Question 1

Earnings per share data is required to be reported:

Accepted Answer

A)  In disclosure notes to the financial statements. 
B)  Only if it adds to the relevance of the income statement. 
C)  In the summary section of the annual report. 
D)  On the face of the income statement. 
A)  In disclosure notes to the financial statements. 
B)  Only if it adds to the relevance of the income statement. 
C)  In the summary section of the annual report. 
D)  On the face of the income statement.

Question 2

Burnet Company had 30,000 shares of common stock outstanding on January 1, 2018. On April 1, 2018, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock was $9. The company reported net income in the amount of $189,374 for 2018. What is the effect of the options?

Accepted Answer

A)  The options are antidilutive. 
B)  The options will dilute EPS by $.09 per share. 
C)  The options will dilute EPS by $.33 per share. 
D)  The options will dilute EPS by $.17 per share. 
A)  The options are antidilutive. 
B)  The options will dilute EPS by $.09 per share. 
C)  The options will dilute EPS by $.33 per share. 
D)  The options will dilute EPS by $.17 per share.

Question 3

GAAP requires using intrinsic value accounting for employee stock options.

Accepted Answer

A) True 
 B)False

Question 4

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. Which is the correct entry to record compensation expense for the year 2018?

Accepted Answer

A)    
B)  $\begin{array}{|l|l|l|}
\hline \text { Compensation expense } & 20,000 & \
\hline \text { Common stock } & & 20,000 \
\hline
\end{array}$ 
C)  $\begin{array}{|l|l|l|}
\hline \text { Compensation expense } & 20,000 & \
\hline \text { Paid-in capital?stock options } & & 20,000 \
\hline
\end{array}$ 
D)  $\begin{array}{|l|l|l|}
\hline \text { Compensation expense } & 80,000 & \
\hline \text { Paid-in capital—stock options } & & 80,000 \
\hline
\end{array}$ 
A)    
B)  $\begin{array}{|l|l|l|}
\hline \text { Compensation expense } & 20,000 & \
\hline \text { Common stock } & & 20,000 \
\hline
\end{array}$ 
C)  $\begin{array}{|l|l|l|}
\hline \text { Compensation expense } & 20,000 & \
\hline \text { Paid-in capital?stock options } & & 20,000 \
\hline
\end{array}$ 
D)  $\begin{array}{|l|l|l|}
\hline \text { Compensation expense } & 80,000 & \
\hline \text { Paid-in capital—stock options } & & 80,000 \
\hline
\end{array}$

Question 5

January 1, 2018, Woody Forrest Corporation granted executive stock options to purchase 27,000 of its common shares at $7 each. The market price of common stock was $10 per share on December 31, 2018, and averaged $9 per share during the year then ended. There was no change in the 150,000 shares of outstanding common stock during the year. Net income for the year was $25,000. The number of shares to be used in computing diluted earnings per share for the quarter is

Accepted Answer

A)  150,000 
B)  156,000 
C)  171,000 
D)  177,000 
A)  150,000 
B)  156,000 
C)  171,000 
D)  177,000

Question 6

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. Which is the correct entry to record the exercise of 90% the options on April 15, 2021, when the market price of the stock was $8?

Accepted Answer

A)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 270,000 & \
\hline \text { Paid-in capital -stock options } & 54,000 & \
\hline \text { Common stock } & & 60,000 \
\hline \text { Paid-in capital excess of par } & & 264,000 \
\hline
\end{array}$ 
B)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 378,000 & \
\hline \text { Paid-in capital -stock options } & 54,000 & \
\hline \text { Common stock } & & 54,000 \
\hline \text { Paid-in capital\_excess of par } & & 378,000 \
\hline
\end{array}$ 
C)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 270,000 & \
\hline \text { Paid-in capital—stock options } & 54,000 & \
\hline \text { Compensation expense } & 108,000 & \
\hline \text { Common stock } & & 54,000 \
\hline \text { Paid-in capital\_excess of par } & & 378,000 \
\hline
\end{array}$ 
D)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 270,000 & \
\hline \text { Paid-in capital -stock options } & 54,000 & \
\hline \text { Common stock } & & 54,000 \
\hline \text { Paid-in capital excess of par } & & 270,000 \
\hline
\end{array}$ 
A)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 270,000 & \
\hline \text { Paid-in capital -stock options } & 54,000 & \
\hline \text { Common stock } & & 60,000 \
\hline \text { Paid-in capital excess of par } & & 264,000 \
\hline
\end{array}$ 
B)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 378,000 & \
\hline \text { Paid-in capital -stock options } & 54,000 & \
\hline \text { Common stock } & & 54,000 \
\hline \text { Paid-in capital\_excess of par } & & 378,000 \
\hline
\end{array}$ 
C)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 270,000 & \
\hline \text { Paid-in capital—stock options } & 54,000 & \
\hline \text { Compensation expense } & 108,000 & \
\hline \text { Common stock } & & 54,000 \
\hline \text { Paid-in capital\_excess of par } & & 378,000 \
\hline
\end{array}$ 
D)  $\begin{array}{|l|r|r|}
\hline \text { Cash } & 270,000 & \
\hline \text { Paid-in capital -stock options } & 54,000 & \
\hline \text { Common stock } & & 54,000 \
\hline \text { Paid-in capital excess of par } & & 270,000 \
\hline
\end{array}$

Question 7

Preferred dividends would not be subtracted from earnings when computing basic earnings per share in a year when the dividends are not declared if the preferred stock is:

Accepted Answer

A)  Noncumulative. 
B)  Convertible. 
C)  Participating. 
D)  Cumulative. 
A)  Noncumulative. 
B)  Convertible. 
C)  Participating. 
D)  Cumulative.

Question 8

Stock options do not affect the calculation of:

Accepted Answer

A)  Diluted EPS. 
B)  Weighted-average common shares. 
C)  The denominator in the diluted EPS fraction. 
D)  Basic EPS. 
A)  Diluted EPS. 
B)  Weighted-average common shares. 
C)  The denominator in the diluted EPS fraction. 
D)  Basic EPS.

Question 9

On January 1, 2018, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2020, and expire on January 1, 2024. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant. If unexpected turnover in 2019 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2019?

Accepted Answer

A)  $30,000. 
B)  $60,000. 
C)  $120,000. 
D)  $150,000. 
A)  $30,000. 
B)  $60,000. 
C)  $120,000. 
D)  $150,000.

Question 10

Lance Chips 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 $5 per share on the grant date. The total compensation cost pertaining to the restricted stock units is:

Accepted Answer

A)  $5 million. 
B)  $40 million. 
C)  $50 million. 
D)  $200 million. 
A)  $5 million. 
B)  $40 million. 
C)  $50 million. 
D)  $200 million.

Question 11

On December 31, 2017, Belair Corporation had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2018, Belair purchased 24,000 shares of common stock on the open market as treasury stock paying $20 per share. On June 30, 2018, Belair declared and issued a 2-for-1 stock split on outstanding common stock. Belair sold 6,000 treasury shares on September 30, 2018, for $15 per share. Net income for 2018 was $180,905.
Required:
Compute Belair's basic earnings per share for 2018.

Accepted Answer

$180,905 - (30,000 × $50 × 7%)

Question 12

On January 1, 2018, Hage Corporation granted incentive stock options to purchase 18,000 of its common shares at $7 each. The options are exercisable after one year. The market price of common averaged $9 per share during the quarter ending on March 31, 2018. There was no change in the 100,000 shares of outstanding common stock during the quarter ended March 31, 2018. Net income for the quarter was $8,268. The number of shares to be used in computing diluted earnings per share for the quarter is:

Accepted Answer

A)  100,000. 
B)  104,000. 
C)  106,000. 
D)  118,000. 
A)  100,000. 
B)  104,000. 
C)  106,000. 
D)  118,000.

Question 13

Restricted stock units (RSUs):

Accepted Answer

A)  are a grant valued in terms of a set number of shares of company stock. 
B)  are reported as a liability if payable in shares rather than cash. 
C)  are recorded based on a value estimated by a restricted stock valuation model. 
D)  represent shares issued at the date of grant that must be returned if the recipient fails to satisfy the vesting requirement. 
A)  are a grant valued in terms of a set number of shares of company stock. 
B)  are reported as a liability if payable in shares rather than cash. 
C)  are recorded based on a value estimated by a restricted stock valuation model. 
D)  represent shares issued at the date of grant that must be returned if the recipient fails to satisfy the vesting requirement.

Question 14

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.
-Antidilutive security

Accepted Answer

A) Decrease in the EPS numerator. 
B) Time-weighted increase in the basic EPS denominator. 
C) Does not affect and is not affected by EPS calculations. 
D) Potentially dilutive debt. 
E) Time-weighted decrease in the basic EPS denominator. 
A) Decrease in the EPS numerator. 
B) Time-weighted increase in the basic EPS denominator. 
C) Does not affect and is not affected by EPS calculations. 
D) Potentially dilutive debt. 
E) Time-weighted decrease in the basic EPS denominator.

Question 15

Regardless of the form of share-based compensation, the accounting objective is to record compensation expense:

Accepted Answer

A)  as the book value of the compensation expensed over the vesting period. 
B)  as the fair value of the compensation expensed over the vesting period. 
C)  as the book value of the compensation expensed at the date of grant. 
D)  as the fair value of the compensation expensed at the date of grant. 
A)  as the book value of the compensation expensed over the vesting period. 
B)  as the fair value of the compensation expensed over the vesting period. 
C)  as the book value of the compensation expensed at the date of grant. 
D)  as the fair value of the compensation expensed at the date of grant.

Question 16

Under its executive stock option plan, Q 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 were anticipated; however, unexpected turnover during 2019 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2020?

Accepted Answer

A)  $18.5 million. 
B)  $18 million. 
C)  $19 million. 
D)  $20 million. 
A)  $18.5 million. 
B)  $18 million. 
C)  $19 million. 
D)  $20 million.

Question 17

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 option

Accepted Answer

A) Expensed as compensation in the period earned 
B) Benefit period over which stock option compensation expense is spread. 
C) Paid-in capital effectively renamed under the fair value approach 
D) Shares given for achieving financial goals 
E) A right to buy shares of stock in the future. 
A) Expensed as compensation in the period earned 
B) Benefit period over which stock option compensation expense is spread. 
C) Paid-in capital effectively renamed under the fair value approach 
D) Shares given for achieving financial goals 
E) A right to buy shares of stock in the future.

Question 18

The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except:

Accepted Answer

A)  The shares are deducted rather than added. 
B)  The shares are added rather than deducted. 
C)  The shares are treated as being acquired at the end of the year. 
D)  The shares are treated as being acquired at the beginning of the year. 
A)  The shares are deducted rather than added. 
B)  The shares are added rather than deducted. 
C)  The shares are treated as being acquired at the end of the year. 
D)  The shares are treated as being acquired at the beginning of the year.

Question 19

Current year stock dividends and splits require retroactive restatement of EPS for all prior years presented in comparative financial statements.

Accepted Answer

A) True 
 B)False

Question 20

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.
-If-converted method

Accepted Answer

A) Assumption used for options, rights, and warrants. 
B) Dual presentation of EPS does not apply. 
C) Applies to both convertible debt and convertible equity securities. 
D) Approximation of EPS assuming potential common shares became common stock. 
E) Add after-tax interest to EPS numerator. 
A) Assumption used for options, rights, and warrants. 
B) Dual presentation of EPS does not apply. 
C) Applies to both convertible debt and convertible equity securities. 
D) Approximation of EPS assuming potential common shares became common stock. 
E) Add after-tax interest to EPS numerator.

Earnings per share data is required to be reported:

GAAP requires using intrinsic value accounting for employee stock options.

Preferred dividends would not be subtracted from earnings when computing basic earnings per share in a year when the dividends are not declared if the preferred stock is:

Stock options do not affect the calculation of:

Restricted stock units (RSUs):

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. -Antidilutive security

Regardless of the form of share-based compensation, the accounting objective is to record compensation expense:

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 option

The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except:

Current year stock dividends and splits require retroactive restatement of EPS for all prior years presented in comparative financial statements.

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. -If-converted method

Environment and Theoretical Structure of Financial Accounting

Review of the Accounting Process

The Balance Sheet and Financial Disclosures

The Income Statement, Comprehensive Income, and the Statement of Cash Flows

Revenue Recognition

Time Value of Money Concepts

Cash and Receivables

Inventories: Measurement

Inventories: Additional Issues

Property, Plant, and Equipment and Intangible Assets: Acquisition

Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition

Investments

Current Liabilities and Contingencies

Bonds and Long-Term Notes

Leases

Accounting for Income Taxes

Pensions and Other Postretirement Benefits

Shareholders Equity

Accounting Changes and Error Corrections

The Statement of Cash Flows Revisited

Filters

Exam 19: Share-Based Compensation and Earnings Per Share

Earnings per share data is required to be reported:

GAAP requires using intrinsic value accounting for employee stock options.

Preferred dividends would not be subtracted from earnings when computing basic earnings per share in a year when the dividends are not declared if the preferred stock is:

Stock options do not affect the calculation of:

Restricted stock units (RSUs):

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. -Antidilutive security

Regardless of the form of share-based compensation, the accounting objective is to record compensation expense:

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 option

The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except:

Current year stock dividends and splits require retroactive restatement of EPS for all prior years presented in comparative financial statements.

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. -If-converted method

Environment and Theoretical Structure of Financial Accounting

Review of the Accounting Process

The Balance Sheet and Financial Disclosures

The Income Statement, Comprehensive Income, and the Statement of Cash Flows

Revenue Recognition

Time Value of Money Concepts

Cash and Receivables

Inventories: Measurement

Inventories: Additional Issues

Property, Plant, and Equipment and Intangible Assets: Acquisition

Property, Plant, and Equipment and Intangible Assets: Utilization and Disposition

Investments

Current Liabilities and Contingencies

Bonds and Long-Term Notes

Leases

Accounting for Income Taxes

Pensions and Other Postretirement Benefits

Shareholders Equity

Accounting Changes and Error Corrections

The Statement of Cash Flows Revisited

Filters