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At what amount should trading, available-for-sale, and held-to-maturity securities be reported on thebalance sheet?
Explain how trading securities are accounted for and reported.
When should a debt security be classified as held-tomaturity?
Identify and explain the three types of classifications for investments in debt securities.
What is the cost of a long-term investment in bonds?
What purpose does the variety in bond features (types and characteristics) serve?
Distinguish between a debt security and an equity security.
Ragatz, Inc., a drug company, reported the following information. The company prepares its financial statements in accordance with GAAP.
\r\n2014 (,000)
\r\nCurrent liabilities $ 554,114
\r\nConvertible subordinated debt 648,020
\r\nTotal liabilities 1,228,313
\r\nStockholders’ equity 176,413
\r\nNet income 58,333
\r\nAnalysts attempting to compare Ragatz to drug companies that issue debt with detachable warrants may face a challenge due to differences in accounting for convertible debt.
\r\nInstructions
\r\n(a) Compute the following ratios for Ragatz, Inc. (Assume that year-end balances approximate annual averages.)
\r\n(1) Return on assets.
\r\n(2) Return on common stock equity.
\r\n(3) Debt to assets ratio.
\r\n(b) Briefly discuss the operating performance and financial position of Ragatz. Industry averages for these ratios in 2014 were ROA 3.5%; return on equity 16%; and debt to assets 75%. Based on this analysis, would you make an investment in the company’s 5% convertible bonds? Explain.
\r\n(c) Assume you want to compare Ragatz to an IFRS company like Merck (which issues nonconvertible debt with detachable warrants). Assuming that the fair value of the equity component of Ragatz’s convertible bonds is $150,000, how would you adjust the analysis above to make valid comparisons between Ragatz and Merck?
Instructions
\r\nGo to the book’s companion website and use information found there to answer the following questions related to The Coca-Cola Company and PepsiCo, Inc.
\r\n(a) What employee stock-option compensation plans are offered by Coca-Cola and PepsiCo?
\r\n(b) How many options are outstanding at year-end 2011 for both Coca-Cola and PepsiCo?
\r\n(c) How many options were granted by Coca-Cola and PepsiCo to officers and employees during 2011?
\r\n(d) How many options were exercised during 2011?
\r\n(e) What was the average exercise price for Coca-Cola and PepsiCo employees during 2011?
\r\n(f) What are the weighted-average number of shares used by Coca-Cola and PepsiCo in 2011, 2010, and 2009 to compute diluted earnings per share?
\r\n(g) What was the diluted net income per share for Coca-Cola and PepsiCo for 2011, 2010, and 2009?
The financial statements of Marks and Spencer plc (M&S) are available at the book’s companion website or can be accessed at http://annualreport.marksandspencer.com/_assets/downloads/ Marks-and-Spencer-Annual-report-and-financial-statements-2012.pdf.
\r\nInstructions
\r\nRefer to M&S’s financial statements and the accompanying notes to answer the following questions.
\r\n(a) Under M&S’s share-based compensation plan, share options are granted annually to key managers and directors.
\r\n(1) How many options were granted during 2012 under the plan?
\r\n(2) How many options were exercisable at 31 March 2012?
\r\n(3) How many options were exercised in 2012, and what was the average price of those exercised?
\r\n(4) How many years from the grant date do the options expire?
\r\n(5) To what accounts are the proceeds from these option exercises credited?
\r\n(6) What was the number of outstanding options at 31 March 2012, and at what average exercise price?
\r\n(b) What number of diluted weighted-average shares outstanding was used by M&S in computing earnings per share for 2012 and 2011? What was M&S’s diluted earnings per share in 2012 and 2011?
\r\n(c) What other share-based compensation plans does M&S have?
Richardson Company is contemplating the establishment of a share-based compensation plan to provide long-run incentives for its top management. However, members of the compensation committee of the board of directors have voiced some concerns about adopting these plans, based on news accountsrelated to a recent accounting standard in this area. They would like you to conduct some research on this recent standard so they can be better informed about the accounting for these plans.
\r\nInstructions
\r\nAccess the IFRS authoritative literature at the IASB website (http://eifrs.iasb.org/). (Click on the IFRS tab and then register for free eIFRS access if necessary.) When you have accessed the documents, you can use the search tool in your Internet browser to respond to the following questions. (Provide paragraph citations.)
\r\n(a) Identify the authoritative literature that addresses the accounting for share-based payment compensation plans.
\r\n(b) Briefly discuss the objectives for the accounting for share-based compensation. What is the role of fair value measurement?
\r\n(c) The Richardson Company board is also considering an employee share-purchase plan, but the
\r\nBoard does not want to record expense related to the plan. What are the IFRS requirements for the accounting for an employee share-purchase plan?
Assume that Sarazan Company has a share-option plan for top management. Each share option represents the right to purchase a $1 par value ordinary share in the future at a price equal to the fair value of the shares at the date of the grant. Sarazan has 5,000 share options outstanding, which were granted at the beginning of 2014. The following data relate to the option grant.
\r\nExercise price for options $40
\r\nMarket price at grant date (January 1, 2014) $40
\r\nFair value of options at grant date (January 1, 2014) $6
\r\nService period 5 years
\r\nInstructions
\r\n(a) Prepare the journal entry(ies) for the first year of the share-option plan.
\r\n(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted shares were granted at the beginning of 2014.
\r\n(c) Now assume that the market price of Sarazan shares on the grant date was $45 per share. Repeat the requirements for (a) and (b).
\r\n(d) Sarazan would like to implement an employee share-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Explain how employee sharepurchase plans are recorded.
Assume the same information in IFRS16-11, except that Angela Corporation converts its convertible bonds on January 1, 2014.
\r\nInstructions
\r\n(a) Compute the carrying value of the bond payable on January 1, 2014.
\r\n(b) Prepare the journal entry to record the conversion on January 1, 2014.
\r\n(c) Assume that the bonds were repurchased on January 1, 2014, for $1,940,000 cash instead of being converted. The net present value of the liability component of the convertible bonds on January 1,
\r\n2014, is $1,900,000. Prepare the journal entry to record the repurchase on January 1, 2014.
Angela Corporation issues 2,000 convertible bonds at January 1, 2013. 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%.
\r\nInstructions
\r\n(a) Compute the liability and equity component of the convertible bond on January 1, 2013.
\r\n(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2013.
\r\n(c) Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2016, its maturity date.
Petrenko Corporation has outstanding 2,000 $1,000 bonds, each convertible into 50 shares of $10 par value ordinary shares. The bonds are converted on December 31, 2014. The bonds payable has a carrying value of $1,950,000 and conversion equity of $20,000. Record the conversion using the book value method.
\r\n
Archer Company issued $4,000,000 par value, 7% convertible bonds at 99 for cash. The net present value of the debt without the conversion feature is $3,800,000. Prepare the journal entry to record the issuance of the convertible bonds.
Cordero Corporation has an employee share-purchase plan which permits all full-time employees to purchase 10 ordinary shares on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased less a 10% discount. How is this discount accounted for by Cordero?
Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 ordinary shares immediately after an interest payment date. At that time, the market price of the debentures is 104, and the ordinary shares are selling at $14 per share (par value $10). At date of issue, the company recorded Share Premium—Conversion Equity of $50,000.
\r\nThe company records the conversion as follows.
\r\nBonds Payable 960,000
\r\nShare Premium—Conversion Equity 50,000
\r\nShare Capital—Ordinary 800,000
\r\nShare Premium—Ordinary 210,000
\r\nDiscuss the propriety of this accounting treatment.
What are the arguments for giving separate accounting recognition to the conversion feature of debentures?
Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.
Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share.
Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of $400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of $35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS. (a) Prepare the entry to record issuance of the bonds at par under GAAP. (b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance. (c) Which approach provides the better accounting? Explain.
Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.
Where can authoritative IFRS be found related to dilutive securities, stock-based compensation, and earnings per share?
Richardson Company is contemplating the establishment of a share-based compensation plan to provide long-run incentives for its top management. However, members of the compensation committee of the board of directors have voiced some concerns about adopting these plans, based on news accounts related to a recent accounting standard in this area. They would like you to conduct some research on this recent standard so they can be better informed about the accounting for these plans.
\r\nInstructions
\r\nIf your school has a subscription to the FASB Codification, go to http://aaahq.org/ascLogin.cfm to log in and prepare responses to the following. Provide Codification references for your responses.
\r\n(a) Identify the authoritative literature that addresses the accounting for share-based payment compensation plans.
\r\n(b) Briefly discuss the objectives for the accounting for stock compensation. What is the role of fair value measurement?
\r\n(c) The Richardson Company board is also considering an employee share-purchase plan, but the Board does not want to record expense related to the plan. What criteria must be met to avoid recording expense on an employee stock-purchase plan?
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