How would Crocs account for the conversion of its preferred stock into common stock?

At the end of December 2013, Crocs Inc. announced that Blackstone Group is investing $200 million into the footwear company in the form of a preferred stock purchase. In three years, the preferred stock shares owned by Blackstone Group will convert into common shares if the Crocs common stock market price rises to a certain level.  Crocs’ preferred stock has a par value of $0.001 per share, as does its common stock.  Over the next three years, Blackstone Group expects Crocs to replace its CEO, close some stores, expand into Asia, and offer new products in an effort to increase its stock price.

Assume that Blackstone Group purchases 4 million preferred shares with its $200 million investment in the first quarter of 2014.

Questions

1. Assume that in three years, the market price for one share of Crocs common stock is $75 and this market price meets the original conversion criteria when Blackstone Group made its original investment.  Also assume that one share of preferred stock converts into one share of common stock. Write the journal entry that Crocs would prepare to convert the preferred stock shares into common stock shares.
2. What is the impact of this conversion of preferred stock into common stock on Crocs’ assets, liabilities, and stockholders’ equity?
3. Why would preferred stock shares have been attractive to Blackstone Group when it made the initial investment in Crocs?
4. Why would Blackstone Group have wanted the conversion feature on the Crocs preferred stock that it purchased?

Instructor Resources

These resources are provided to give the instructor flexibility for use of Accounting in the Headlines articles in the classroom. The blog posting itself can be assigned via a link to this site OR by distributing the student handout below. Alternatively, the PowerPoint file below contains a bullet point overview of the article and the discussion questions. The YouTube video link below is a narration of the blog post article (no discussion questions are included in the YouTube video; those can be assigned separately.)

• Student handout (pdf) (contains entire blog posting + discussion questions)
• PowerPoint file (brief article overview + discussion questions)
• YouTube video (narrated article in shareable YouTube link)

This work is licensed under a Creative Commons Attribution-NonCommercial 3.0 Unported License.