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Blah Blah Blah Essay

1277 words - 6 pages

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 ...view middle of the document...

VI. Employee stock-based compensation plans take a variety of forms:
* Stock option plans
* Stock award plans (Restricted stock plans)
* Stock purchase plans
* Stock appreciation rights plans (SARs)
A. Regardless of the type of plan, there are two key accounting issues:
* How to determine the amount of compensation expense to record
* Over what period of time to recognize the expense
B. Types of plans
1. A stock option plan grants employees options to purchase the company’s stock at a given price over an extended period of time.
2. In a restricted stock plan (also called stock award plan), the company awards (gives) employees shares of stock.
See example and journal entries for restricted stock on pages 807 and 808.
3. An employee stock purchase plan permits employees to purchase the company’s stock at a discounted price for a short period of time.

A stock purchase plan may be compensatory or noncompensatory.
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If a plan is deemed compensatory, the company should record compensation expense for the amount of the employee’s discount.
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Let’s say an employee stock purchase plan permits employees to purchase 10 shares of company $1 par common stock at a 20% discount. At the time of the purchase the market value is $10 per share. The company would make the following journal entry:
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Cash (10 shares X $8) $80
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Compensation expense (diff. between market and employee’s cost) $20
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Common stock (@par 10 shares X $1) $10
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Additional paid in capital (or PIC in excess of par) $90
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To record issuance of common stock in a compensatory employee stock purchase plan

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If deemed noncompensatory, the company records the stock issuance as it would to a nonemployee.
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...

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