Deck 19: Share-Based Compensation and Earnings Per Share

Question 1

Executive stock options should be reported as compensation expense:

A)Using the intrinsic value method.
B)Using the fair value method.
C)Using either the fair value method or the intrinsic value method.
D)Only on rare occasions.

Answer 1

B

Question 2

What amount should M recognize as compensation expense for 2009?

A)$ 30,000
B)$ 60,000
C)$120,000
D)$150,000 (90,000 5 = $450,000; $450,000 / 3 yrs = $150,000)

Answer 2

D

Question 3

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

Answer 3

True

Question 4

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

Question 5

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.

Question 6

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.

Question 7

If unexpected turnover in 2010 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2010?

A)$ 30,000
B)$ 60,000
C)$120,000
D)$150,000 (90,000 5 = $450,000; $450,000 90% = $405,000 2/3 = $270,000; $270,000 150,000 = $120,000)

Question 8

The current FASB standard requires using intrinsic value accounting for employee stock options.

Question 9

The most important accounting objective for executive stock options is:

A)Measuring and reporting the amount of compensation expense during the service period.
B)Measuring their fair value for balance sheet purposes.
C)To disclose increases or decreases in the stock options held at the end of each accounting period.
D)None of these is correct.

Question 10

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.

Question 11

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?

A)$ 0
B)$ 15 million
C)$ 40 million
D)$120 million The $120 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $40 million each year.

Question 12

Under its executive stock option plan, N Corporation granted options on January 1, 2009, 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, 2011 (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?

A)$ 0
B)$20 million
C)$60 million
D)$90 million The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million each year.

Question 13

On January 1, 2009, 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 reduction in earnings in 2009?

A)$ 0
B)$ 200,000
C)$ 400,000
D)$1,200,000 The estimate of the total compensation would be:
200,000 $6 = $1,200,000
One-third of that amount, or $400,000, will be recorded in each of the three years.

Question 14

Current year stock dividends and splits require retroactive restatement of EPS for all prior years presented in comparative financial statements.

Question 15

If a company reports an extraordinary gain, EPS must be disclosed for both income from ordinary continuing operations and net income.

Question 16

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

A)the book value of an unrestricted share of the same stock times the number of shares.
B)the estimated fair value of a share of similar stock times the number of shares.
C)allocated to expense over the service period which usually is the vesting period.
D)the book value of a share of similar stock times the number of shares.

Question 17

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

A)The market price of a share of similar fixed income securities.
B)The market price of an unrestricted share of the same stock.
C)The book value of an unrestricted share of the same stock.
D)The book value of a share of similar stock.

Question 18

The compensation associated with executive stock option plans is

A)the book value of a share of the company's shares times the number of options
B)the estimated fair value of the options
C)allocated to expense over the number of years until expiration
D)recorded as compensation expense on the date of grant

Question 19

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.

Question 20

If a company's capital structure includes convertible bonds, diluted EPS might be reduced even if the bonds are not actually converted during the year.

Question 21

If restricted stock is forfeited because an employee leaves the company, the appropriate accounting procedure is to:

A)Reverse related entries made previously.
B)Do nothing.
C)Prepare correcting entries.
D)Record an income item.

Question 22

On January 1, 2009, Blue 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. Blue initially estimates that it is not probable the goal will be achieved, but in 2010, after one year, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2011. Ignoring taxes, what is the effect on earnings in 2010?

A)$200,000
B)$400,000
C)$600,000
D)$800,000 In 2010, the revised estimate of the total compensation would change from zero to 200,000 $6 = $1,200,000.Blue would reflect the cumulative effect on compensation in 2010 earnings and record compensation thereafter:

Question 23

On January 1, 2009, 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?

A)$10,000
B)$45,000
C)$50,000
D)no effect If an award contains a market condition such as the stock price reaching a specified level, then no special accounting is required.The fair value estimate of the share option ($5) already implicitly reflects market conditions due to the nature of share option pricing models.So, Oliver recognizes compensation expense regardless of when, if ever, the market condition is met.The estimate of the total compensation would be:
40,000 $5 = $200,000
One-fourth of that amount, or $50,000, will be recorded in each of the four years.

Question 24

To encourage employee ownership of the company's common shares, KL Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During May, employees purchased 10,000 shares at a time when the market price of the shares on the New York Stock Exchange was $15 per share. KL will record compensation expense associated with the May purchases of:

A)$ 0
B)$ 15,000
C)$ 22,500
D)$150,000

Question 25

On March 1, 2013, 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:

A)A debit to paid-in capital - stock options for $42 million.
B)A credit to paid-in capital - excess of par for $255 million
C)A credit to common stock for $75 million
D)All of these are correct.The computation is as follows: Cash: 3 million options 5 shares/option $10/share = $150 million
Paid-in capital-stock options: 3 million options $40/option) = $120 million
Common stock: 15 million shares $1 par/share = $15 million
Paid-in capital in excess of par (to balance) = $255 million

Question 26

On January 1, 2009, 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, 2010, after the employee completed two years of service. The option was exercised on January 10, 2011. The market prices of D's stock were as follows: January 1, 2009, $30; December 31, 2010, $50; and January 10, 2011, $45. An option pricing model estimated the value of the options at $8 each on the grant date. For 2009, D should recognize compensation expense of:

A)$ 0.
B)$24,000.
C)$30,000.
D)$90,000.The total compensation is $48,000, the option model price of $8 each times the number of options, 6,000.Since the service period is two years, the compensation expense for 2009 is $24,000 ($48,000/2 years).

Question 27

Under its executive stock option plan, Z Corporation granted options on January 1, 2009, 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, 2011 (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 2017 without being exercised. By what amount will Z's shareholder's equity be increased?

A)$ 0 million
B)$270 million
C)$315 million
D)$330 million The $60 million total compensation is expensed equally over the three-year vesting period, increasing the balance in the Paid-in capital-stock options account.Upon expiration:

Question 28

On January 1, 2009, 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 2010, 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 2010?

A)$200,000 decrease
B)$200,000 increase
C)$400,000 increase
D)no effect In 2009, the estimate of the total compensation would be:
200,000 $6 = $1,200,000
One-third of that amount, or $400,000, will be recorded in 2009.In 2010, the new estimate of the total compensation would change to zero.In that case, Black would reverse the $400,000 expensed in 2009 because no compensation can be recognized for options that don't vest due to performance targets not being met, and that's the new expectation.So, earnings are increased (reduction in compensation expense) by that amount.

Question 29

Martin Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During 2009, employees purchased 8 million shares; during this same period, the shares had an average market price of $15 per share. Martin's 2009 pretax earnings will be reduced by:

A)$ 0
B)$ 12 million
C)$108 million
D)$120 million

Question 30

On December 31, 2008, Albacore Company had 300,000 shares of common stock issued and outstanding. Albacore issued a 10% stock dividend on June 30, 2009. On September 30, 2009, 12,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2009?

A)303,000.
B)342,000.
C)312,000.
D)327,000.(300,000 1.10) (12,000 3/12) = 327,000

Question 31

Wilson's compensation expense in 2009 for these stock options was:

A)$0
B)$200 million
C)$400 million
D)$800 million.The computation is as follows:
Compensation fair value is spread over the 4-year vesting period at $200 million/year.

Question 32

If the options have a vesting period of five years, what would be the balance in "Paid-in Capital - Stock Options" three years after the grant date?

A)A credit of $4.8 million.
B)A credit of $16.2 million.
C)A debit of $4.8 million.
D)A debit of $16.2 million.1,000,000 $8 3/5 = $4,800,000

Question 33

What would be the total compensation indicated by these options?

A)$ 3 million.
B)$27 million.
C)$ 8 million.
D)$35 million.1,000,000 $8 = $8,000,000

Question 34

Under its executive stock option plan, W Corporation granted options on January 1, 2009, 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, 2011 (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 are exercised on April 2, 2012, when the market price is $21 per share. By what amount will W's shareholder's equity be increased?

A)$ 60 million
B)$270 million
C)$315 million
D)$330 million The $60 million total compensation is expensed equally over the three-year vesting period, increasing the balance in the Paid-in capital-stock options account.$315 + 15 60 = $270 Note: The market price at exercise is irrelevant.

Question 35

What is the total compensation cost for this plan?

A)$0.
B)$60,000.
C)$240,000.
D)$300,000.60,000 $1 = $60,000

Question 36

Under its executive stock option plan, M Corporation granted options on January 1, 2009, 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, 2011 (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 were anticipated, however unexpected turnover during 2010 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2010?

A)$ 0
B)$18 million
C)$19 million
D)$20 million The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million in 2009.The company should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes.

Question 37

Assume that all compensation expense from the stock options granted by Wilson already has been recorded. Further assume that 200,000 options expire in 2014 without being exercised. The journal entry to record this would include:

A)Debit to paid-in capital-stock options for $8 million.
B)A debit to common stock for $5 million.
C)A debit to paid-in capital-expiration of stock options for $8 million.
D)None of these is correct.This is 200,000 options that had been recorded by credits to paid-in capital-stock options for $8 million, i.e., 200,000 options $40 option.This is reversed at expiration.

Question 38

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

A)A change in accounting principle.
B)A loss.
C)An income item.
D)A change in estimate.

Question 39

Under its executive stock option plan, Q Corporation granted options on January 1, 2009, 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, 2011 (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 were anticipated, however unexpected turnover during 2010 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2011?

A)$ 0
B)$18 million
C)$19 million
D)$20 million The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million in 2009.The company should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes.

Question 40

On January 1, 2009, 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, 2011, by the grantees still in the employ of the company. No options were terminated during 2009, 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, 2009?

A)$307,200.
B)$320,000.
C)$384,000.
D)$400,000.Total compensation is $800,000 (80,000 options estimated fair value of $10 each) times 96% = $768,000 divided by 2-year service period = $384,000 per year.

Question 41

Nonconvertible bonds affect the calculation of:

A)Basic earnings per share.
B)Diluted earnings per share.
C)Both a and b.
D)None of these is correct.

Question 42

Flyaway Travel Company reported net income for 2009 in the amount of $90,000. During 2009, Flyaway declared and paid $2,125 in cash dividends on its nonconvertible preferred stock. Flyaway also paid $10,000 cash dividends on its common stock. Flyaway had 40,000 common shares outstanding from January 1 until 10,000 new shares were sold for cash on April 1, 2009. What is 2009 basic earnings per share?

A)$1.85.
B)$1.64.
C)$1.76.
D)None of these is correct

Question 43

Basic earnings per share is computed using:

A)The actual number of common shares outstanding at the end of the year.
B)A weighted-average of preferred and common shares.
C)The number of common shares outstanding plus common stock equivalents.
D)Weighted-average common shares outstanding for the year.

Question 44

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

A)Typically increase cash upon exercise.
B)Usually reduce total assets upon exercise.
C)Often reduce liabilities upon exercise.
D)Normally increase retained earnings upon exercise.

Question 45

When a company's only potential common shares are convertible bonds:

A)Diluted EPS will be greater if the bonds are actually converted than if they are not converted.
B)Diluted EPS will be smaller if the bonds are actually converted than if the bonds are not converted.
C)Diluted EPS will be the same whether or not the bonds are converted.
D)The effect of conversion on diluted EPS cannot be determined without additional information.

Question 46

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

A)Will be added to the numerator of the earnings per share fraction for the current year.
B)Will be added to the denominator of the earnings per share fraction for the current year.
C)Will be subtracted from the numerator of the earnings per share fraction for the current year.
D)Has no effect on the earnings per share for the coming year.

Question 47

What is Angel's basic earnings per share for 2009, rounded to the nearest cent?

A)$5.29
B)$5.57
C)$6.50
D)None of these is correct.The basic EPS is $6.50.The computation is as follows:

Question 48

On December 31, 2008, the Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2009, the company sold 50,000 additional shares for cash. Frisbee's net income for the year ended December 31, 2009 was $700,000. During 2009, Frisbee declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2009 basic earnings per share?

A)$2.16.
B)$3.50.
C)$3.10.
D)$2.80.

Question 49

A simple capital structure might include:

A)Stock rights.
B)Convertible bonds.
C)Nonconvertible preferred stock.
D)Stock purchase warrants.

Question 50

The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except:

A)The shares are deducted rather than added.
B)The shares are added rather than deducted.
C)The shares are treated as being acquired at the end of the year.
D)The shares are treated as being acquired at the beginning of the year.

Question 51

Which of the following results in increasing basic earnings per share?

A)Paying more than carrying value to retire outstanding bonds.
B)Issuing cumulative preferred stock.
C)Purchasing treasury stock.
D)All of these increase basic earnings per share.

Question 52

The result of a stock split is:

A)A larger number of more valuable shares.
B)An increase in corporate assets.
C)An increase in shareholders' equity.
D)A larger number of less valuable shares.

Question 53

If a stock split occurred, when calculating the current year's EPS, the shares are treated as issued:

A)At the end of the year.
B)On the first day of the next fiscal year.
C)At the beginning of the year.
D)On the date of distribution.

Question 54

Basic earnings per share ignores:

A)All potential common shares.
B)Some potential common shares, but not others.
C)Dividends declared on noncumulative preferred stock.
D)Stock splits.

Question 55

What will Angel report as diluted earnings per share for 2009, rounded to the nearest cent?

A)$6.43
B)$6.25
C)$6.22
D)None of these is correct.* (2,000,000 5%) = $100,000 in interest; $100,000 20% = $20,000 in tax savings So, after-tax interest cost = $80,000.**Because, this increases EPS, it is anti-dilutive.Only $6.50 basic EPS will be reported.

Question 56

When computing diluted earnings per share, which of the following will be omitted from the calculation?

A)Dividends paid on common stock.
B)The weighted average common shares.
C)The effect of stock splits.
D)The number of common shares represented by stock purchase warrants.

Question 57

When several types of potential common shares exist, the one that enters the computation of diluted EPS first is the one with the:

A)Highest incremental effect.
B)Higher numerator.
C)Median incremental effect.
D)Lowest incremental effect.

Question 58

How many types of potential common shares must a corporation have in order to be said to have a complex capital structure?

A)3.
B)2.
C)1.
D)0.

Question 59

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

A)The end-of-year market price.
B)The average market price during the period.
C)The purchase price stated on the options.
D)The stock's par value.

Question 60

Which of the following is not a potential common stock?

A)Convertible preferred stock.
B)Convertible bonds.
C)Stock rights.
D)Participating preferred stock.

Question 61

Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009 the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $11 while the average price for the year was $12. What number of shares of stock should be used in computing diluted earnings per share?

A)65,000.
B)56,667.
C)55,000.
D)61,667.40,000 + (20,000 9/12) + (10,000 - 8,333*) = 56,667 *(10,000 $10)/$12 = 8,333

Question 62

Dulce Corporation had 200,000 shares of common stock outstanding during the current year. At the beginning of the year, options for 10,000 shares of common stock were granted with an exercise price of $20. The average market price of the common stock during the year was $25. Net income was $4 million. What is diluted EPS?

A)$20.00.
B)$19.80.
C)$19.23.
D)$18.18.*(10,000 $20)/$25 = 8,000

Question 63

When computing diluted earnings per share, stock options:

A)Are included if they are anti-dilutive.
B)Should be ignored.
C)Are included if they are dilutive.
D)Increase the numerator while not affecting the denominator.

Question 64

In computing diluted earnings per share, the treasury stock method is used for:

A)Stock warrants.
B)Stock splits.
C)Reverse stock splits.
D)Convertible preferred stock.

Question 65

What is Falwell's basic earnings per share for 2009, rounded to the nearest cent?

A)$3.14
B)$4.40
C)$5.00
D)None of these is correct.

Question 66

When we take into account the dilutive effect of stock options, rights, and warrants in the calculation of EPS, the method used is called the:

A)Optional method.
B)If converted method.
C)Dilution method.
D)Treasury stock method.

Question 67

On December 31, 2008, Beta Company had 300,000 shares of common stock issued and outstanding. Beta issued a 5% stock dividend on June 30, 2009. On September 30, 2009, 40,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2009?

A)315,000.
B)307,500.
C)305,000.
D)267,500.(300,000 1.05) (40,000 3/12) = 305,000

Question 68

Which of the following will require a recalculation of weighted-average shares outstanding for all years presented?

A)Stock dividends and stock splits.
B)Stock dividends but not stock splits.
C)Stock splits but not stock dividends.
D)Stock rights.

Question 69

Getaway Travel Company reported net income for 2009 in the amount of $50,000. During 2009, Getaway declared and paid $2,000 in cash dividends on its nonconvertible preferred stock. Getaway also paid $10,000 cash dividends on its common stock. Getaway had 40,000 common shares outstanding from January 1 until 10,000 new shares were sold for cash on July 1, 2009. A 2-for-1 stock split was granted on July 5, 2009. What is the 2009 basic earnings per share?

A)$.42.
B)$.47.
C)$.53.
D)$.56.

Question 70

The following information pertains to J Company's outstanding stock for 2009: What is the number of shares J should use to calculate 2009 basic earnings per share?

A)20,000.
B)22,500.
C)25,000.
D)27,000.

Question 71

What is Falwell's diluted earnings per share for 2009, rounded to the nearest cent?

A)$3.14.
B)$4.90.
C)$4.34.
D)Cannot determine from the given information.The computation ($ in 000's) is as follows:
*10,000 options 20 shares/option = 200,000 shares;
Proceeds = 200,000 $29 = $5,800,000
$5,800,000 / $30 per share = 193,333 shares of treasury stock
Net shares added = 200,000 193,333 = 6,667

Question 72

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

A)At the end of the year.
B)At the beginning of the year.
C)On the declaration date.
D)On the date of distribution.

Question 73

On December 31, 2008, the Bennett Company had 100,000 shares of common stock issued and outstanding. On July 1, 2009, the company sold 20,000 additional shares for cash. Bennett's net income for the year ended December 31, 2009 was $650,000. During 2009, Bennett declared and paid $89,000 in cash dividends on its nonconvertible preferred stock. What is the 2009 basic earnings per share?

A)$5.91.
B)$5.61.
C)$5.10.
D)None of these is correct.

Question 74

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?

A)2,075,000.
B)2,282,500.
C)2,475,000.
D)2,620,000.

Question 75

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

A)Buy common stock as an investment.
B)Retire preferred stock.
C)Buy treasury stock.
D)Increase net income.

Question 76

Stock options do not affect the calculation of:

A)Diluted EPS.
B)Weighted-average common shares.
C)The denominator in the diluted EPS fraction.
D)Basic EPS.

Question 77

All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?

A)Decrease.
B)No effect if the shares are held as treasury shares.
C)Increase only if the shares are considered to be retired.
D)Increase.

Question 78

Purple Cab Company had 50,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009, 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 end-of-year market price of common stock was $11 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2009. What is the basic earnings per share?

A)$4.10.
B)$3.86.
C)$3.60.
D)$4.15.$269,915 / (50,000 + (20,000 9/12)) = $4.15

Question 79

Burnet Company had 30,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009, 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 end-of-year market price of common stock was $8 while the average for the year was $9. The company reported net income in the amount of $189,374 for 2009. What is the effect of the options?

A)The options are anti-dilutive.
B)The options will dilute EPS by $.09 per share.
C)The options will dilute EPS by $.33 per share.
D)The options will dilute EPS by $.17 per share.Market price is less than exercise price, so the options are ignored when computing EPS.

Question 80

Blue Cab Company had 50,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009, 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 end-of-year market price of common stock was $11 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2009. What is the diluted earnings per share?

A)$3.60.
B)$4.10.
C)$4.50.
D)$3.81.*(5,000 $10) / $12 = 4,167 from options, plus 50,000 + (20,000 9/12).