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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 111

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Jet Corporation had 8 million shares of common stock outstanding during the current calendar year. On July 1, Jet issued ten thousand $1,000 face value, convertible bonds. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannuallly for 20 years. They have a stated rate of 12%. Jet had income before tax of $30 million and a net income of $18 million. Jet would report the following EPS data (rounded) :

A) Option A
B) Option B
C) Option C
D) Option D

E) None of the above
F) A) and C)

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Question 112

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Woolery, Inc. had 50,000 shares of common stock outstanding at January 1, 2018. On March 31, 2018, an additional 12,000 shares were sold for cash. Woolery also had $4,000,000 of 6% convertible bonds outstanding throughout the year. The bonds are convertible into 40,000 shares of common stock. Net income for the year was $350,000. The tax rate is 35%. Required: Compute basic and diluted earnings per share (rounded to 2 decimal places) for the year ended December 31, 2018.

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Basic EPS
$350,000 ÷ [50,000 +...

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Question 113

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Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2018, options were granted for 60,000 $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2021, and expire December 31, 2022. -Each option has a fair value of $1 based on an option pricing model. What is the total compensation cost for this plan?

Wilson Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2018, 20 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date-$10 per share. Options vest on January 1, 2022. They cannot be exercised before that date and will expire on December 31, 2024. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $40 per option. Ignore income tax. - Assume that all compensation expense from the stock options granted by Wilson already has been recorded. Further assume that 200,000 options expire in 2023 without being exercised. The journal entry to record this would include:

A disclosure note from E Corp.'s 2018 annual report is shown below: Employee Stock Purchase Plan. We have an employee stock purchase plan for all eligible employees. Compensation expense for the employee stock purchase plan is recognized in accordance with GAAP. Shares of our common stock may be purchased by employees at three-month intervals at 85% of the fair value on the last day of each three-month period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. Employees purchased the following shares: At June 30, 2018, 150 million shares were reserved for future issuance. Required: Describe the way "Compensation expense for the employee stock purchase plan" is recognized in accordance with GAAP by E Corp. Include in your explanation the journal entry that summarizes employee share purchases during 2018.

On January 1, 2018, Wendy Day Co. granted stock options to key executives exercisable for 500,000 shares of the company's common stock at $18 per share. The stock options are intended as compensation for the next four years. The options are exercisable within a four-year period beginning January 1, 2022, by the executives still in the employ of the company. No options were terminated during 2018, but the company anticipates 5% forfeitures over the life of the stock options. The market price of the common stock was $18 per share at the date of the grant. Wendy Day estimated the fair value of the options at $4 each. 1% of the options are forfeited during 2019 due to executive turnover. What amount should Wendy Day record as compensation expense for the year ended December 31, 2019, assuming the company chooses to estimate forfeitures?

Taxon Corp. granted restricted stock units (RSUs) representing 30 million 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 $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?

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. -Undeclared preferred dividends

Stock options, rights, and warrants are different from convertible securities in that they:

Paul Company had 100,000 shares of common stock outstanding on January 1, 2018. On September 30, 2018, Paul sold 48,000 shares of common stock for cash. Paul also had 10,000 shares of convertible preferred stock outstanding throughout 2018. The preferred stock is $100 par, 6%, and is convertible into 3 shares of common for each share of preferred. Paul also had 500, 8%, convertible bonds outstanding throughout 2018. Each $1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2018 was $300,000 with a 40% tax rate. Common shareholders received $2 per share dividends after preferred dividends were paid in 2018. Required: Compute basic and diluted earnings per share (rounded to 2 decimal places) for 2018.

Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100 par convertible preferred stock outstanding during the year. Net income for the year was $400,000 and dividends were paid to both common and preferred shareholders. Rudyard's effective tax rate is 40%. Each share of preferred stock is convertible into five shares of common stock. -What is Rudyard's diluted EPS (rounded) ?

Hammerstein Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock award plan, the company, on January 1, 2018, granted 2 million of its $1 par common shares to various division managers. The shares are subject to forfeiture if employment is terminated within four years. The common shares have a market price of $20 per share on the award date. Required: (1.) Determine the total compensation cost from these restricted shares. (2.) Prepare the appropriate journal entry to record the award on January 1, 2018. (3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2018. (4.) Suppose a 15% forfeiture rate was expected prior to vesting. Determine the total compensation cost, assuming the company follows the fair value approach and chooses to anticipate forfeitures at the grant date.

During the current year, East Corporation had 2 million shares of common stock outstanding. Two thousand 8% convertible bonds, each with $1,000 face value, were issued at face amount at the beginning of the year. East reported income before tax of $3 million and net income of $1.8 million for the year. Each bond is convertible into 10 shares of common stock. What is diluted EPS (rounded) ?

At December 31, 2018, Hansen Corporation had 50,000 shares of common stock and 5,000 shares of 6%, $100 par cumulative preferred stock outstanding. No dividends were declared or paid in 2018. Net income was reported as $200,000. What is basic EPS?

Executive stock options:

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. -Price-earnings ratio

The following information pertains to Torque Corp.'s outstanding stock for 2018: How many shares should Torque use to calculate 2018 basic earnings per share?

On January 1, 2018, Jeans-R-Us Company awarded 15 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the date of the grant, the stock had a market price of $3 per share. Required: (1.) Determine the total compensation cost pertaining to the restricted shares. (2.) Prepare the appropriate journal entry to record the award on January 1, 2018. (3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2018.

On January 1, 2018, Lawson Brothers Enterprises (LBE) granted restricted stock units (RSUs) representing 40 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 $10 per share on the grant date. At the date of grant, LBE anticipated that 5% of the recipients would leave the firm prior to vesting. Ignore taxes. Required: 1. Prepare the appropriate journal entry to record compensation expense on December 31, 2018. Show calculations. 2. Prepare the appropriate journal entry to record compensation expense on December 31, 2019. Show calculations. 3. During 2020 third year, LBE revised its estimate of forfeitures from 5% to 10%. Prepare the appropriate journal entry to record compensation expense on December 31, 2020. Show calculations. 4. Prepare the appropriate journal entry to record compensation expense on December 31, 2021. Show calculations.

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: