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Chapter 16 Dilutive securities and earnings per share
Learning objectives
After studying this chapter, you should be able to: 1. Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. Explain the accounting for convertible preferred stock. 3. Contrast the accounting for stock warrants and for stock warrants issued with other securities. 4. Describe the accounting for stock compensation plans 5. Discuss the controversy involving stock compensation plans 6. Compute earnings per share in a simple capital structure 7. Compute earnings per share in a complex capital structure.

As the opening story indicates, companies are rethinking the use of various forms of
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The book value method records the securities exchanged for the bond at the carrying amount of the bond.

Induced conversions
Sometimes the issuer wishes to encourage prompt conversion of its convertible debt to equity securities in order to reduce interest costs or to improve its debt to equity ratio. Thus, the issuer may offer some form of additional consideration (such as cash or common stock), called a “sweetener,” to induce conversion. The issuing company reports the sweetener as an expense of the current period. Its amount is the fair value of the additional securities or other consideration given.

Retirement of convertible debt
As indicated earlier, the method of recording the issuance of convertible bonds follows that used in recording straight debt issues. Specifically this means that issuing companies should not attribute any portion of the proceeds to the conversion feature, nor should it credit a paid-in capital account.

Although some raise theoretical objections to this approach, to be consistent, companies need to recognize a gain or loss on retiring convertible debt in the same way that they recognize a gain or loss on retiring nonconvertible debt. For this reason, companies should report differences between the cash acquisition price of debt and its carrying amount in current income as a gain or loss.

Convertible preferred stock
Convertible preferred stock includes an option for the holder to convert preferred shares into a fixed
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