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Owners ’ Equity RCJ Chapter 15 Key Issues Statement of O/E O/E accounts O/E events Convertible debt 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)

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owners equity

Owners’ Equity

RCJ Chapter 15

key issues
Key Issues
  • Statement of O/E
  • O/E accounts
  • O/E events
  • Convertible debt

Paul Zarowin

statement of owners equity link to scf financing section
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*ParAPCTreasStockAcc’dCompIncR/ETotal

1. ex. Repo - DR DR

2. ex. Option + CRCR (or CR to Treasury Stock) CR

exercise

3. ex. Con- + CRCR (or CR to Treasury Stock) CR

version

4. ex. NICR CR

5. ex. DivDR 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 Zarowin

convertible debt
Convertible Debt

Def: bonds with an option attached

    • option = right to convert bonds into common stock @ 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) 

DR Cash

CR B/P

2. interest payment: also just like straight bond

DR Interest expense

CR Cash

Paul Zarowin

convertible bonds cont d
Convertible Bonds (cont’d)

3.Conversion: 2 methods: market value method and book value method.

market value method book value method

DRCRDRCR

B/P (BV) C/S (MV @ 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

Paul Zarowin