Exam 19: Share-Based Compensation and Earnings Per Share

Flyaway Travel Company reported net income for 2018 in the amount of $90,000. During 2018, Flyaway declared and paid $2,125 in cash dividends on its nonconvertible preferred stock. Flyaway also paid $10,000 cash dividends on its common stock. Flyaway had 40,000 common shares outstanding from January 1 until 10,000 new shares were sold for cash on April 1, 2018. What is 2018 basic earnings per share?

At the end of 2018, what is the maximum number of shares that could possibly be issued if all stock options and awards are exercised? Explain why V Co. used only 3.3 million in its computation for 2018.

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. What amount should M recognize as compensation expense for 2018?

Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2018, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within two 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, 2019.

When computing diluted earnings per share, which of the following will not be considered in the calculation?

During the current year, High Corporation had 3 million shares of common stock outstanding. Five thousand $1,000, 6% convertible bonds were issued at face amount at the beginning of the year. High reported income before tax of $4 million and net income of $2.4 million for the year. Each bond is convertible into 10 shares of common. What is diluted EPS (rounded)?

During 2018, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2018. Falwell's net income for the year ended December 31, 2018, was $2.5 million. The income tax rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2018. - What is Falwell's basic earnings per share for 2018, rounded to the nearest cent?

What is restricted stock? Describe how compensation expense is determined and recorded for a restricted stock plan.

Blue Cab Company had 50,000 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 5,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $13 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2018. What is the diluted earnings per share (rounded)?

On December 31, 2017, Witherspoon Services had 800,000 shares of common stock and 200,000 shares of 5.5%, noncumulative, nonconvertible $10 par preferred stock issued and outstanding. On March 2, 2018, Witherspoon sold 120,000 common shares. In keeping with its long-term share repurchase plan, 30,000 shares were retired on August 31. Witherspoon distributed a 10% common stock dividend on June 3. Witherspoon's net income for the year ended December 31, 2016, was $600,000. The company paid cash dividends of $110,000 to preferred shareholders on December 20, 2018. The income tax rate is 40%. Required: Compute Witherspoon's earnings per share for the year ended December 31, 2018.

If a company's capital structure includes convertible bonds, diluted EPS might be reduced even if the bonds are not actually converted during the year.

In order to encourage employee ownership of the company's $1 par common shares, T 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 June, employees purchased 150,000 shares at a time when the market price of the shares on the New York Stock Exchange was $10 per share. Required: Prepare the appropriate journal entry to record the June purchases of shares under the employee share purchase plan.

Parsley Corporation had 250,000 shares of common stock and 5,000 shares of 8%, $100 par, preferred stock outstanding on December 31, 2017. The preferred stock is cumulative, nonconvertible preferred stock. On June 1, 2018, Parsley sold 36,000 shares of common stock for cash. No cash dividends were declared for 2018. Parsley reported a net loss of $320,000 for the year ended December 31, 2018. Required: Calculate Parsley's loss per share (rounded to 2 decimal places) for the year ended December 31, 2018.

XYZ paid $10,000 in dividends in January of the current year to its preferred shareholders. The preferred stock is nonconvertible and noncumulative. The dividend:

Except for tax considerations the potentially dilutive effect of convertible preferred stock is handled in EPS calculations in much the same way as convertible debt.

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. -Contingently issuable

A primary goal of earnings per share determination is:

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. - Wilson's compensation expense in 2018 for these stock options was:

Kramer Inc. had 95 million shares of common stock, 1 million shares of 6%, $100 par, cumulative preferred stock, and 1 million shares of 8%, $100 par, noncumulative preferred stock outstanding at the end of 2017 and 2018. No dividends were declared or paid on common stock in either year. In 2018, a $3 million dividend was paid on the 6% preferred stock and a $4 million dividend was paid on the 8% preferred stock. Net income for 2018 was $300 million. The company's tax rate is 30%. Required: Compute basic earnings per share (rounded to 2 decimal places) for the year ended December 31, 2018.

On January 2, 2018, L Co. issued at face value $20,000 of 4% bonds convertible in total into 1,000 shares of L's common stock. No bonds were converted during 2018. Throughout 2018, L had 1,000 shares of common stock outstanding. L's 2018 net income was $2,000. L's income tax rate is 50%. No potential common shares other than the convertible bonds were outstanding during 2018. L's diluted earnings per share for 2018 would be: