Problem:
After reviewing the convertible securities, you realize that if everyone converted their securities to shares of stock, it would have a significant affect on the financial statements. The common stock is currently listed at $65 a share on the open market and the par value for each share is $5. Listed below are the potential securities that could be converted and the current value listed on the financial statements:
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Financial Statement Listings
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5 percent cumulative preferred stock - $100 par value
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$10,000,000
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Additional paid-in capital - Preferred stock
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$5,000,000
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Convertible bond payable (7 percent, 10-year bonds issued 7/1/06)
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$15,000,000
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Discount on convertible bonds payable
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$1,125,000
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Security
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Conversion Rate
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100,000 shares of $100 par value preferred stock
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3 shares of CS for each share
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$1,000 convertible bond
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20 shares of CS for each bond
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The stock compensation plan grants the company’s 1,000 employees the option to purchase 10 shares of stock annually. The strike price for the stock is based on current market price. This year the strike price will be $45.
Analyze the company’s convertible securities. Prepare the journal entries that would be needed, if they were converted. Also, examine the company’s proposed stock compensation plan, and compute the impact on the company’s financial statements. In addition, update the log of issues to include this week’s topics.