Acc 302 Study guide- Chapter 16
Acc 302 Study guide- Chapter 16 Acc 302
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This 4 page Study Guide was uploaded by Nicole Nord on Saturday October 17, 2015. The Study Guide belongs to Acc 302 at Ball State University taught by James Schmutte in Fall 2015. Since its upload, it has received 76 views. For similar materials see Intermediate Accounting 2 in Accounting at Ball State University.
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Date Created: 10/17/15
Exam Two Chapter 16 amp 17 Study Guide Test Notes 101515 0 Chapter 16 will be 45 of the exam and Chapter 17 will be 55 of the exam 0 15 of the exam will be objective questions ie multiple choice true false or short answer 0 80 will be problems make sure to show work because he will give partial credit if you make a calculation error If it is a conceptual error that is a different story Chapter 16 Dilutive Securities and Earnings per Share 1 Dilutive Securities Securities that can be converted into common stock a Convertible bonds can be converted into shares of stock during a speci ed period of time after the bond issuance b Convertible preferred stock has a provision for converting the preferred stock into a fixed number of shares of common stock c Stock Warrant entitles the owner to acquire shares of stock at a certain price within a stated period of time Often stock warrants are issued with other securities The issuance of warrants normally arises under three situations i When issuing other securities companies will often use warrants to make their securities more attractive ii When a company issues additional stock existing stockholders have a preemptive right to purchase the stock rst so companies may issue warrants to evidence that right iii Warrants are given to employees as a form of compensation 2 Accounting for Stock Warrants issued with other securities a The proportional Methodallocates cost according to proportion For example Assume you just bought 10000 bonds par value 1000bond with stock warrants attached for 10000000 The bonds would sell for 99 without the stock warrants Market price of warrants is 30 Step One Fair value of bonds without warrants 9900000 100000001 99 Fair value of warrants 300000 100002 30 Aggregate fair value 10200000 1 10000 bonds 1000 10000000 2 10000 bonds means 10000 warrants Step Two Portion allocated to bonds 990000010200000 10000000 9705882 Portion allocated to warrant 30000010200000 10000000 294118 This method is simply calculating what proportion of the sale price is to be allocated to the bonds and the warrants b The Incremental Method this method is used when the fair value of either the bonds or the warrants cannot be determined In this situation the security that the fair value is known for is used to determine the fair value of the other security For Example Let s say you only know the fair value for the warrants which is 3 0 warrant and there are 10000 bonds Assume the same information as the last problem Lump Sum Receipt 10000000 Fair Value of Warrants 300000 Balance allocated to bonds 9700000 You will always us the Proportional Method unless the fair value of one of the securities is not able to be determined then you will use the Incremental Method 3 Earnings per Share a Basic EPS this EPS is used when a company has a simple capital structure A company s capital structure is simple if it consists of only common stock and nothing that can be converted into common stock such as convertible preferred stock convertible bonds or stock warrants i Earnings per share calculation Net income preferred dividends Weighted average number of shares b Dilutive EPS this EPS is used when a company has a complex capital structure A complex capital structure is when a company has securities with the capability of diluting earnings per share Dilutive EPS includes the effect of potential dilutive shares 3 i Don t forget to account for tax if there is an increase in income ii Our professor may ask for per share effect which is calculated by dividing the change in net income by the change in shares outstanding Per Share Effect Change in Income Change in Shares Outstanding 3 See second handout given on 106 15 4 WeightedAverage Number of Shares Outstanding Dates Shares Fraction of Weighted Outstanding Outstanding Year Shares Jan 1 April 1 90000 312 22500 a To calculate weighted shares you multiple the number of shares outstanding by the fraction of the year these shares were outstanding You do this for the entire year and at the end you add them up that will give you the weighted average shares for the year If there is a stock split or stock dividend companies must restate shares outstanding before the stock split or dividend I would make sure you know how to account for this because I am almost positive our professor will ask a question about this For reference look at illustration 1612 on page 902 of our text Questions from book to review El6l457810l623242628 Pl6578 Chapter 17 Investments Categorizing investments When categorizing investments it is highly important to consider the intent of the buyer and the ability The intent is the most important part of the picture but the ability plays a big part as well l Held to Maturity Debt securities that a company purchases with the intent and ability to hold until maturity 2 Trading Debt securities bought and held for sale near their maturity date to turn a short term profit 3 Available for sale Debt securities that are not Trading or Held to Maturity Valuation Approaches Type of Security Management intent Valuation Approach Debt No plans to sell Amortized Cost Plan to sell Fair Value Equity Plan to sell Fair Value Exercise some Control Equity method Journal Entries 1 Held to Maturity a Purchase Date when recording purchase of securities make sure to indicate if the security is held to maturity trading or available for sale Securities investments XX Cash XX b Record interest The effective interest method is used to amortize the premium or discount on bond investments So that method Will be used When we account for the interest revenue received So remember to use the chart from chapter 14 Cash XX Debt Investments XX4 Interest Revenue XX c Amortization of DiscountPremium Interest Receivable XX Debt Investments XX Interest Revenue XX Premium Interest Receivable XX Debt Investments XX Interest Revenue XX 4 Debt investments is debited for discounts and credited for premiums
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