Exam 19: Share-Based Compensation and Earnings Per Share

Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2018, the company had issued 20 million executive stock options permitting executives to buy 20 million 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: Required: Determine the compensation expense related to the options to be recorded each year for 2018-2020, assuming Pastner prepares its financial statements in accordance with International Financial Reporting Standards (IFRS).

During 2018, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2018. On January 1, 2017, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares. Angel's net income for the year ended December 31, 2018, was $6 million. The income tax rate is 20%. - What will Angel report as diluted earnings per share for 2018, rounded to the nearest cent?

On January 1, 2018, Felix Austead Athletic Club (FAAC) 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. FAAC 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 FAAC record as compensation expense for the year ended December 31, 2019, assuming FAAC chooses the option not to estimate forfeitures?

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. -Grant date

The Peach Corporation provides restricted stock to certain executives. Under the plan, the company granted 30 million shares on January 1, 2018, which vest in four years. The fair value of the shares is $14. No forfeitures are anticipated. Ignore taxes. Required: 1. Determine the total compensation cost pertaining to the restricted stock. 2. Prepare the appropriate journal entry (if any) to record the award of restricted stock on January 1, 2018. 3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2018.

Under its executive stock option plan, Z 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 are anticipated. The options expired in 2024 without being exercised. By what amount will Z's shareholder's equity be increased?

On December 31, 2017, Vitners Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). February 28, 2018, issued an additional 36,000 shares of common stock September 1, 2018, 9,000 shares were retired. A 10% stock dividend was declared and distributed on July 1, 2018. 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 averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2015 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%. Required: Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 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. -Treasury stock method

Purple 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 average market price of common stock was $12. The company reported net income in the amount of $269,915 for 2018. What is the basic earnings per share (rounded)?

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. -Option exercise date

Which of the following does not represent potential shares for an EPS calculation?

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 diluted earnings per share for 2018, rounded to the nearest cent?

A company is said to have a complex capital structure if:

Dublin Inc. had the following common stock record during the current calendar year: -A 10% stock dividend was paid on December 1. What is the number of shares to be used in computing basic EPS?

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. -Market condition plans

On December 31, 2017, Brisbane Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2018, Brisbane purchased 24,000 shares of common stock on the open market as treasury stock paying $40 per share. Brisbane sold 6,000 treasury shares on September 30, 2018, for $45 per share. Net income for 2018 was $180,905. Also outstanding during the year were fully vested incentive stock options giving key personnel the option to buy 50,000 common shares at $40. The market price of the common shares averaged $50 during 2018. Required: Compute Brisbane's basic and diluted earnings per share (rounded to 2 decimal places) 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 most correct term. -Expired options

If a stock dividend were distributed, when calculating the current year's EPS, the shares distributed are treated as having been issued:

Contingently issuable shares may be included in:

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 entry to record the expiration of 10% of the options on December 31, 2022?