Exam 19: Share-Based Compensation and Earnings Per Share

Fully vested incentive stock options for 60,000 shares of common stock at an exercise price of $50 were outstanding at the beginning of 2013. The market price of the stock averaged $56 during the year. Required: If these options are exercised on March 1 of the current year, by how many shares will the options increase the weighted-average number of shares outstanding when calculating diluted earnings per share?

If previous experience indicates that a material number of stock options will be forfeited before they vest, the fair value estimate of the options on the grant date should be adjusted to reflect that expectation.

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

When the income statement includes separately reported items such as discontinued operations or extraordinary items, which amounts require per share presentation?

Sugarland Industries reported a net income of $750,750 on December 31, 2013. At the beginning of the year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000 shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger. Required: Compute Sugarland's net income that would produce a basic EPS of $2.00 per share for 2013.

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

The following information pertains to J Company's outstanding stock for 2013: What is the number of shares J should use to calculate 2013 basic earnings per share?

When a company's income statement includes an extraordinary gain, the company should report per share information on:

Green Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2013, the company had issued 40,000 executive stock options permitting executives to buy 40,000 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: Assuming Green uses the straight-line method, what is the compensation expense related to the options to be recorded in 2014?

ABC declared and paid cash dividends to its common shareholders in January of the current year. The dividend:

(amounts in millions, except per share amount) Basic EPS:

On December 31, 2012, 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, 2013, 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, 2013, for $47 per share. Net income for 2013 was $180,905. Also outstanding at December 31, 2012, 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, 2013. The market price of the common shares averaged $50 during 2013. Required: Compute Jackson's basic and diluted earnings per share (rounded to 2 decimal places) for 2013.

On January 1, 2013, Red 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. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is compensation expense for 2013?

How are outstanding stock options and awards taken into account in computing diluted EPS for V Co.?

Horrocks Company granted 180,000 restricted stock awards of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. Horrocks' common shares have a market price of $10 per share on January 1, 2012, the grant date, and at December 31, 2013, averaging $10 throughout the year. When calculating diluted EPS at December 31, 2013, the net increase in the denominator of the EPS fraction will be:

Under its executive stock option plan, N Corporation granted options on January 1, 2013, 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, 2015 (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?

On January 1, 2013, 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 2014, 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 2014?

At December 31, 2013, MedX Corporation had outstanding 200,000 shares of common stock. Also outstanding were 120,000 shares of preferred stock convertible into 64,000 common shares and $1,800,000 of 10% bonds convertible into 27,000 common shares MedX's net income for the year ended December 31, 2013, is $1,040,000. The income tax rate is 40%. MedX paid dividends of $2 per share on its preferred stock during 2013. Required: Compute basic and diluted earnings per share for the year ended December 31, 2013, considering possible antidilutive effects.

Stock options will be dilutive and included in the calculation of dilutive EPS if the exercise price is greater than the average market value of the stock.

The Santiago Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2013, 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, 2016 (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, 2013. 3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2013.