principle of accounting lecture 1 .pdf how and the allowance for doubtful account & depreciation and impairment 1. Accounts receivable are amounts owed by customers on account. Companies generally expect to collect these receivables within 30 to 60 days.

1. Corporation 29
Chapter Nine
Dilutive Securities and Compensation Plans
Accounting for Convertible Debt:-
➢ Convertible bonds can be changed into other corporate securities during some specified
period of time after issuance.
‫اصدارها‬ ‫بعد‬ ‫محدد‬ ‫فتره‬ ‫في‬ ‫السهم‬ ‫تحويلها‬ ‫سيتم‬ ‫انها‬ ‫يعني‬ ‫السندات‬ ‫تحويل‬
➢ A convertible bond combines the benefits of a bond with the privilege of exchanging it
for share at the holder’s option.
)‫الفوائد‬ ‫سداد‬ ‫(عدم‬ ‫السهم‬ ‫وتحويلها‬ )‫االداريه‬ ‫العمليه‬ ‫في‬ ‫الدخول‬ ‫(عدم‬ ‫السندات‬ ‫من‬ ‫الميزه‬ ‫يدمج‬ ‫السندات‬ ‫تحويل‬
➢ Investors who purchase it desire the security of a bond holding (guaranteed interest and
principal) plus the added option of conversion if the value of the stock appreciates
significantly
‫ا‬ ‫هذه‬ ‫تحويل‬ ‫احقيه‬ ‫عليه‬ ‫مضاف‬ )‫المبلغ‬ ‫واصل‬ ‫للفوائد‬ ‫(كضمات‬ ‫سندات‬ ‫شاء‬ ‫يريد‬ ‫االستثمار‬ ‫بدايه‬ ‫في‬ ‫المستثمرين‬
‫السهم‬ ‫لسندات‬
Corporations issue convertible securities for two main reasons:-
1. to raise equity capital without giving up more ownership control than necessary.
)‫(المملوك‬ ‫المال‬ ‫رأس‬ ‫زياده‬
‫عليه‬ ‫جديده‬ ‫ملكيه‬ ‫دخول‬ ‫بدون‬
2. to issue convertibles is to obtain debt financing at cheaper rates.
‫الشركه‬ ‫علي‬ ‫اللي‬ ‫الديون‬ ‫نسبه‬ ‫يقلل‬
Journal entry:-
Bonds payable
Premium (Dr)
Discount (cr)
Common stock (number of share x par)
Paid in capital in excess of par ‫متمم‬
Example:-
Hilton company has convertible bonds outstanding with a par value of $500,000 and an un
amortized discount of $25,000. Each $1,000 bond is convertible into 10 shares of Hiltons’ $25
par value common stock.
Solution
The number of bonds outstanding =
$500,000
1000
= 500 bonds
The number of shares converted = 500 bond x 10 = 5000 shares
Bonds payable
Discount on bonds (cr)
Common stock (5,000 shares x 25)
Paid in capital in excess of par ‫متمم‬
500,000
25,000
125,000
350,000 ‫متمم‬

2. Corporation 30
Induced Conversions
Sometimes the issuer wishes to encourage prompt conversion of its convertible debt to equity
securities in order to reduce interest costs or to improve its debt to equity ratio.
: ‫التحوويل‬ ‫علي‬ ‫المستثمرين‬ ‫تحفيز‬
-
‫تشجيع‬ ‫يتم‬ ‫الحاالت‬ ‫بعض‬ ‫في‬
‫نسبه‬ ‫لتقليل‬ ‫السهم‬ ‫السندات‬ ‫من‬ ‫التحويل‬ ‫علي‬ ‫المستثمرين‬
‫والمديونيه‬ ‫الملكيه‬ ‫نسبه‬ ‫لتحسين‬ ‫الفوائد‬
Thus, the issuer may offer some form of additional consideration (such as cash or common
stock), called a “sweetener,” to induce conversion.
‫اضافي‬ ‫اموال‬ ‫اعطائهم‬ ‫يتم‬
‫التحويل‬ ‫مقابل‬ ‫كهديه‬ )‫اسهم‬ + ‫(اموال‬ ‫ه‬
Journal entry:-
Conversion expense
Bonds payable
Premium (Dr)
Discount (cr)
Common stock
Cash
Paid in capital in excess of par ‫متمم‬
Example:-
If Hilton company paid the holders of the bonds a total of $30,000 to induce them to convert the
bonds, the $30,000 sweetener is recorded as an expense of the conversion period.
Solution
Conversion expense
Bonds payable
Discount on bonds (cr)
Common stock (5,000 shares x 25)
Paid in capital in excess of par ‫متمم‬
Cash
30,000
500,000
25,000
125,000
350,000 ‫متمم‬
30,000

3. Corporation 31
Example:-
On January 1, 2011, Lin Company issued a convertible bond with a par value of $100,000 in the
market for $120,000. The bonds are convertible into 12,000 ordinary shares of $1 per share
par value. The bond has a 5-year life and has a stated interest rate of 10% payable annually.
The market interest rate for a similar non-convertible bond at January 1, 2011, is 8%. The
liability component of the bond is computed to be 107,986. The following bond amortization
schedule is provided for this bond.
EFFECTIVE-INTEREST METHOD 10% BOND DISCOUNTED AT 8%
The requirements
(a) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2011
(b) Assume that the bonds were converted on December 31, 2013. The fair value of the liability
component of the bond is determined to be $108,000 on December 31, 2013.Prepare the journal
entry to record the conversion on December 31, 2013. Assume that the accrual of interest
related to 2013 has been recorded.
a) Cash .................................................................................... 107,986
Bonds Payable .......................................................... 107,986
(b) Share Premium .................................................................. 12,014
Bonds Payable .................................................................... 103,566
Share Capital—Ordinary (12,000  $1) ...................... 12,000
Share Premium—Ordinary.......................................... 103,580