Owners

1
Owners Equity

• RCJ Chapter 15

2
Key Issues

1. Statement of O/E
2. O/E accounts
3. O/E events
4. Convertible debt

3
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
  AccdCompInc 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

4
Convertible Debt

• Def bonds with an option attached
• option right to convert bonds into common stock
  _at_ conversion price for a certain period
• because of conversion option, convertible bonds
  have yields lt 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) 
• DR Cash
• CR B/P
• 2. interest payment also just like straight bond
• DR Interest expense
• CR Cash

5
Convertible Bonds (contd)

• 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 (MV _at_ conversion) B/P (BV)
  C/S (BV)
• Loss 
• MV gt 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
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