Exam 19: Share-Based Compensation and Earnings Per Share

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?

The compensation associated with executive stock option plans is:

On January 1, 2018, Cori Ander Herbs granted restricted stock units (RSUs) representing 300,000 of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three 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 $12 per share on the grant date. At the date of grant, the company anticipated that 6% of the recipients would leave the firm prior to vesting. In 2019, 2% of the options are forfeited due to executive turnover. The company chooses the option not to estimate forfeitures. What amount should the company record as compensation expense for the year ended December 31, 2019?

A simple capital structure might include:

On October 1, 2018, Iona Ford Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Ford initially estimates that it is probable the goal will be achieved. After one year, Ford estimates that it is not probable that divisional revenue will increase by 5% in three years. In 2019, Ford will:

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. - On March 1, 2022, when the market price of Wilson's stock was $14 per share, 3 million of the options were exercised. The journal entry to record this would include:

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

The compensation associated with restricted stock units (RSUs) under a stock award plan is:

On January 1, 2018, Black 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. Black initially estimates that it is probable the goal will be achieved. In 2019, after one year, Black estimates that it is not probable that divisional revenue will increase by 6% in three years. Ignoring taxes, what is the effect on earnings in 2019?

On January 1, 2018, La-Dee-Da Company awarded 15 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the date of the grant, the stock had a market price of $3 per share. Required: (1.) Determine the total compensation cost pertaining to the restricted shares. (2.) Prepare the appropriate journal entry to record the award on January 1, 2018. (3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2018. (4.) Prepare the appropriate journal entry to record compensation expense on December 31, 2019. (5.) Prepare the appropriate journal entry to record compensation expense on December 31, 2020. (6.) Prepare the appropriate journal entry to record the lifting of restrictions on December 31, 2020.

During 2018, M Co. had the following two classes of stock issued and outstanding for the entire year: • 400,000 shares of common stock, $1 par. • 2,000 shares of 4% preferred stock, $100 par, convertible share-for-share into common stock. M's 2018 net income was $1,800,000, and its income tax rate for the year was 30%. In the computation of diluted earnings per share for 2018, the amount to be used in the numerator is:

Reacting to opposition to the FASB's "Share-Based Payment" Exposure Draft, Senator Carl Levin stated, "Stock options are the 800-pound gorilla that has yet to be caged by corporate reform." In reference to a bill that would thwart the FASB's position, Senator John McCain said, "This legislation blocking stock option expensing not only undermines FASB's independence, but undermines the effort to restore confidence in our financial markets as well." Discuss what these two senators meant by their statements.

When recognizing compensation under a stock option plan, unanticipated forfeitures are treated as:

On December 31, 2017, the Bennett Company had 100,000 shares of common stock issued and outstanding. On July 1, 2018, the company sold 20,000 additional shares for cash. Bennett's net income for the year ended December 31, 2018, was $650,000. During 2018, Bennett declared and paid $89,000 in cash dividends on its nonconvertible preferred stock. What is the 2018 basic earnings per share?

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. -Simple capital structure

Dilutive convertible bonds affect both the numerator and the denominator in computing diluted EPS.

When we take into account the dilutive effect of convertible securities in the calculation of EPS, the method used is called the:

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

Cracker Company had 2 million shares of common stock outstanding all through 2017. On April 1, 2018, an additional 100,000 shares were sold and issued. On September 30, 2018, Cracker declared a 2-for-1 stock split. Net income in 2018 and 2017 was $10 million and $8 million, respectively. In the 2018 comparative financial statements, EPS (rounded) would be reported as follows:

On October 1, 2018, Iona Bell Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Bell initially estimates that it is not probable the goal will be achieved, but then after one year, Bell estimates that it is probable that divisional revenue will increase by 6% by the end of 2020. Bell will: