the award is settled; adjust the compensation cost each period for changes in fair value pro-rated for the portion of the service period completed.Once the service period is completed, determine compensation expense each subsequent period by reporting the full change in market price as an adjustment to compensation expense.LO 8 Explain the accounting for stock appreciation rights plans.Illustration: American Hotels, Inc. establishes a stock-appreciation rights plan on January 1, 2010. The plan 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 $10 on 10,000 SARs. The fair value of the SARs on December 31, 2010, is $3, and the service period runs for two years (2010–2011).Illustration 16A-1 indicates the amount of compensation expense to be recorded each period.LO 8 Explain the accounting for stock appreciation rights plans.Illustration 16-A1American Hotels records compensation expense in the first year as follows.Compensation Expense 15,000 Liability under Stock-Appreciation Plan 15,000LO 8 Explain the accounting for stock appreciation rights plans.In 2012, when it records negative compensation expense, American would debit the account for $20,000. The entry to record the negative compensation expense is as follows.Liability under Stock-Appreciation Plan 20,000 Compensation Expense 20,000At December 31, 2012, the executives receive $50,000. American would remove the liability with the following entry.Liability under Stock-Appreciation Plan 50,000 Cash 50,000LO 9 Compute earnings per share in a complex situation.Illustration 16-B1Balance Sheet for Comprehensive IllustrationIllustration 16-B1Balance Sheet for Comprehensive IllustrationLO 9 Compute earnings per share in a complex situation.Illustration 16-B2Computation of Earnings per Share—Simple Capital StructureSolution on notes pageLO 9 Compute earnings per share in a complex situation.Diluted Earnings Per ShareSteps for computing diluted earnings per share:Determine, for each dilutive security, the per share effect assuming exercise/conversion.Rank the results from step 1 from smallest to largest earnings effect per share. Beginning with the earnings per share based upon the weighted-average of common shares outstanding, recalculate earnings per share by adding the smallest per share effects from step 2. Continue this process so long as each recalculated earnings per share is smaller than the previous amount. LO 9 Compute earnings per share in a complex situation.The first step is to determine a per share effect for each potentially dilutive security.Per Share Effect of Options (Treasury-Stock Method), Diluted Earnings per ShareIllustration 16-B3LO 9 Compute earnings per share in a complex situation.The first step is to determine a per share effect for each potentially dilutive security.Per Share Effect of 8% Bonds (If-Converted Method), Diluted Earnings per ShareIllustration 16-B4LO 9 Compute earnings per share in a complex situation.The first step is to determine a per share effect for each potentially dilutive security.Per Share Effect of 10% Bonds (If-Converted Method), Diluted Earnings per ShareIllustration 16-B5LO 9 Compute earnings per share in a complex situation.The first step is to determine a per share effect for each potentially dilutive security.Per Share Effect of 10% Convertible Preferred (If-Converted Method), Diluted Earnings per ShareIllustration 16-B6LO 9 Compute earnings per share in a complex situation.The first step is to determine a per share effect for each potentially dilutive security.Ranking of per Share Effects (Smallest to Largest), Diluted Earnings per ShareIllustration 16-B7LO 9 Compute earnings per share in a complex situation.The next step is to determine earnings per share giving effect to the rankingRecomputation of EPS Using Incremental Effect of OptionsIllustration 16-B8LO 9 Compute earnings per share in a complex situation.The effect of the options is dilutive.The next step is to determine earnings per share giving effect to the rankingRecomputation of EPS Using Incremental Effect of 8% Convertible BondsIllustration 16-B9LO 9 Compute earnings per share in a complex situation.The effect of the 8% convertible bonds is dilutive.The next step is to determine earnings per share giving effect to the rankingRecomputation of EPS Using Incremental Effect of 10% Convertible BondsIllustration 16-B10LO 9 Compute earnings per share in a complex situation.The effect of the 10% convertible bonds is dilutive.The next step is to determine earnings per share giving effect to the rankingRecomputation of EPS Using Incremental Effect of 10% Convertible PreferredIllustration 16-B11LO 9 Compute earnings per share in a complex situation.The effect of the 10% convertible preferred is NOT dilutive.Finally, Webster Corporation’s disclosure of earnings pershare on its income statement.Illustration 16-B12LO 9 Compute earnings per share in a complex situation.The effect of the 10% convertible preferred is NOT dilutive.Assume that Barton Company provides the following information.Illustration 16-B13LO 9 Compute earnings per share in a complex situation.Barton Company DataBasic and Diluted EPSIllustration 16-B14Copyright © 2009 John Wiley & Sons, Inc. 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