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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 121

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On December 31, 2017, Jackson Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2018, Jackson purchased 24,000 shares of common stock on the open market as treasury stock for $35 per share. Jackson sold 6,000 treasury shares on September 30, 2018, for $37 per share. Net income for 2018 was $180,905. Also outstanding during the year were fully vested incentive stock options giving key personnel the option to buy 50,000 common shares at $40. The market price of the common shares averaged $39 during 2018. Required: Compute Jackson's basic and diluted earnings per share (rounded to 2 decimal places) for 2018.

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Basic EPS
[$180,905 - (7% × $50 × 30,000...

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Question 122

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JD Co. is a calendar-year firm with 600 million common shares outstanding throughout 2018 and 2019. As part of its executive compensation plan, at January 1, 2017, the company had issued 60 million executive stock options permitting executives to buy 60 million shares of stock for $10 per share within the next eight years, but not prior to January 1, 2020. The fair value of the options was estimated on the grant date to be $3 per option. In 2018, JD began granting employees stock awards rather than stock options as part of its equity compensation plans and granted 30 million restricted common shares to senior executives at January 1, 2018. The shares vest four years later. The fair value of the stock was $12 per share on the grant date. The average market price of the common shares was $12 and $15 during 2018 and 2019, respectively. The stock options qualify for tax purposes as an incentive plan. The restricted stock does not. The company's income before tax was $400 million and $500 million, and the net income was $240 million and $300 million, in 2018 and 2019, respectively. Required: 1. Determine basic and diluted earnings per share (rounded to 2 decimal places) for JD in 2018. 2. Determine basic and diluted earnings per share for JD (rounded to 2 decimal places) in 2019.

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1. (amounts in millions, except per shar...

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Question 123

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If previous experience indicates that a material number of stock options will be forfeited before they vest, the fair value estimate of the options on the grant date should be adjusted to reflect that expectation.

A company has cumulative preferred stock. When computing earnings per share, the current year's dividends not declared on the preferred stock should be:

On January 1, 2018, Cobbler Corporation awarded restricted stock units (RSUs) representing 30 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. On the grant date, the shares had a market price of $3 per share. Required: (1.) Determine the total compensation cost pertaining to the RSUs. (2.) Prepare the appropriate journal entry to record the award of RSUs on January 1, 2018. (3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2018. (4.) Prepare the appropriate journal entry to record compensation expense on December 31, 2019. (5.) Prepare the appropriate journal entry to record compensation expense on December 31, 2020. (6.) Prepare the appropriate journal entry to record the lifting of restrictions on the RSUs and issuing shares at December 31, 2020.

On January 1, 2018, Marguerite DeVille Co. granted restricted stock units (RSUs) representing 300,000 of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $12 per share on the grant date. At the date of grant, DeVille anticipated that 6% of the recipients would leave the firm prior to vesting. In 2019, 2% of the options are forfeited due to executive turnover. DeVille chooses the option not to estimate forfeitures. What amount should DeVille record as compensation expense for the year ended December 31, 2019, assuming DeVille chooses the option not to estimate forfeitures?

Which of the following results in increasing basic earnings per share?

Common forms of share-based compensation include each of the following except:

Nagy Industries reported a net income of $619,369 on December 31, 2018. At the beginning of the year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000 shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger. On December 1, 2018, the company declared and issued a 10% stock dividend. Required: Compute Nagy's net income that would produce a basic EPS of $2.00 per share for 2018.

Fully vested incentive stock options for 60,000 shares of common stock at an exercise price of $50 were outstanding at the beginning of 2018. The market price of the stock averaged $56 during the year. Required: If these options are exercised on March 1 of the current year, by how many shares will the options increase the weighted-average number of shares outstanding when calculating diluted earnings per share?

If restricted stock is forfeited because an employee leaves the company, the appropriate accounting procedure is to: