Chapter 16: Dilutive Securities And Earnings Per Share
Convertible bonds are usually converted into:
When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounted for as a(n)
In 2014, Chartres Inc., issued for $105 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Chartre's $25 par value common stock at the option of the preferred stockholder. In April 2015, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock?
The preferred stock's par value and any additional paid-in capital is transferred to Common Stock and Additional Paid-in Capital when preferred stock is converted: $6,300,000 – (60,000 × 3 × $25) = $1,800,000.
The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be
treated as a direct reduction of retained earnings.
When preferred stock is converted to common, any excess of the par value of the common shares issued over the carrying amount of the preferred being converted reduced retained earnings.
Lake Norman Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the Lake Norman bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants?
The amount allocated to the warrants is: [$20,000 ÷ ($20,000 + $180,000)] × $205,000 = $20,500.
Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when
the warrants issued with the debt securities are nondetachable.