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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 71

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The most important accounting objective for executive stock options is:

A) Measuring and reporting the amount of compensation expense during the service period.
B) Measuring their fair value for balance sheet purposes.
C) To disclose increases or decreases in the stock options held at the end of each accounting period.
D) None of these answer choices is correct.

E) B) and D)
F) B) and C)

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Question 72

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Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year.It issued ten thousand $1,000,convertible bonds on January 1.Each bond is convertible into 50 shares of common stock.The bonds were issued at face amount and pay interest quarterly at an annual rate of 10%.On June 30,Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock.Dividends are declared and paid semiannually.Ignatius has an effective tax rate of 40%.Ignatius would report the following EPS data (rounded)on its net income of $20 million:

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Question 73

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Preferred dividends are subtracted from earnings when computing basic earnings per share whether or not the dividends are declared or paid if the preferred stock is:

When recognizing compensation under a stock option plan,unanticipated forfeitures are treated as:

What is the total compensation cost for this plan?

FX Services granted 15 million of its $1 par common shares to executives,subject to forfeiture if employment is terminated within three years.The common shares have a market price of $8 per share on the grant date.Ignoring taxes,what is the effect on earnings in the year after the shares are granted to executives?

On January 1,2016,Algerian Delivery had 100,000 shares of common stock outstanding.The following transactions occurred during 2016: March 1: Reacquired 3,000 shares,accounted for as treasury stock. September 30: Sold all the treasury shares. December 1: Sold 12,000 new shares for cash. December 31: Reported a net income of $297,750. Required: Calculate Algerian Delivery's basic earnings per share for the year ended December 31,2016.

On December 31,2015,Jackson Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%,$50 par,cumulative preferred stock outstanding.On February 28,2016,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 30,2016,for $37 per share.Net income for 2016 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 2016. Required: Compute Jackson's basic and diluted earnings per share (rounded to 2 decimal places)for 2016.

Salle Services issued $300 million of 6% bonds in 2014.The bonds are convertible into 60 million shares of its no par common stock.Salle elected the option to report the bonds at fair value,with changes in fair value reported in earnings.As a result the bonds are reported at $312 million in the December 31,2016,balance sheet. Required: When calculating diluted EPS at December 31,2016,what will be the net increase in the denominator of the EPS fraction? Explain.

Which of the following will require a recalculation of weighted-average shares outstanding for all years presented?

On December 31,2015,Witherspoon Services had 800,000 shares of common stock and 200,000 shares of 5.5%,noncumulative,nonconvertible $10 par preferred stock issued and outstanding. On March 2,2016,Witherspoon sold 120,000 common shares.In keeping with its long-term share repurchase plan,30,000 shares were retired on August 31.Witherspoon distributed a 10% common stock dividend on June 3.Witherspoon's net income for the year ended December 31,2014,was $600,000.The company paid cash dividends of $110,000 to preferred shareholders on December 20,2016.The income tax rate is 40%. Required: Compute Witherspoon's earnings per share for the year ended December 31,2016.

Restricted stock units (RSUs) :

Capital Consulting Company had 400,000 shares of common stock outstanding on December 31,2016.On that date,there were also 5,000 shares of $100 par,6% noncumulative preferred stock outstanding.On March 1,2016,the company's common stock split 3-for-1.On December 15,2016,a preferred dividend was declared and paid in the amount of $25,000.Net income for 2016 was $3,000,000. Required: Compute basic earnings per share (rounded to 2 decimal places)for the year ended December 31,2016.

On March 1,2020,when the market price of Wilson's stock was $14 per share,3 million of the options were exercised.The journal entry to record this would include:

During 2016,M Co.had the following two classes of stock issued and outstanding for the entire year:  400,000 shares of common stock,$1 par.  2,000 shares of 4% preferred stock,$100 par,convertible share-for-share into common stock. M's 2016 net income was $1,800,000,and its income tax rate for the year was 30%.In the computation of diluted earnings per share for 2016,the amount to be used in the numerator is:

During 2016,Quattro entered into the following transactions relating to shareholders' equity.The corporation was authorized to issue 20 million common shares,$1 par per share. Net income for 2016 was $110 million. Jan.2: Issued 10 million common shares for cash. Jan.3 Entered an agreement with the company president to issue up to 2 million additional shares of common stock in 2016 based on the earnings of Quattro in 2016.If net income exceeds $100 million,the president will receive 1 million shares;2 million shares if net income exceeds $120 million. Required: Compute basic and diluted EPS for 2016.

The Burford Corporation provides an executive stock option plan.Under the plan,the company granted options on January 1,2016,that permit executives to acquire 12 million of the company's $1 par value common shares within the next five years,but not before December 31,2019 (the vesting date).The exercise price is the market price of the shares on the date of the grant,$14 per share.The fair value of the options,estimated by an appropriate model,is $3 per option.No forfeitures are anticipated.Ignore taxes. Required: (1. )Determine the total compensation cost pertaining to the options.Show calculations. (2. )Prepare the appropriate journal entry (if any)to record the award of options on January 1,2016. (3. )Prepare the appropriate journal entry (if any)to record compensation expense on December 31,2016.

No time-weighting of contingently issuable shares is required when computing basic EPS.

During the current year,High Corporation had 3 million shares of common stock outstanding.Five thousand $1,000,6% convertible bonds were issued at face amount at the beginning of the year.High reported income before tax of $4 million and net income of $2.4 million for the year.Each bond is convertible into 10 shares of common.What is diluted EPS (rounded) ?

What is the advantage of stock appreciation rights over stock options?