Problem D-4 Stock Dividends and Stock Splits
Stock dividends and stock splits are common forms of corporate share distribution to shareholders. Consider each of the numbered statements below, and decide whether it:
A.Applies to both stock dividends and stock splits.
B.Applies to stock splits only.
C.Applies to stock dividends only.
D.Applies to neither.
(In each instance, assume the issuing corporation has only one class of shares.)
Print next to the number of each statement below, the single capital letter of the description which applies to the statement.
____ 1.There is no transfer between retained earnings and share capital accounts.
____ 2.There is no change in the total shareholders' equity of the issuing corporation.
____ 3.The retained earnings account is increased.
____ 4.Book value decreases.
____ 5.Retained earnings in the amount of the distribution are transferred to share capital.
____ 6.Book value increases.
____ 7.The total number of shares outstanding is increased.
____ 8.The distribution is a multiple as compared to a percentage of the number of shares previously outstanding.
Problem D-5 Earnings per Share (EPS) Concepts
Indicate which of the following types of securities would be included in the calculation of “basic earnings per share,” and which would be included in the calculation of “diluted earnings per share.” Place a “B” before those which affect only basic EPS, a “D” before those which affect only diluted EPS, a “BD” before those which affect both basic and diluted EPS, and an “N” before those securities which do not affect EPS calculations. Assume that, where applicable, the securities are dilutive.
____ 1.Notes payable
____ 2.Executive stock options
____ 3.Convertible bonds
____ 4.Cumulative, nonconvertible preferred shares
____ 5.Warrants to purchase additional common shares
____ 6.Common shares
____ 7.Nonconvertible bonds
____ 8.Convertible preferred shares
Problem D-6 Convertible Bonds
On January 1, 2017, Charlie Corp. issued $5,000,000 (par value) 8%, 10-year convertible bonds at par. Interest is to be paid annually on December 31. Each $10,000 bond carries the right to purchase 100 Charlie common shares for $20 each during the life of the bond. The current market rate for similar non-convertible bonds is 9%.
a.Calculate how much of the bond proceeds to allocate to the bond and how much to the option.Charlie adheres to IFRS.
b.Prepare the journal entry to record the issuance of the bond.