Exam 19: Share-Based Compensation and Earnings Per Share

On December 31, 2017, Jackson 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, Jackson purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Jackson sold 6,000 of the treasury shares on September 30, 2018, for $47 per share. Net income for 2018 was $180,905. Also outstanding at December 31, 2017, were fully vested incentive stock options giving key personnel the option to buy 50,000 common shares at $40. These stock options were exercised on November 1, 2018. The market price of the common shares averaged $50 during 2018. Required: Compute Jackson's basic and diluted earnings per share (rounded to 2 decimal places) for 2018.

Tweet Inc. included the following disclosure note in an annual report: Share-Based Compensation (in part) compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straight-line basis over the applicable three-year vesting period. The following table summarizes the activities for our unvested RSUs for the year ended December 31, 2018: Required: (1.) Ignoring taxes, determine compensation expense Tweet reported in the year ended December 31, 2019, for the restricted stock units granted during the year ended December 31, 2018. (2.) Based on the information provided in the disclosure note, prepare the journal entry that summarizes the vesting of RSUs during the year ended December 31, 2018. (Tweet's common shares have a par amount per share of $0.01.)

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. -Convertible bonds

Rice Inc. had 420 million shares of common stock and 1 million shares of 6%, $200 par, cumulative preferred stock outstanding at the end of 2017 and 2018. No dividends were declared or paid on either class of stock in either year. Net income for 2018 was $398.4 million. The company's tax rate is 30%. Required: Compute basic earnings per share for the year ended December 31, 2018.

If a company reports discontinued operations, EPS must be disclosed for both income from continuing operations and net income.

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

At December 31, 2018 and 2017, Cow Co. had 100,000 shares of common stock and 5,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2018 or 2017. Net income for 2018 was $500,000. For 2018, basic earnings per share was:

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.

Blair Systems offers its employees a variety of share-based compensation plans including stock options, stock appreciation rights, and restricted stock. The following is an excerpt from a disclosure note from Blair's 2018 financial statements: Note 11 Employee Benefit Plans (in part) The Company adopted accounting guidelines under ASC Topic 718 which require the measurement and recognition of compensation expense for all share-based payment awards made to the Company's employees and directors including employee stock options and employee stock purchase rights, based on estimated fair values. Employee share-based compensation expense under ASC Topic 718 was as follows (in millions): Years Ended 2018 2017 2016 Total employee share-based compensation expense \ 455 \ 870 \ 760 Required: 1. Blair's share-based compensation includes stock options, stock appreciation rights, and restricted stock awards. What is the general financial reporting objective when recording compensation expense for these forms of compensation? 2. Blair reported share-based expense of $455 million in 2018. Without referring to specific numbers and ignoring other forms of share-based compensation, describe how this amount reflects the value of stock options.

On January 1, 2018, Algerian Delivery had 100,000 shares of common stock outstanding. The following transactions occurred during 2018: Required: Calculate Algerian Delivery's basic earnings per share for the year ended December 31, 2018.

Under U.S. GAAP, a deferred tax asset for stock options:

What is the "if converted method"?

On January 1, 2018, G Corp. granted stock options to key employees for the purchase of 80,000 shares of the company's common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2020, by the grantees still in the employ of the company. No options were terminated during 2018, but the company does have an experience of 4% forfeitures over the life of the stock options. The market price of the common stock was $31 per share at the date of the grant. G Corp. used the Binomial pricing model and estimated the fair value of each of the options at $10. What amount should G charge to compensation expense for the year ended December 31, 2018?

FX Services granted 15 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

XYZ Company had 200,000 shares of common stock outstanding on December 31, 2017. On July 1, 2018, XYZ issued an additional 50,000 shares for cash. On January 1, 2018, XYZ issued 20,000 shares of convertible preferred stock. The preferred stock had a par value of $100 per share and paid a 5% dividend. Each share of preferred stock is convertible into 8 shares of common. During 2018, XYZ paid the regular annual dividend on the preferred and common stock. Net income for the year was $300,000. Required: Calculate XYZ's basic and diluted earnings per share (rounded to 2 decimal places) for 2018.

Mann Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2018, the corporation granted 10 million of its $5 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market value of $10 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.

If executive stock options or restricted stock are outstanding when calculating diluted EPS, what are the components of the "proceeds" assumed available for the repurchase of shares under the treasury stock method?

On January 1, 2018, Oliver Foods issued stock options for 40,000 shares to a division manager. The options have an estimated fair value of $5 each. To provide additional incentive for managerial achievement, the options are not exercisable unless Oliver Foods' stock price increases by 5% in four years. Oliver Foods initially estimates that it is not probable the goal will be achieved. How much compensation will be recorded in each of the next four years?

Pastore Inc. granted options for 1 million shares of its $1 par common stock at the beginning of the current year. The exercise price is $35 per share, which was also the market value of the stock on the grant date. The fair value of the options was estimated at $8 per option. What would be the total compensation indicated by these options?

The Santiago Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2018, that permit executives to acquire 70 million of the company's $1 par value common shares within the next eight years, but not before December 31, 2021 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $27 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignore taxes. Required: 1. Determine the total compensation cost pertaining to the options. 2. Prepare the appropriate journal entry (if any) to record the award of options on January 1, 2018. 3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2018.