Owners ’ Equity RCJ Chapter 15

Paul Zarowin2 Key Issues 1.Statement of O/E 2.O/E accounts 3.O/E events 4.Convertible debt

Paul Zarowin3 Statement of Owners ’ Equity (link to SCF, financing section) Shows all events affecting common O/E accounts (entry is O/E side of event JE) ex. Stock issuances, repos, option exercises, NI, dividends, conversions, etc. Common O/E accounts _________________ events # shares * Par APC TreasStock Acc’dCompInc R/E Total 1. ex. Repo - DR DR 2. ex. Option + CR CR (or CR to Treasury Stock) CR exercise 3. ex. Con- + CR CR (or CR to Treasury Stock) CR version 4. ex. NI CR CR 5. ex. Div DR DR * #’shares in table show the effect of the event on the specific O/E account (CR is + and DR is -) Ex. P15-13,14

Paul Zarowin4 Convertible Debt Def: bonds with an option attached option = right to convert bonds into common conversion price for a certain period because of conversion option, convertible bonds have yields < straight bonds i.e., bondholder gives up some guaranteed interest for the possibility of stock price appreciation Journal entries 1. issuance: ignore conversion feature, as if its value were zero (just like IV method for options) DRCash CR B/P 2. interest payment: also just like straight bond DRInterest expense CRCash

Paul Zarowin5 Convertible Bonds (cont ’ d) 3. Conversion: 2 methods: market value method and book value method. market value method book value method DR CR DR CR B/P (BV) C/S conversion) B/P (BV) C/S (BV) Loss  MV > BV or no one would convert Ex. P15-3 Key financial statement analysis implications: 1. difficulty to estimate future cash outflows, because of the probability of conversion, and 2. recorded interest expense understates the true cost of debt