Asked by Hadeel Jaber on Jun 11, 2024
Verified
The "if-converted" method for computing earnings per share dilution understates diluted earnings per share when a company's share price is substantially below the conversion price of the debt.
If-converted Method
An accounting method used to calculate earnings per share, assuming all convertible securities were transformed into common stock.
Diluted Earnings
Earnings per share calculated using the assumption that all convertible securities have been converted to common stock, potentially lowering earnings per share.
- Identify the characteristics of convertible securities and their accounting treatment.
Verified Answer
RO
relly oassyharryJun 17, 2024
Final Answer :
True
Explanation :
If the conversion price of debt is substantially higher than the current share price, it is less likely that the debt will be converted into shares, and therefore, the potential dilution from the debt is not accurately reflected in the if-converted method. As a result, diluted earnings per share may be understated.
Learning Objectives
- Identify the characteristics of convertible securities and their accounting treatment.