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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 1

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Jmart Corporation included the following disclosure note in a recent annual report: RESTRICTED STOCK (in part) we issued 100,000 shares of restricted stock at market prices ranging from $46.00 to $60. The restricted stock generally vests over three years, during which time we will recognize total compensation expense of approximately $6 million. Required: 1. Based on the information provided in the disclosure note, determine the weighted average market price of the restricted stock issued. 2. How much compensation expense did Jmart report for the year following the year in which the restricted stock was issued?

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1. $6,000,000 ÷ 100,000 shares = $60
2. ...

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Question 2

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All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?

A) Decrease.
B) No effect if the shares are held as treasury shares.
C) Increase only if the shares are considered to be retired.
D) Increase.

E) A) and B)
F) B) and C)

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Question 3

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Stock options will be dilutive and included in the calculation of diluted EPS if the exercise price is greater than the average market value of the stock.

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Stock dividends and splits

ABC declared and paid cash dividends to its common shareholders in January of the current year. The dividend:

On December 31, 2017, Heffner Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $100 par, cumulative preferred stock outstanding. On February 28, 2018, Heffner purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Heffner sold 6,000 of the treasury shares on September 30, 2018, for $47 per share. Net income for 2018 was $540,000. The income tax rate is 40%. Also outstanding at December 31, 2017, 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 $50 during 2018. Five thousand 6% bonds were issued at par on January 1, 2018. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds had been converted by December 31, 2018, and no stock options were exercised during the year. Required: Compute basic and diluted earnings per share (rounded to 2 decimal places) for Heffner Company for 2018.

Red Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2018, the company had issued 40,000 executive stock options permitting executives to buy 40,000 shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting) . The fair value of the options is estimated as follows: What is the compensation expense related to the options to be recorded in 2019?

EG Corporation granted restricted stock units (RSUs) representing 32 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four 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 $6 per share on the grant date. Required: (1.) Ignoring taxes, determine the total compensation cost pertaining to the restricted stock units. (2.) What is the effect on earnings in the year after the shares are granted to executives?

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Reacquired shares

Basic earnings per share ignores:

Under its executive stock option plan, W Corporation granted options on January 1, 2018, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2020 (the vesting date) . The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. The options are exercised on April 2, 2021, when the market price is $21 per share. By what amount will W's shareholder's equity be increased when the options are exercised?

If convertible bonds were issued at a discount, when computing diluted EPS, the amortization of the bond discount:

During 2018, 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 2018 was $110 million. Required: Compute basic and diluted EPS for 2018.

Capital Consulting Company had 400,000 shares of common stock outstanding on December 31, 2018. On that date, there were also 5,000 shares of $100 par, 6% noncumulative preferred stock outstanding. On March 1, 2018, the company's common stock split 3-for-1. On December 15, 2018, a preferred dividend was declared and paid in the amount of $25,000. Net income for 2018 was $3,000,000. Required: Compute basic earnings per share (rounded to 2 decimal places) for the year ended December 31, 2018.

The Burford Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2018, 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, 2021 (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, 2018. (3.) Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2018.

Fully vested incentive stock options for 100,000 shares of common stock at an exercise price of $50 were outstanding for the entire year. The market price of the stock during the year averaged $56. Required: By how many shares will the assumed exercise of these options increase the weighted-average number of shares outstanding when calculating diluted earnings per share?

When we assume conversion of convertible bonds, the numerator is increased by:

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.

The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to buy treasury stock at:

Isadore Bell Company granted 8 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $3 per share on January 1, 2018, the grant date. When calculating diluted EPS at December 31, 2019, what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averaged $4 per share during 2019?