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I. Introduction II. Two types of dilutive securities are convertible bonds and convertible preferred stock. A. Convertible bonds can be converted to other corporate securities during some specific time after issuance. B. Convertible preferred stock, includes an option for the holder to convert preferred shares into a certain number of common shares. Unlike convertible bonds, convertible preferred stock is considered equity (unless there is a mandatory redemption feature).
Note the example and journal entry on page 799.

III. Another type of dilutive security is a stock warrant. A. A stock warrant is a certificate that entitles the holder to acquire shares of stock at a certain price within a stated period. B.
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a. An employee stock purchase plan is considered compensatory unless all three of the following conditions are met: * substantially all full-time employees can participate on an equitable basis, and * the price discount on shares is no greater than 5%. (The 5% is a guideline. If it can be demonstrated that a discount greater than 5% is “reasonable,” the plan may still be considered noncompensatory.) and * the plan offers no substantive option feature. b. If these criteria are met, the entry to record the sale of the stock is the same as if the stock were sold to any investor. c. If the criteria are not met, the plan is considered compensatory, and the company must recognize a portion of the benefit as compensation expense over the service life of the employee. 4. Stock appreciation rights (SARs) give employees the right to receive compensation equal to share appreciation.

C. Terms 1. Grant date 2. Vesting date 3. Exercise date 4. Service period

VII. The accounting issues related to share-based compensation plans are: * How to determine the amount of compensation expense to record * Over what period of time to recognize the expense

VIII. Earnings per Share (EPS) is used by analysts and potential investors to evaluate the profitability of a company.
See Illustration 16-7 on page 812.

IX. Basic Earnings per Share
Recall the formula to calculate

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