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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 31

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When several types of potential common shares exist, the one that enters the computation of diluted EPS first is the one with the:

A) Highest incremental effect.
B) Higher numerator.
C) Median incremental effect.
D) Lowest incremental effect.

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

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Question 32

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The compensation associated with executive stock option plans is

A) the book value of a share of the company's shares times the number of options
B) the estimated fair value of the options
C) allocated to expense over the number of years until expiration
D) recorded as compensation expense on the date of grant

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

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Question 33

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Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2009, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within 2 years. The common shares have a market value of $6 per share on the date the award is granted. Required: (1.) Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares. (2.) Prepare the appropriate journal entries related to the restricted stock through December 31, 2010.

The most important accounting objective for executive stock options is:

Compare the concepts of basic and diluted earnings per share with respect to their calculation.

Assume that all compensation expense from the stock options granted by Wilson already has been recorded. Further assume that 200,000 options expire in 2014 without being exercised. The journal entry to record this would include:

Why are earnings per share figures for prior years adjusted for stock splits and stock dividends when data from prior years is presented in comparative financial statements?

If the options have a vesting period of five years, what would be the balance in "Paid-in Capital - Stock Options" three years after the grant date?

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

The compensation associated with a share of restricted stock under a stock award plan is:

Compensation expense must be adjusted during the service period to reflect changes in the fair value of options caused by changes in the market price of the underlying shares.

Under its executive stock option plan, M Corporation granted options on January 1, 2009, 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, 2011 (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 were anticipated, however unexpected turnover during 2010 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2010?

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

On January 1, 2009, 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 2010, after one year, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2011. Ignoring taxes, what is the effect on earnings in 2010?

What is Rudyard's basic EPS?

On December 31, 2008, the Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2009, the company sold 50,000 additional shares for cash. Frisbee's net income for the year ended December 31, 2009 was $700,000. During 2009, Frisbee declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2009 basic earnings per share?

The compensation associated with restricted stock under a stock award plan is:

Under its executive stock option plan, N Corporation granted options on January 1, 2009, 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, 2011 (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. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?

On December 31, 2008, Merlin Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). On February 28, 2009, Merlin issued an additional 36,000 shares of common stock. On September 1, 2009, 9,000 shares were retired. At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock during the year had averaged $20. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2006 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 40%. A 10% stock dividend was declared and distributed on July 1, 2009. Required: Compute basis and diluted EPS for the year ended December 31, 2009.

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.