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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RCJ Chapter 15
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
3. ex. Con- + CRCR (or CR to Treasury Stock) CR
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 -)
Def: bonds with an option attached
1. issuance: ignore conversion feature, as if its value were zero (just like IV method for options)
2. interest payment: also just like straight bond
DR Interest expense
3.Conversion: 2 methods: market value method and book value method.
market value method book value method
B/P (BV) C/S (MV @ conversion) B/P (BV) C/S (BV)
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