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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 51

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On January 1, 2018, Blue Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Blue initially estimates that it is not probable the goal will be achieved, but in 2019, after one year, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2020. Ignoring taxes, what is the effect on earnings in 2019?

A) $200,000.
B) $400,000.
C) $600,000.
D) $800,000.

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

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Question 52

Multiple Choice

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

A) Require(s) compensation expense regardless of condition satisfaction.
B) Date on or after which employees can buy stock with options.
C) An important factor in option pricing models.
D) Date on which options are awarded.
E) The amount paid to convert the option into stock.

F) A) and B)
G) A) and E)

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Question 53

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On January 1, 2018, Red Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is compensation expense for 2018?

The compensation associated with restricted stock units (RSUs) under a stock award plan is the number of shares represented by the RSUs multiplied by:

When computing earnings per share, noncumulative preferred dividends not declared should be:

To encourage employee ownership of the company's common shares, KL Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During May, employees purchased 10,000 shares at a time when the market price of the shares on the New York Stock Exchange was $15 per share. KL will record compensation expense associated with the May purchases of:

As part of its stock-based compensation package, on January 1, 2018, Weldon Well Supplies granted restricted stock units (RSUs) representing 100,000 $1 par common shares. At exercise, holders of the RSUs are entitled to receive cash or stock equal in value to the market price of those shares at exercise. The RSUs cannot be exercised until the end of 2021 (vesting date) and expire at the end of 2023. The $1 par common shares have a market price of $6 per share on the grant date. The fair value at December 31, 2018, 2019, 2020, 2021, and 2022, is $16, $12, $16, $10, and $12, respectively. All recipients are expected to remain employed through the vesting date. Required: (1.) Prepare the appropriate journal entry to record the award of RSUs on January 1, 2018. (2.) Prepare the appropriate journal entries pertaining to the RSUs on December 31, 2018-December 31, 2021. (3.) The RSUs remain unexercised on December 31, 2022. Prepare the appropriate journal entry on that date. (4.) The RSUs are exercised on June 6, 2023, when the share price is $13, and executives choose to receive cash. Prepare the appropriate journal entry(s) on that date.

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

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. -Issuance of new shares

On January 1, 2018, M.T. Toombe Mausoleum granted restricted stock units (RSUs) representing 60 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 $15 per share on the grant date. At the date of grant, Toombe anticipated that 5% of the recipients would leave the firm prior to vesting. In 2019, 3% of the options are forfeited due to executive turnover. Toombe chooses the option not to estimate forfeitures. Required: 1. Prepare the appropriate journal entry to record compensation expense on December 31, 2018. Ignore taxes. 2. Prepare the appropriate journal entry to record compensation expense on December 31, 2019. Ignore taxes.

Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2018. On April 1, 2018, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock for the year was $12. What number of shares of stock (rounded) should be used in computing diluted earnings per share?

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

Green 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: Assuming Green uses the straight-line method, what is the compensation expense related to the options to be recorded in 2019?

Horrocks Company granted 180,000 restricted stock awards of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. Horrocks' common shares have a market price of $10 per share on January 1, 2017, the grant date, and at December 31, 2018, averaging $10 throughout the year. When calculating diluted EPS at December 31, 2018, the net increase in the denominator of the EPS fraction will be:

On December 31, 2017, Beta Company had 300,000 shares of common stock issued and outstanding. Beta issued a 5% stock dividend on June 30, 2018. On September 30, 2018, 40,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2018?

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. -Preferred dividends

The result of a stock split is:

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 semiannually 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 quarterly. Ignatius has an effective tax rate of 40%. Ignatius would report the following EPS data (rounded) on its net income of $20 million:

At December 31, 2018, MedX Corporation had outstanding 200,000 shares of common stock. Also outstanding were 120,000 shares of preferred stock convertible into 64,000 common shares and $1,800,000 of 10% bonds convertible into 27,000 common shares. MedX's net income for the year ended December 31, 2018, is $1,040,000. The income tax rate is 40%. MedX paid dividends of $2 per share on its preferred stock during 2018. Required: Compute basic and diluted earnings per share for the year ended December 31, 2018, considering possible antidilutive effects.

Dulce Corporation had 200,000 shares of common stock outstanding during the current year. There were also fully vested options for 10,000 shares of common stock were granted with an exercise price of $20. The market price of the common stock averaged $25 for the year. Net income was $4 million. What is diluted EPS (rounded) ?