Exam 19: Share-Based Compensation and Earnings Per Share

On January 1, 2013, D Corp. granted an employee an option to purchase 6,000 shares of D's $5 par common stock at $20 per share. The options became exercisable on December 31, 2014, after the employee completed two years of service. The option was exercised on January 10, 2015. The market prices of D's stock were as follows: January 1, 2013, $30; December 31, 2014, $50; and January 10, 2015, $45. An option pricing model estimated the value of the options at $8 each on the grant date. For 2013, D should recognize compensation expense of:

Why are preferred dividends deducted from net income when calculating EPS?

What is the entry to record the expiration of 10% of the options on December 31, 2017?

Morrison Corporation had the following common stock record during the current calendar year: What is the number of shares to be used in computing basic EPS?

Which is the correct entry to record the exercise of 90% the options on April 15, 2016, when the market price of the stock was $8?

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

The compensation associated with restricted stock under a stock award plan is:

The most important accounting objective for executive stock options is:

On December 31, 2012, Heffner Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $100 par, cumulative preferred stock outstanding. On February 28, 2013, Heffner purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Heffner sold 6,000 of the treasury shares on September 30, 2013, for $47 per share. Net income for 2013 was $540,000. The income tax rate is 40%. 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. The market price of the common shares averaged $50 during 2013. Five thousand 6% bonds were issued at par on January 1, 2013. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds had been converted by December 31, 2013, and no stock options were exercised during the year. Required: Compute basic and diluted earnings per share (rounded to 2 decimal places) for Heffner Company for 2013.

Paul Company had 100,000 shares of common stock outstanding on January 1, 2013. On September 30, 2013, Paul sold 48,000 shares of common stock for cash. Paul also had 10,000 shares of convertible preferred stock outstanding throughout 2013. The preferred stock is $100 par, 6%, and is convertible into 3 shares of common for each share of preferred. Paul also had 500, 8%, convertible bonds outstanding throughout 2013. Each $1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2013 was $300,000 with a 40% tax rate. Common shareholders received $2 per share dividends after preferred dividends were paid in 2013. Required: Compute basic and diluted earnings per share (rounded to 2 decimal places) for 2013.

Stock options, rights, and warrants are different from convertible securities in that they:

On December 31, 2012, the Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2013, the company sold 50,000 additional shares for cash. Frisbee's net income for the year ended December 31, 2013, was $700,000. During 2013, Frisbee declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2013 basic earnings per share (rounded)?

Burnet Company had 30,000 shares of common stock outstanding on January 1, 2013. On April 1, 2013, the company issued 15,000 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 $9. The company reported net income in the amount of $189,374 for 2013. What is the effect of the options?

How is a complex capital structure different from a simple capital structure?

Stock option plans give employees the option to purchase (a) a specified number of shares of the firm's stock, (b) at a specified price, (c) during a specified period of time. One of the most heated controversies in standard-setting history has been the debate over the amount of compensation to be recognized as expense for stock options. At issue is how the value of stock options is measured, which for most options determines whether any expense at all is recognized. The opposition included corporate executives, auditors, members of Congress, and the SEC. Required: Describe the primary objections of critics of the FASB's eventually successful attempt to require expensing of the fair value of the options.

Parsley Corporation had 250,000 shares of common stock and 5,000 shares of 8%, $100 par, preferred stock outstanding on December 31, 2012. The preferred stock is cumulative, nonconvertible preferred stock. On June 1, 2013, Parsley sold 36,000 shares of common stock for cash. No cash dividends were declared for 2013. Parsley reported a net loss of $320,000 for the year ended December 31, 2010. Required: Calculate Parsley's loss per share (rounded to 2 decimal places) for the year ended December 31, 2013.

If unexpected turnover in 2014 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2014?

A disclosure note from E Corp.'s 2013 annual report is shown below: Employee Stock Purchase Plan. We have an employee stock purchase plan for all eligible employees. Compensation expense for the employee stock purchase plan is recognized in accordance with GAAP. Shares of our common stock may be purchased by employees at three-month intervals at 85% of the fair value on the last day of each three-month period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. Employees purchased the following shares: At June 30, 2013, 150 million shares were reserved for future issuance. Required: Describe the way "Compensation expense for the employee stock purchase plan is recognized in accordance with GAAP by E Corp. Include in your explanation the journal entry that summarizes employee share purchases during 2013.

On January 1, 2013, Jeans-R-Us 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, 2013. (3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2013.

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.