CHAPTER 16: DILUTIVE SECURITIES AND EARNINGS PER SHARE TRUE-FALSE—Conceptual
1. The recordin recording g of convertib convertible le bonds at the the date of issue is the same as the recording of straight debt issues.
7. Nondet Nondetach achabl ablee warran warrants ts,, as with with detach detachabl ablee warrants, require an allocation of the proceeds between the bonds and the warrants.
2. Companie Companiess recognize recognize the gain or loss loss on retiring retiring convertible debt as an extraordinary item.
8. The intrin intrinsi sicc value of a stock stock option option is the difference between the market price of the stock and the exercise price of the options at the grant date.
3. The FASB FASB states states that that when an issue issuerr makes an additional payment to encourage c onversion, the payment should be reported as an expense. 4. The market market value value method method is used used to account account for the exercise of convertible preferred stock. 5. Comp Compan anie iess reco recogn gniz izee a gain gain or loss loss when when stockhol stockholders ders exercise exercise convertib convertible le preferred preferred stock. 6. A company company should should allocate allocate the the proceeds proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values. Item 1. 2. 3.
Ans. T F T
Item 4. 5. 6. 6.
Ans. F F T
9. Under the the fair value method, method, companies compute total compensati compensation on expense expense based on the fair value of options on the date of exercise. 10. The service service period in stock option option plans is the time between the grant date a nd the vesting date. 11. If an employe employeee fails to exercise a stock option option before its expiration date, the company should decrease compensation expense.
Item 7. 8. 9.
Ans. F T F
Item 10. 11. 12.
Ans. T F F
Item 13. 14.
12. If an employee forfeits forfeits a stock option option because of failure failure to satisfy satisfy a service service requireme requirement, nt, the company company should should record record paid-in paid-in capital capital from expired options. 13. If preferred stock is cumulative cumulative and no dividends dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share. 14. When stock dividends dividends or stock splits occur, companies must restate the shares outstand-ing after the stock dividend dividend or split, split, in order to compute the weighted-average number of shares. 15. If a stock stock dividend dividend occurs after year-end, year-end, but befor beforee issuin issuing g the financ financial ial statem statement ents, s, a company company must restate restate the weighted weighted-aver -average age number of shares outstanding for the year.
Ans. T F
Item 15. 16.
Ans. T F
Item 17. 18.
16. Preferred Preferred dividends dividends are subtracte subtracted d from net income income but not income income before before extraordi extraordinary nary items in computing earnings per share. 17. 17. When When a comp compan any y has has a comp comple lex x capi capita tall structure, it must report both basic and diluted earnings per share. 18. In computing computing diluted diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price. 19. In a contingent issue issue agreement, the contingent shares are considered outstanding outstanding for computing diluted EPS when the earnings or market price level is met by the end of the year. 20. A company should should report per share amounts amounts for income before extraordinary items, but not for income from continuing operations.
Ans. T F
Item 19. 20.
Ans. T F
MULTIPLE CHOICE—Dilutive Securities, Conceptual
21. Convertible bonds a. have priority over other indebtedness. indebtedness. b. are usually secured by a first or second mortgage. mortgage. c. pay interest only in the event earnings earnings are sufficient to cover the interest. d. may be exchanged for equity securities. securities. 22. The conversion of bonds is most commonly recorded by the a. incremental me method. b. proportional me method. c. market va value me method. d. book v vaalue me method. 23. When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounted for as a(n) a. extraordinary item. b. expense. c. loss. d. none of these. S
24. Corporations issue issue convertible debt for two main reasons. reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is a. the ease with which convertible convertible debt is sold sold even if the company has a poor credit rating.
b. the fact that equity capital has issue costs that convertible convertible debt does not. c. that many corporations corporations can obtain financing at lower lower rates. d. that convertible bonds bonds will always sell at a premium. premium. S
25. When convertib convertible le debt is retired retired by the issuer, issuer, any material material difference difference between the cash acquisition acquisition price and the carrying amount of the debt should be a. reflected currently in income, income, but not as an extraordinary extraordinary item. b. reflected currently in income income as an extraordinary item. item. c. treated as a prior period adjustment. adjustment. d. treated as an adjustment of additional paid-in paid-in capital.
S
26.The conversion of preferred stock into common common requires that any excess excess of the par value value of the common common shares issued over the carrying amount of the preferred being converted should be a. reflected currently in income, income, but not as an extraordinary extraordinary item. b. reflected currently in income income as an extraordinary item. item. c. treated as a prior period adjustment. adjustment. d. treated as a direct reduction reduction of retained retained earnings.
27. The conversion of preferred stock may be recorded by the a. incremental method. b. book value method. c. market value method. d. par value method.
28. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants, the excess should be credited to a. additional paid-in paid-in capital from from stock warrants. warrants. b. retained earnings. c. a liability liability account. account. d. premium on bonds payable. 29. Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when a. the market value of the warrants is not not readily available. b. exercise of the warrants within within the next few fiscal periods periods seems remote. c. the allocation would would result in a discount on the debt debt security. d. the warrants issued with with the debt securities are nondetachable. nondetachable. 30. Stock warrants outstanding should be c lassified as a. liabiliti liabilities. es. b. reductions of capital contributed contributed in excess of par value. value. c. assets assets.. d. none of of these. these.
P
31. A c orporation issues bonds with detachable warrants. The amount to be recorded as paid-in capital is preferably a. zero zero.. b. calculated by the excess of the proceeds over over the face amount of the bonds. c. equal to the market market value of the warrants. warrants. d. based on the relative market market values of the two securities involved. involved. P
32.The distribution distribution of stock rights to existing common stockholders will increase paid-in capital at the Date Date of Issuan Issuance ce Date Date of Exerci Exercise se of th the Ri Righ ts ts of th th e Righ ts ts a. Yes Yes b. Yes No c. No Yes d. No No
c. Unlimited time time period permitted permitted for exercise of an option as long long as the holder is still employed by the company. d. Discount from the market market price of the stock no greater than would would be reasonable in an offer of stock to stockholders or others. 35. The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee a. is granted granted the option. b. has performed all conditions precedent precedent to exercising the option. c. may first exercise the the option. d. exercises the option. 36.
S
33.The major difference between convertible debt and stock warrants is that upon exercise of the warrants a. the stock is held by the company company for a defined period period of time before they are issued to the warrant holder. b. the holder holder has to pay a certain amount amount of cash to obtain the shares. c. the stock involved involved is restricted restricted and can only be sold by the recipient after a set period of time. d. no paid-in capital in excess of of par can be a part of the transaction.
37.
S
34. 34. Whic Which h of the the foll follow owin ing g is not a charac characte teris ristic tic of a noncompensatory stock option plan? a. Substant Substantiall ially y all full-time full-time employee employeess may participate participate on an equitable basis. b. The plan offers no substantive substantive option feature.
Multiple Choice Answers—Dilutive Securities, Conceptual Item Ans. Item Ans. Item Ans.
d
33.
38. Which of the following is not a characteristic of a noncompensatory noncompensatory stock purchase plan? a. It is open to almost almost all full-time full-time employees. employees. b. The discount from market price is small.
Ans.
Item
b
Ans.
Item
Ans.
37.
a
*41.
b
38.
d
*42
b
d
25.
22.
d
26.
d
30.
d
34.
c
23.
b
27.
b
31.
d
35.
a
*39.
c
24.
c
28.
d
32.
c
36.
c
*40.
b
* 39 39. *40.
29.
The date on which which total compens compensatio ation n expense expense is computed computed in a stock option plan is the date a. of gran grant. t. b. of exerci exercise. se. c. that the market price coincides with with the option option price. c. that the market price exceeds the option option price.
21.
a d
a
Item
Compensation Compensation expense expense resulting resulting from a compensatory compensatory stock option plan is generally a. recognized in in the period of exercise. b. recognized in the the period of the grant. grant. c. allocated allocated to the periods benefited benefited by the employee's employee's required required service. d. allocated allocated over the periods periods of the employee's employee's service service life to retirement.
Co mp mp en ensa titio n ex pe pe n nsse in a n in cceen titiv e sto cck k op titio n pl an an. Stock appreciation rights plan.
c a
*4 1. 1. *42.
c. The plan offers no substantive option feature. d. All of these are characteristics. characteristics. *39. Under the intrinsic intrinsic value method, compensation compensation expense expense resulting from an incentive stock option is generally a. not recognized recognized because because no excess of market market price over the option price exists at the date of grant. b. recognized in the the period of the grant. grant. c. allocated allocated to the periods benefited benefited by the employee's employee's required required service. d. recognized in in the period of exercise. *40. An executive executive compensatio compensation n plan in which the executive executive may receive compensation in cash, shares of stock, or a combination of both, is known as ______________ plan. a. a nonqualified nonqualified stock option b. a performan performance-t ce-type ype c. a stock appreciation rights d. both a performance-type performance-type and a stock appreciation rights rights *41. A corporation should should record no compensation expense expense for which of the following types of executive compensation plans? a. Stock appreciation rights b. Nonqualified stock option option plans c. Incentive stock option option plans d. Compensation Compensation expense should should be recorded for all of these. *42. The payment to executives executives from a performance-type performance-type plan is is never based on the a. market price of the common common stock. b. return on assets (investment). (investment). c. return on common common stockholders' stockholders' equity. equity. d. sales. sales.
Comp en ensa titi on on e x xp p en ens e in a n i nc nc en en titiv e st oc oc k op titi on on p la la n. n. Basis of performance-type plan.
---- 30. It is additions to contributed capital. MULTIPLE CHOICE—Dilutive Securities, Computational
43. Jenks Co.has $2,500,000 of 8% convertible bonds outstanding. outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest interest on January 31 and July 31. On July 31, 2007, the holders of $800,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $175,000. Jenks should record, as a result of this conversion, a
a. b. c. d.
credit credit of $136, $136,000 000 to to Paid-in Paid-in Capit Capital al in Excess Excess of Par. Par. credit credit of $120,0 $120,000 00 to PaidPaid-in in Capital Capital in in Excess Excess of Par. Par. credit credit of $56,000 $56,000 to Premi Premium um o on n Bonds Bonds Payable. Payable. loss loss of $8,0 $8,000 00..
44. On July 1, 2007, an interest payment date, $60,000 of Risen Co. bonds were converted into 1,200 shares of Risen Co. common stock each having a par value of $45 a nd a market value of $54. There is $2,400 unamortized discount on the bonds. Using the book value method, Risen would record a. no change change in paid-in capital in excess of par. b. a $3,600 $3,600 increas increasee in paidpaid-in in capital capital in excess excess of of par. c. a $7,200 $7,200 increas increasee in paidpaid-in in capital capital in excess excess of of par. d. a $4,800 $4,800 increas increasee in paidpaid-in in capital capital in excess excess of of par. 45. Quayle Corporation had two issues of securities outstanding: outstanding: common stock and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1,000 bond. On June 30, 2007, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the common stock was $35. The total unamortized bond discount at the date of conversion was $1,000,000. In applying the book value method, what amount should Quayle credit to the account "paid-in capital in excess of par," as a result of this c onversion? a. $330,000. b. $160,000. c. $1,440,000. d. $720,000. Use the following information for questions 46 through 48. Gomez Corporation issued $3,000,000 of 9%, ten-year convertible bonds on July 1, 2007 at 96.1 plus accrued interest. The bonds were dated April 1, 2007 with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2008, $600,000 of these bonds were converted into 500 shares of $20 par value common stock. stock. Accrued interest was paid in cash at the time of conversion. 46. If "interest payable" were credited when the bonds were issued, what should be the amount of the debit to "interest expense" on October 1, 2007? a. $64,500. b. $67,500. c. $70,500. d. d. $135,000. 47. What should be the amount of the unamortized bond discount on April 1, 2008 relating to the bonds converted? a. $23,400. b. $21,600. c. $11,700. d. $22,200. 48. What was the effective interest rate on the bonds when they were issued? a. 9% b. Above 9% c. Belo Below w 9% 9% d. Cann Cannot ot dete determ rmin inee fro from m the the inf infor orma mati tion on give given. n. 49. Darby Corporation issued issued at a premium of $5,000 a $100,000 bond issue issue convertible into 2,000 shares of common stock (par value $40). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the stock is quoted on the market at $60 per share. If the bonds are converted into common, what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds? a. $25,000 b. $22,000 c. $32,000 d. $40,000 50. In 2006, Berger, Inc., issued for $103 per share, 60,000 shares of $100 par value convertible convertible preferred stock. One share of preferred stock can be converted into three shares of Berger's $25 par value common stock at the option of the preferred stockholder. In August 2007, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be c redited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? a. $1,020,000. b. $780,000. c. $1,500,000. d. $1,680,000. 51. On December 1, 2007, Howell Company issued at 103, two hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Howell's common stock. On December 1, 2007, the market value of the bonds, without the stock warrants, was 95, and the market value of each stock purchase warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be a. $193,640. b. $195,700. c. $200,000. d. $206,000.
52. On March 1, 2007, Yang Corporation issued issued $800,000 of 8% nonconvertible nonconvertible bonds at 104, which are due on February 28, 2027. In addition, each $1,000 bond was issued with 25 detachable stock warrants, each of which entitled the bondholder to purchase for $50 one share of Yang common stock, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2007, the fair market value of Yang’s common stock was $40 per share and the fair market value of the warrants was $2.00. What amount should Yang record on March 1, 2007 as paid-in capital from stock warrants? a. $28,800 b. $33,600 c. $41,600 d. d. $40,000 53. During During 2007, 2007, Cartel Company Company issued at 104 three hundred, hundred, $1,000 bonds due in ten years. One detachable stock warrant entitling the holder to purchase 15 shares of Cartel’s common stock was attached to each bond. At the date of issuance, the market value of the bonds, without the stock warrants, was quoted at 96. The market value of each detachable warrant was quoted at $40. What amount, amount, if any, of the proceeds proceeds from the issuance issuance should should be accounted accounted for as part of Cartel’s Cartel’s stockholders' equity? a. $0 b. $12,000 c. $12,480 d. $11,856 54. On April April 7, 2007, Meade Corporati Corporation on sold a $2,000,0 $2,000,000, 00, twenty-year twenty-year,, 8 percent percent bond issue for $2,120,000. $2,120,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporati corporation's on's common common stock for $30. The stock has a par value of $25 per share. Immediately after the sale of the bonds, the corpo-ration's securities had the following market values: 8% bond without warrants $1,008 Warrants 21 Common stock 28 What accounts should Meade credit to record the sale of the bonds? a. Bonds Payable $2,000,000 Premium on Bonds Payable 77,600 Paid-in Capital—Stock Warrants 42,400 b. Bonds Payable $2,000,000 Premium on Bonds Payable 16,000 Paid-in Capital—Stock Warrants 84,000 c. Bonds Payable $2,000,000 Premium on Bonds Payable 35,200 Paid-in Capital—Stock Warrants 84,800 d. Bonds Payable $2,000,000 Premiums on Bonds Payable 120,000 Use the following information for questions 55 and 56. On May 1, 2007, Logan Co. issued $300,000 of 7% bonds at 103, which are due on April 30, 2017. Twenty detachable stock warrants entitling entitling the holder to purchase for $40 one share of Logan’s common stock, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2007, the fair value of Logan’s common stock was $35 per share and of the warrants was $2. 55.On May 1, 2007, Logan should credit Paid-in Capital from Stock Warrants for a. $ 11 11 ,,5 52 0. 0. b. $12 ,,0 00 0. 0. c. c. $ 12 12 ,,3 3 60 60 . d. $2 1, 1,00 0. 0. 56.On May 1, 2007, Logan should record the bonds with a a. discount of $12,000. b. discount of $3,360. c. discount of $3,000. d. premium of $9,000. 57. On July 4, 2007, Diaz Company issued for $4,200,000 a total of 40,000 shares of $100 par value, 7% noncumulative noncumulative preferred stock along with one detachable warrant for each share issued. Each warrant contains a right to purchase one share of Diaz $10 par value common stock for $15 per share. The stock without the warrants would normally sell for $4,100,000. The market price of the rights on July 1, 2007, was $2.50 per right. On October 31, 2007, when the market price of the common stock was $19 per share and the market value of the rights was $3.00 per right, 16,000 rights were exercised. As a result of the exercise of the 16,000 rights and the issuance of the related common stock, what journal entry would Diaz make? a. Cash...... Cash............ ............ ........... ........... ............ ............ ............ ............ ................. ................24 .....240,00 0,000 0 Co mm mm on on Sto cck k . .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 1 60 60 ,0 ,0 00 00
b.
c.
d.
Paid-in Capital in Excess of Par . .... .... .... .... .... Cash...... Cash............ ............ ............ ............ ............ ............ ............ ............ ................... ...............240 ..240,000 ,000 Paid-in Capital—Stock Capital—Stock Warrants .......................... 40,000 Common St St oc oc k . .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Paid-in Ca Capital in in Ex Excess of of Pa Par . .... .... .... .... .... Cash...... Cash............ ............ ............ ............ ............ ............ ............ ............ ................... ...............240 ..240,000 ,000 Paid-in Capital—Stock Capital—Stock Warrants ................ .......... 100,000 Common St St oc oc k . .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Paid-in Ca Capital in in Ex Excess of of Pa Par . .... .... .... .... .... Cash...... Cash............ ............ ............ ............ ............ ............ ............ ............ ................... ...............240 ..240,000 ,000 Paid-in Capital—Stock Capital—Stock Warrants .......................... 60,000 Common St St oc oc k . .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Paid-in Ca Capital in in Ex Excess of of Pa Par . .... .... .... .... ....
80,000
1 60 60 ,0 ,0 00 00 120,000
On January 1, 2007, when the market price of the stock was $29 per share, all 40,000 options were exercised. The amount of compensation expense Yunger should record for 2006 under the fair value method is a. $0. b. $40,000. c. $80,000 . d. $120,000. 63.
On December December 31, 2007, Jansen Jansen Company granted granted some some of its executives options options to purchase purchase 45,000 45,000 shares of the company's $50 par common stock at an option price of $60 per share. The Black-Scholes option option pricing pricing model determines determines total compensation compensation expense to be $900,000. $900,000. The options options become exercisable on January 1, 2008, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2008. What is the impact on Jansen's total stockholders' equity for the year ended December 31, 2007, as a result of this transaction under the fair value method? a. $900,000 de decrease b. $3 $300,000 de decrease c. $0 $0 d. $3 $300,000 in increase
64.
On June 30, 2004, 2004, Sealey Corporation Corporation granted granted compensatory stock options for 30,000 shares of of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option option pricing model determines total compensation expense to be $360,000. The options are exercisable beginning January 1, 2007, provided those key employees are still in Sealey’s employ at the time the options are exercised. The options expire on June 30, 2008. On January 4, 2007, when the market price of the stock was $42 per share, all 30,000 options were exercised. exercised. What should should be the amount of compensat compensation ion expense recorded by Sealey Sealey Corporation for the calendar year 2006 using the f air value method? a. $0. b. $144,000. c. $180,000. d. $360,000.
1 60 60 ,0 ,0 00 00 180,000
1 60 60 ,0 ,0 00 00 140,000
58. Sloane Corporation offered detachable detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the Sloane bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants? a. $20,000 b. $20,500 c. $24,000 d. $25,000 59. On January 1, 2008, Porter Company granted granted stock options to officers and key employees for the purchase of 10,000 shares of the company's $1 par common stock at $20 per share as additional compensation compensation for services to be rendered over the next three years. The options are exercisable during a five-year period beginning January 1, 2011 by grantees still employed by Porter. The Black-Scholes option pricing model determines total compensation expense to be $90,000. The market price of common stock was $26 per share at the date of grant. The journal entry to record the compensation expense related to these options for 2008 would include a credit to the Paid-in Capital—Stock Options account for a. $0. b. $18,000. c. $20,000. d. $30,000. 60. On January January 1, 2008, 2008, Downs Company Company granted granted Tim Wright, Wright, an employee employee,, an option option to buy 1,000 1,000 shares of Downs Co. stock for $25 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $7,500. Wright exercised his option on September 1, 2008, and sold his 1,000 shares on December 1, 2008. Quoted market prices of Downs Co. stock during 2008 were January 1 $25 per share September 1 $30 per share December 1 $34 per share The service period is for three years beginning January 1, 2008. As a result of the option granted to Wright, using the fair value method, Downs should recognize compensation compensation expense for 2008 on its books in the amount of a. $9,000. b. $7,500. c. $2,500. d. $1,500. 61.
On December 31, 2007, 2007, Filmore Filmore Company granted granted some of its executives executives options to purchase purchase 50,000 shares of the company's $10 par common stock at an option price of $50 per share. The options become exercisable on January 1, 2008, and represent compensation for executives' services over a three-year period beginning January 1, 2008. The Black-Scholes option pricing model determines total compensation expense to be $300,000. At December 31, 2008, none of the executives had exercised their options. What is the impact on Filmore's net income for the year ended December 31, 2008 as a result of this transaction under the fair value method? a. $100,000 in increase b. $0 c. $100,000 decrease d. $300,000 decrease
62.
Yunger Yunger Corp. on January January 1, 2004, granted granted stock options options for 40,000 40,000 shares of of its $10 par value common common stock to its key employees. The market price of the common stock on that date was $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be $240,000. The options are exercisable beginning January 1, 2007, provided those key employees are still in Yunger’s employ at the time the options are exercised. The options expire on January 1, 2008.
65.
In order to retain certain key executives, executives, Tanner Tanner Corporation granted granted them incentive incentive stock options options on December 31, 2006. 50,000 50,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows: December 31 31, 20 2007 $46 pe per sh share December 31, 2008 51 per share The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2007. The Black-Scholes option pricing model determines total compensation expense to be $500,000. What amount of compensation compensation expense should Tanner recognize as a result of this plan for the year ended December 31, 2007 under the fair value method? a. $250,000. b. $500,000. c. $550,000. d. $1,750,000.
66. Kiner, Kiner, Inc. had 40,000 40,000 shares of treasury treasury stock ($10 par value) value) at December December 31, 2006, which which it acquired at $11 per share. On June 4, 2007, Kiner issued 20,000 treasury shares to employees who exercised options under Kiner's employee stock option plan. The market value per share was $13 at December 31, 2006, $15 at June 4, 2007, and $18 at December 31, 2007. The stock options had been granted for $12 per share. The cost method is used. What is the balance of the treasury stock on Kiner's balance sheet at December 31, 2007? a. $140,000. b. $180,000. c. $220,000. d. $240,000. Use the following information for questions 67 through 69. On January 1, 2006, Merken, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 60,000 SARs. Current market prices of the stock are as follows: January 1, 2006 $35 per share December 31, 2006 38 per share December 31, 2007 30 per share December 31, 2008 33 per share Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2006. *67. What amount of compensation compensation expense should Merken recognize for the year ended December 31, 2006? a. $180,000 b. $270,000 c. $225,000 d. $1,080,000
*68. What amount of compensati compensation on expense should Merken recognize recognize for the year ended December 31, 2007? a. $0 b. $30,000 c. $300,000 d. $150,000 Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
*69. On December 31, 2008, 16,000 SARs are exercised by executives. executives. What amount of compensation compensation expense should Merken recognize for the year ended December 31, 2008? a. $285,000 b. $195,000 c. $585,000 d. $78,000 Item
Ans.
Item
Ans.
Item
Ans.
43.
a
46.
c
49.
b
52.
c
55.
c
58.
b
61.
c
64.
b
44.
b
47.
b
50.
d
53.
c
56.
b
59.
d
62.
c
65.
a
b
54.
c
57.
b
60.
c
63.
c
45. a 48. b 51. S These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter.
Item
66. *67.
Ans.
Item
Ans.
c
*68.
b
b
*69.
a
MULTIPLE CHOICE—Dilutive Securities, CPA Adapted
70.
On January January 2, 2006, Carr Carr Co. issued issued 10-year converti convertible ble bonds bonds at value of the warrants and the face amount of the bonds exceeds the December 31, 2008 50 105. During 2008, these bonds were converted into common stock cash proceeds. This excess is reported as For 2008, Doane should recognize compensation expense under the having an aggregate par value equal to the total face amount of the a. Discount Discount on Bonds Bonds Payabl Payable. e. fair value method of bonds. At conversion, the market price of Carr’s common stock was b. Premium Premium on Bonds Bonds Payable. Payable. a. $90,000. b. $30,000. c. $70,000. d. $0. 50 percent above its par value. On January 2, 2006, cash proceeds c. Common Common Stock Stock Subscribe Subscribed. d. *73. On January 2, 2007, for past services, Titus Titus Corp. granted Ken Pine, Pine, from the issuance of the convertible bonds should be reported as d. Paid-in Paid-in Capital Capital in Excess Excess of Par—Stock Par—Stock Warrants Warrants.. its president, 16,000 stock appreciation rights that are exercisable a. paid-in paid-in capital capital for the entire entire proceeds. proceeds. 72. On January January 1, 2007, 2007, Doane Corp. Corp. granted granted an employe employeee an option to immediately and expire on January 2, 2008. On exercise, Pine is b. paid-in capital capital for the portion portion of the the proceeds attributable to the purchase 6,000 shares of Doane's $5 par value common stock at $20 entitled to receive cash for the excess of the market price of the stock conversion feature and as a liability for the balance. per share. The Black-Scholes Black-Scholes option pricing model determines total on the exercise date over the market price on the grant date. Pine did c. a liability liability for for the face amount amount of the bonds bonds and paid-i paid-in n capital capital compen compensat satio ion n expens expensee to be $140,0 $140,000. 00. The option option became became not exercise any of the rights during 2007. The market price of for the premium over the face amount. exercisable on December 31, 2008, after the employee completed Titus's stock was $30 on January 2, 2007, and $45 on December 31, d. a liabilit liability y for the the entire entire proceeds proceeds.. two years of service. The market prices of Doane's stock were as 2007. As a result of the stock appreciation rights, Titus should 71. Kane Co. issued issued bonds bonds with detachabl detachablee common common stock warrants. warrants. follows: recognize compensation expense for 2007 of Only the warrants had a known market value. The sum of the fair January 1, 2007 $30 a. $0. b. $80,000. c. $240,000. d. $480,000. Item
70.
Ans.
d
Item
71.
Ans.
a
Item
72.
Ans.
c
Item
*73.
Ans.
c
MULTIPLE CHOICE—Earnings Per Share—Conceptual
74. With respect to the computation computation of earnings earnings per share, which of the following would be most indicative of a simple capital structure? a. Common Common stock, stock, preferred stock, stock, and convertible convertible securitie securitiess outstanding in lots of even thousands b. Earnings Earnings derived derived from from one primary primary line line of business business c. Ownership interest consisting solely of common common stock stock d. None None of thes thesee 75. In computing earnings earnings per share for a simple capital structure, if the preferred stock is cumulati cumulative, ve, the amount amount that should should be deducted as an adjustment to the numerator (earnings) is the a. preferred preferred dividend dividendss in in arrears. arrears. b. preferred preferred dividend dividendss in arrears times times (one minus the income income tax rate). c. annual annual preferred preferred dividend dividend times times (one minus minus the income income tax rate).
S
d. none none of thes these. e. 76. In computations of weighted average of shares outstanding, outstanding, when a stock dividend or stock split occurs, the additional shares are a. weighted weighted by the the number number of days days outstandi outstanding. ng. b. weighted weighted by the number number of months months outstand outstanding. ing. c. considered considered outst outstandi anding ng at the beginni beginning ng of the year. d. considered considered outstan outstanding ding at the beginnin beginning g of the earliest year reported. 77. What effect will the acquisition acquisition of treasury stock stock have on stockholders' equity and earnings per share, respectively? a. Decrea Decrease se and and no effe effect ct b. Increa Increase se and and no effe effect ct c. Decrea Decrease se and and increa increase se d. Increa Increase se and and decre decrease ase
78. Due to the importance importance of earnings earnings per share informati information, on, it is required to be reported by all Pub lilic C om omp an ani es es No np np ub ub lilic C om omp an ani es es a. Yes Yes b. Yes No c. No No d. No Yes
P
79. 79. A conver converti tible ble bond issue issue should should be includ included ed in the diluted diluted earnin earnings gs per share comput computati ation on as if the bonds had been been converted into common stock, if the effect of its inclusion is Dilutive Antidilutive a. Yes Yes b. Yes No c. No Yes d. No No
80. When computing computing diluted diluted earnings earnings per share, share, convertible convertible bonds are a . i gn gno re re d d.. b. assumed converted whether whether they they are dilutive dilutive or or antidilutive. antidilutive. c. assumed assumed converted converted only only if they are antidi antidiluti lutive. ve. d. assumed assumed converted converted only only if they are diluti dilutive. ve. 81. 81. a. b. c. d.
Dilu Diluti tive ve conv conver erti tibl blee secu securi riti ties es must must be used used in the the computation of basic basic earning earningss per per share share only. only. diluted diluted earnin earnings gs per per share share only. only. diluted diluted and and basic basic earning earningss per share. share. none none of thes these. e.
82. In computing computing earnings earnings per share, the equivalent equivalent number number of shares of convertible preferred stock are added as an adjustment to the denominator (number (number of shares outstanding). outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)? a. Annual Annual prefe preferre rred d dividen dividend d b. Annual Annual preferred preferred dividend dividend times times (one minus minus the income income tax rate) c. Annual Annual preferred preferred dividen dividend d times the the income income tax rate d. Annual preferred preferred dividend dividend divided divided by the income income tax rate 83. In the diluted earnings earnings per share computa computation tion,, the treasury stock stock method method is used for options options and warrants warrants to reflect reflect assumed Item
Ans.
Item
Ans.
Item
Ans.
Item
reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation computation would a. fair fairly ly prese present nt dilu dilute ted d earn earnin ings gs per shar sharee on a prospective basis. b. fairly fairly present present the the maximum maximum potentia potentiall dilution dilution of diluted diluted earnings per share on a prospective basis. c. reflec reflectt the exces excesss of the numb number er of shares shares assum assumed ed issued over the number of shares assumed reacquired as the potential dilution of earnings per share. d. be anti antidi dilu luti tive ve.. 84. In applying applying the treasury treasury stock method method to determine determine the dilutive dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants a. are are used used to calc calcul ulat atee the the numb number er of comm common on share sharess repurchased at the average market price, when computing diluted earnings per share. b. are added, added, net of tax, to to the numerato numeratorr of the calculati calculation on for diluted earnings per share. c. are disregard disregarded ed in the computa computation tion of of earnings earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock. d. none none of thes these. e.
Ans.
Item
Ans.
Item
Ans.
Item
85. When applying the treasury stock method method for diluted earnings per share, share, the market market price of the common common stock used for the repurchase is the a. price price at the the end end of the the year. year. b. averag averagee market market pric price. e. c. price at the beginnin beginning g of the the year. year. d. none none of thes these. e. 86. Antidilutive Antidilutive securities securities a. should be be included in the computation computation of diluted diluted earnings earnings per share but not basic earnings per share. b. are those whose inclusion inclusion in earnings earnings per share computations computations would would cause basic earnings earnings per share to exceed diluted earnings per share. c. include include stock stock options options and warrants warrants whose whose exercise exercise price is less than the average market price of common stock. d. should be be ignored in all earnings per per share calculations. *87. Assume there are two dilutive dilutive convertible convertible securities. The one that should be used first to recalculate earnings per share is the security with the a. greater greater earnings earnings adjustme adjustment. nt. b. greater greater earnings earnings per share share adjustm adjustment. ent. c. smaller smaller earnings earnings adjustmen adjustment. t. d. smaller smaller earning earningss per share share adjustme adjustment. nt.
Ans.
74.
c
76.
d
78.
b
80.
d
82.
a
84.
a
86.
d
75.
d
77.
c
79.
b
81.
b
83.
d
85.
b
*87.
d
Solution to Multiple Choice question for which the answer is “none of these.” 7 5. 5. a nn nnua l pr ef ef er er re re d d iv iv id ide n nd d.
MULTIPLE CHOICE—Earnings Per Share—Computational
88. Jett Corp. had 600,000 shares of common stock outstanding outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,050,000 $1,050,000 for the year ending December 31, 2007. Earnings per share of common stock for 2007 would be a. $1.75. b. $.83. c. $1.00. d. $1.17. 89. At Decemb December er 31, 2007, 2007, Norbet Norbettt Compa Company ny had 500,00 500,000 0 shares shares of common common stock stock issue issued d and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2007. Net income for the year ended December 31, 2007, was $1,020,000. What should be Norbett's 2007 earnings per common share, rounded to the nearest penny? a. $2.02 b. $2.55 c. $2.40 d. $2.27 90.
Loeb Co. had 600,000 shares shares of common stock outstanding outstanding on January January 1, issued issued 126,000 shares shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is a. 651,000. b. 672,000. c. 693,000. d. 714,000.
91. On January January 1, 2008, 2008, Dingler Dingler Corporation Corporation had 125,000 125,000 shares shares of its $2 par value value common stock stock outstanding. On March 1, Dingler sold an additional 250,000 shares on the open market at $20 per share. Dingler issued issued a 20% stock dividend on May 1. On August 1, Dingler Dingler purchased 140,000 140,000
shares and immediately retired the stock. On November 1, 200,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2008? a. 510,000 b. 375,000 c. 358,333 d. 258,333 92. The following information is available for Alley Corporation: January 1, 2008 Shares outstanding 1,250,000 April 1, 2008 Shares issued 200,000 July 1, 2008 Treasury shares purchased 75,000 Octo Octobe berr 1, 2008 2008 Shar Shares es issu issued ed in in a 100 100% % sto stock ck divi divide dend nd 1,37 1,375, 5,00 000 0 The number of shares to be used in computing earnings per common share for 2008 is a. 2,825,500. b. 2,737,500. c. 2,725,000. d. 1,706,250. 93.
At December 31, 2007 Polk Company Company had 300,000 300,000 shares of of common stock stock and 10,000 shares shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2007 or 2008. On January 30, 2009, prior to the issuance of its financial statements for the year ended December 31, 2008, Polk declared a 100% stock dividend on its common stock. Net income for 2008 was $950,000. In its 2008 financial statements, Polk's 2008 earnings per common share should be
a. 94.
$1.50.
b. $1.58.
c. $3.00.
d.
$3.17.
Caruso Company Company had 500,000 500,000 shares of common common stock issued issued and outstanding at December 31, 2007. 2007. On July 1, 2008 an additional 500,000 shares were issued for cash. Caruso also had stock options outstanding outstanding at the beginning and end of 2008 which allow the holders to purchase 150,000 shares of common stock at $20 per share. The average market price of Caruso's common stock was $25 during 2008. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2008? a. 1,030,000 b. 870,000 c. 787,500 d. d. 780,000
95. Hoffman Hoffman Corporatio Corporation n had net income income for the year of $480,000 $480,000 and a weighted weighted average average number of common shares outstanding outstanding during the period of 200,000 shares. The company has a convertible bond issue outstanding. outstanding. The bonds were issued four years ago at par ($2,000,000), carry a 7% interest rate, and are convertible into 40,000 shares of common stock. stock. The company has a 40% tax rate. Diluted earnings per share are a. $1.65 b. $2.23. c. $2.35. d. $2.58. 96. Kern Corporat Corporation ion purchased purchased Goltra Goltra Inc. and agreed to give stockhol stockholders ders of Goltra Inc. 50,000 50,000 additional shares in 2009 if Goltra Inc.’s net income in 2008 is $400,000 or more; in 2007 Goltra Inc.’s net income is $410,000. Kern has net income for 2007 of $800,000 and has an average number of common shares outstanding outstanding for 2007 of 500,000 shares. What should Kern report as earnings per share for 2007? Basic Earnings Diluted Earnings Basic Earnings Diluted Earnings Per Share Per Share Per Share Per Share a. $1.60 $1.60 b. $1.45 $1.60 c. $1.60 $1.45 d. $1.45 $1.45 97. On January January 2, 2007, Ramos Co. issued issued at par $10,000 $10,000 of 6% bonds convertibl convertiblee in total total into 1,000 shares of Ramos's common stock. No bonds were converted during 2007. Throughout 2007, Ramos had 1,000 shares of common stock outstanding. outstanding. Ramos's 2007 net income was $3,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2007. Ramos's diluted earnings per share for 2007 would be (rounded to the nearest penny) a. $1.50. b. $1.71. c. $1.80. d. $3.42.
and $3.00 per share on the preferred stock. Each $1,000 bond is convertible into into 45 shares of common stock. The net income for 2007 was $600,000 and the income tax rate was 30%. 101. Basic earnings per share for 2007 is is (rounded to the nearest penny) penny) a. $2.21. b. $2.42. c. $2.51.
d. $2.70.
102. Diluted earnings earnings per share for 2007 is (rounded to the nearest penny) penny) a. $2.14. b. $2.25. c. $2.35. d.
$2.46.
103. Werth, Incorporated, has 3,200,000 3,200,000 shares of common stock outstanding outstanding on December 31, 2006. An additional 800,000 shares of common stock were issued on April 1, 2007, and 400,000 more on July 1, 2007. On October 1, 2007, Werth issued 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2007. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively? a. 4,000,000 and 4,000,000 b. 4,000,000 and 4,100,000 c. 4,000,000 and 4,400,000 d. 4,400,000 and 5,200,000 104. Lemke Co. has 4,000,000 shares of common stock outstanding outstanding on December 31, 2006. An additional 200,000 shares are issued on April 1, 2007, and 480,000 more on September 1. On October 1, Lemke issued $6,000,000 $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2007 is a. 4,310,000 and 4,310,000. b. 4,310,000 a n nd d 4,370,000. c. 4,310,000 and 4,550,000. d. 5,080,000 a n nd d 5,320,000. 105. At December 31, 2006, Quirk Company had 2,000,000 2,000,000 shares of common common stock outstanding. outstanding. On January 1, 2007, Quirk issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of common stock. During 2007, Quirk declared and paid $1,500,000 cash dividends on the common stock and $500,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2007, was $5,000,000. $5,000,000. Assuming an income income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2007? (Round to the nearest penny.) a. $1.50 b. $1.67 c. $2.50 d. $2.08
98.
At December 31, 31, 2006, Pratt Company Company had 500,000 shares of common stock stock outstanding. outstanding. On October October 1, 2007, an additional 100,000 shares of common stock were issued. In addition, Pratt had $10,000,000 of 6% c onvertible bonds outstanding outstanding at December 31, 2006, which are convertible into 225,000 shares of common stock. No bonds were converted into common stock in 2007. The net income for the year ended December 31, 2007, was $3,000,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2007, should be (rounded to the nearest penny) a. $6.52. b. $4.80. c. $4.56. d. $4.00.
106. Colaw Company had 300,000 300,000 shares of common stock issued and outstanding at December 31, 2006. During 2007, no additional common stock was issued. On January 1, 2007, Colaw issued 400,000 shares of nonconvertible preferred stock. During 2007, Colaw declared and paid $180,000 cash dividends on the common stock and $150,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2007, was $960,000. $960,000. What should be Colaw's 2007 2007 earnings per common share, rounded to the nearest penny? a. $1.16 b. $2.10 c. $2.70 d. $3.20
99.
On January 2, 2007, 2007, Dino Co. issued issued at par $300,000 $300,000 of 9% convertible convertible bonds. Each $1,000 bond is is convertible into 30 shares. No bonds were converted during 2007. Dino had 50,000 shares of common stock outstanding during 2007. Dino's 2007 net income was $160,000 and the income tax rate was 30%. Dino's diluted earnings per share for 2007 would be (rounded to the nearest penny) a. $2.71. b. $3.03. c. $3.20. d. $3.58.
107. At December 31, 2006, Agler Company had 1,200,000 1,200,000 shares of common stock outstanding. On September 1, 2007, an additional 400,000 shares of common stock were issued. In addition, Agler had $12,000,000 of 6% convertible bonds outstanding at December 31, 2006, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2007. The net income for the year ended December 31, 2007, was $4,500,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2007, rounded to the nearest penny? a. $2.11 b. $3.38 c. $2.35 d. $2.45
100. At December 31, 2006, 2006, Kegan Co. had 1,200,000 1,200,000 shares shares of common stock outstanding. outstanding. In addition, Kegan had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2007, Kegan paid $600,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for 2007 was $3,400,000 and the income tax rate was 40%. The diluted earnings per share for 2007 is (rounded to the nearest penny) a. $1.24. b. 1.74. c. $2.51. d. $2.84. Use the following information for questions 101 and 102. Gilley Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2007. The preferred stock is convertible into 40,000 shares of common stock. During 2007, Gilley paid dividends of $.90 per share on the common stock
108. Foley Foley Company Company has 1,800,000 1,800,000 shares of common common stock outstandin outstanding g on December December 31, 2006. An additional 150,000 shares of common stock were issued on July 1, 2007, and 300,000 more on October 1, 2007. On April 1, 2007, Foley issued 6,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 40 shares of common stock. No bonds were converted into common stock in 2007. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, 2007? a. 1,950,000 and 2,130,000 b. 1,950,000 and 1,950,000 c. 1,950,000 and 2,190,000 d. 2,250,000 and 2,430,000
Use the following information for questions 109 and 110. Information concerning the capital structure of Simot Corporation is as follows: December 31, 2007 2006 Common stock 150,000 shares 150,000 shares Convertible pr ef eferr ed ed stock 15,000 shares 15,000 shares 9% convertible bonds $2,400,000 $2,400,000 During 2007, Simot paid dividends of $1.20 per share on its common stock and $3.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 9% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2007, was $600,000. Assume that the income tax rate was 30%.
110. What should be the diluted earnings per share for the year ended December 31, 2007, rounded rounded to the nearest penny? a. $3.20 b. $2.95 c. $2.83 d. $2.35 111. Warrants exercisable at $20 each to obtain 30,000 shares of common stock stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by a. 30,000. b. 24,000. c. 6,000. d. 7,500. 112. Ferry Corporati Corporation on had 300,000 300,000 shares of common common stock outstanding outstanding at December December 31, 2007. 2007. In addition, it had 90,000 stock options outstanding, which had been granted to certain executives, and which gave them the right to purchase shares of Ferry's stock at an option price of $37 per share. The average market price of Ferry's common stock for 2007 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2007? a. 300,000 b. 331,622 c. 366,600 d. 323,400
109. What should be the basic basic earnings per share for the year ended Decem December ber 31, 2007, rounded rounded to the nearest penny? a. $2.66 b. $2.92 c. $3.70 d. $4.00 Item
88.
Ans.
c
Item
91.
Ans.
b
Item
94.
Ans.
d
Item
97.
Ans.
b
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
Item
Ans.
100.
b
103.
b
105.
b
107.
c
109.
c
111.
c
104.
b
106.
c
108.
a
110.
b
112.
d
89.
c
92.
c
95.
c
98.
c
101.
d
90.
b
93.
a
96.
c
99.
b
102.
c
MULTIPLE CHOICE—Earnings Per Share—CPA Adapted
113. 113. Peine Peine Co. had 300,0 300,000 00 shares shares of commo common n stock stock issued issued and to issue 100,000 additional shares of its common stock on July 1, outstanding at December 31, 2006. No common stock was issued 2008, to the former owners of the subsidiary. Royce paid $200,000 during 2007. On January 1, 2007, Peine issued 200,000 shares of in preferred stock dividends in 2007, and reported net income of nonconvertible preferred stock. During 2007, Peine declared and $3,400,000 $3,400,000 for the year. Royce's diluted earnings per share for 2007 paid $100,000 cash dividends on the common stock and $80,000 on should be the preferred stock. Net income for the year ended December 31, a. $1.42. b. $1.36. c. $1.33. d. $1.28. 2007 was $620,000 $620,000.. What should be Peine's Peine's 2007 earnings earnings per 116. 116. Eller, Eller, Inc., had 560,00 560,000 0 shares shares of commo common n stock stock issued issued and common share? outstanding at December 31, 2006. On July 1, 2007, an additional a. $2.07 b. $1.80 c. $1.73 d. $1.47 40,000 shares of common stock were issued for cash. Eller also had 114. At December 31, 2007 and 2006, 2006, Glass Corp. had 180,000 shares shares of unexercised stock options to purchase 32,000 shares of common common stock and 10,000 shares of 5%, $100 par value cumulative stock at $15 per share outstanding at the beginning and end of 2007. preferred stock outstanding. No dividends were declared on either The average market price of Eller's common stock was $20 during the preferred or common stock in 2007 or 2006. Net income for 2007. What is the number of shares that should be used in computing 2007 was $400,000. For 2007, earnings per common share amounted diluted earnings per share for the year ended December 31, 2007? to a. 58 0, 0,000 b. 588,000 c. 608 ,0 ,000 d. 612,000 a. $ $2 2.22. b. $1.94. c. $1.67. d. $1.11. 117. When computing computing diluted earnings earnings per share, convertible convertible securities 115. Royce Co. had 2,400,000 2,400,000 shares of common common stock outstanding outstanding on Januar January y 1 and December December 31, 2007. 2007. In connec connectio tion n with with the acquisition acquisition of a subsidiary company in June 2006, Royce is required Item
113.
Ans.
b
Item
114.
Ans.
b
Item
115.
Ans.
d
Item
116.
are a. ignored. b. recogn recognize ized d only only if they they are are dilut dilutive ive.. Ans.
b
Item
117.
Ans.
b
Item
118.
Ans.
d
Item
119.
Ans.
a
DERIVATIONS DERIVATIONS — Dilutive Securities, Computational
c. d.
recognized recognized only if they are antidilu antidilutive tive.. recognized recognized whether whether they they are dilut dilutive ive or antid antidilut ilutive. ive.
118. 118. In determ determini ining ng dilut diluted ed earnin earnings gs per share, share, divid dividend endss nonconvertible nonconvertible cumulative preferred stock should be a. d is is re re g gaa rd rd eed d. b. added back to net net income income whether whether declared declared or or not. not. c. deducted deducted from net income income only if declare declared. d. d. deducted deducted from net incom incomee whether whether declared declared or or not. not.
on
119. The if-converted if-converted method method of computing computing earnings earnings per share data assumes conversion of convertible securities as of the a. beginnin beginning g of the earlie earliest st period period reported reported (or (or at time time of issuan issuance, ce, if later). b. begin beginnin ning g of the earlie earliest st period period reporte reported d (regardl (regardless ess of time time of issuance). c. midd middle le of the the earl earlie iest st peri period od report reported ed (reg (regar ardl dles esss of time time of issuance). d. endi ending ng of the the earl earlie iest st period period repo report rted ed (reg (regar ardl dles esss of time time of issuance).
43.
a
$800,000 + ($175,000 × .32) – (8 (800 × 30 30 × $3 $30) = $136,000.
44.
b
$60,000 – (1,200 × $45) – $2,400 = $3,600.
45.
a
($2,400,000 ÷ $1,000) × 40 × $20 = $1,920,000 (common stoc k) k) ($2,400,000 ÷ $16,000,000) × $1,000,000 = $150,000 (unamortized discount) $2,400,000 – $1,920,000 – $150,000 = $330,000.
46.
51 .
c
b
47.
b
$117,000 $117,000 – [($1,000 [($1,000 × 3) + ($1,000 ($1,000 × 6] ×
b
Bonds issued at a discount, market rate > coupon rate.
49.
b
$100,000 + $2,000 – (2,000 × $40) = $22,000.
($3,000,000 – $2 $2,883,000) ÷ 11 117 = $1 $1,000/month ($3,000,000 × .09 × 3/12) + ($1,000 × 3) = $70,500.
50.
d
$6,180,000 – (60,000 × 3 × $25) = $1,680,000.
( $2 $20 0, 0,00 0 × . 95 95 ) + ( 20 20 0 × $5 0) 0) = $ 20 20 0, 0,0 00 00 ; $2 $2 00 00,00 0 × 1. 03 03 = $2 06 06 ,0 ,000
52.
c
( $8 $8 00 00, 00 000 × .9 5) 5) + ( 80 800 × $2 5 × 2 ) = $8 00 00 ,0 ,000 ; $8 $8 00 00 ,0 ,00 0 × 1.04 = $8 32 32 ,,0 0 00 00
($30 ($300, 0,00 000 0 × .96) .96) + (30 (300 0 × $40) $40) = $30 $300, 0,00 000; 0; $300, $300,00 000 0 × 1.04 1.04 = $31 $312, 2,00 000 0
$40,000 ———— × $832,000 = $41,600. $800,000
54.
c
$12,000 ———— × $312,000 = $12,480. $300,000
(2,000 × $1,008) + (4,000 × $21) = $2,100,000 $2,016,000 ————— × $2,120,000 = $2,035,200, bonds: $2,000,000 $2,100,000
P re re m mii um um: $3 $35 ,,2 20 0; 0;
5 5. 5. c
57.
58.
$84,000 — —— —— —— —— × $2 ,,1 12 0, 0,0 00 00 = $ 84 84 ,,8 8 00 00. $2,100,000
( $3 $30 0, 0,00 0 × .9 .96 ) + (6 (6,0 00 00 × $2 ) = $3 $3 00 00 ,0 ,000 ; $300,000 × 1.03 = $309,000
b
b
63 .
c
64.
b
65.
$600,000 ————— = $21,600 $21,600 $3,000,000
48.
$190,000 ———— × $206,000 = $195,700. $200,000
53. 53. c
$117,000 ÷ 117 = $1,000/month
a
$288,000 (————— × $309,000) = $3,360. $300,000
$12,000 ———— × $309,000 = $12,360. $300,000
56.
b
$300,000 –
Dr. Cash: 16,000 × $15 = $240,000 Dr. Paid-in Capital—Stock Warrants: $100,000 × 16/40 = $40,000 Cr. Common Stock: 16,000 × $10 = $160,000 Cr. Paid-in Capital in Excess of Par: ($5 + $2.50) × 16,000 = $120,000.
59.
d
$90,000 ÷ 3 = $30,000.
60.
c
$7,500 ÷ 3 = $2,500.
61.
c
$300,000 ÷ 3 = $100,000.
62.
c
$240,000 ÷ 3 = $80,000/year.
[$20,000 ÷ ($20,000 + $180,000)] × $205,000 = $20,500. 2 $ 90 90 0, 0,0 00 00 – ($ ($ 90 900 ,0 ,00 0 × — ) = $3 00 00 ,0 ,00 0 in ccrr ea ea se se ( fr fro m t he he c re red itit to Pa Pa id id -i -in 3 Capital—Stock Options). Offset by $300,000 decrease (from the debit to Compensation Expense). 12 $360,000 × —- = $144,000. 30
66.
c
20,000 × $11 = $220,000.
*67.
b
($38 – $20) × 60,000 × .25 = $270,000.
$500,000 ÷ 2 = $250,000.
*68.
b
($30 – $20) × 60,000 × .5 = $300,000 $300,000 – $270,000 = $30,000.
$585,000 – $300,000 = $285,000. *69.
a
($33 – $20) × 60,000 × .75 = $585,000
70.
d
Conceptual.
71.
a
Conceptual.
DERIVATIONS — DERIVATIONS — Dilutive Securities, CPA Adapted 72. c
*73.
c
($140,000) ÷ 2 = $70,000. ($45 – $30) × 16,000 = $240,000.
DERIVATIONS — DERIVATIONS — Earnings Per Share, Computational
$1,050,000 ———————————— = $1.00. 6 600,000 + (900,000 × — ) 12
88.
c
90 .
b
6 00 00 ,0 ,00 0 + ( 12 12 6, 6,0 00 00 × 8/ 8/12 ) – (6 (6 3, 3,0 00 00 × 4 /1 /12 ) + ( 54 54,0 00 00 × 2 /1 /12 ) = 6 72 72 ,,0 00 0. 0.
91 .
b
[ (1 (12 5, 5, 00 000 × 2 × 1. 1.2 0) 0) + ( 37 375 ,,0 0 00 00 × 2 × 1 ..2 20 ) + ( 45 45 0, 0,00 0 × 3) + ( 31 310, 00 000 × 3) 3) + (510,000 × 2)] ÷ 12 = 375,000.
92.
c
97.
b
98.
c
99.
b
10 3. 3.
b
105.
b
$1,020,000 ———————————— = $2.40. 3 400,000 + (100,000 × —- ) 12
89.
c
93.
a
[ $9 $950,000 – (10,000 × $100 × .05)] ÷ ( 30 300,000 × 2) = $1.50.
94.
d
500,000 + (5 (500,000 × 6/12) + [(25 – 20) /2 /25 × 15 150,000] = 780,000.
95.
c
[ $4 $48 0, 0, 00 000 + ($ 2, 2,000 ,0 ,0 00 00 × . 07 07 × . 60 60) ] ÷ ( 20 200 ,0 ,00 0 + 4 0, 0,00 0) 0) = $2 ..3 35.
96.
c
Basis: Dilu Dilute ted: d:
100.
b
$3,400,000 —————————— = $1.74. 1,200,000 + 750,000
101.
d
$600,000 – (20,000 × $3) ——————————— = $2.70. 200,000
$160,000 + ($300,000 × .09 × .7) ————————————————— = $3.03. 50,000 + [($300,000 ÷ $1,000) × 30)]
102.
c
$600,000 + ($1,000,000 × .10 × .7) ———————————————— = $2.35. 200,000 + 45,000 + 40,000
3 ,,2 20 0, 0,00 0 + (8 00 00 ,0 ,00 0 × 9 /1 /12 ) + ( 40 400 ,0 ,0 00 00 × 6/ 12 12 ) = 4,0 00 00 ,0 ,000 ( BE BEPS ) 4,000,000 + (20,000 × 20 × 3/12) = 4,100,000 (DEPS).
104.
b
107.
c
108.
a
110.
b
111.
c
[(1,250,000 × 3 × 2) + (1,450,000 × 3 × 2) + (1,375,000 × 3 × 2) + (2,750,000 × 3)] ÷ 12 = 2,725,000. $3,000 + ($10,000 × .06 × .70) —————————————— = $1.71. 1,000 + 1,000 $3,000,000 + ($10,000,000 × .06 × .7) ————————————————— = $4.56. 3 500,000 + (100,000 × —- ) + 225,000 12
$5,000,000 —————————— = $1.67. 2,000,000 + 1,000,000
106.
c
$960,000 – $150,000 —————————— = $2.70. 300,000
109.
c
$600,000 – (15,000 × $3.00) ————————————— = $3.70. 150,000
$800,000 ÷ 500,000 = $1.60. $800 $800,0 ,000 00 ÷ (50 (500, 0,00 000 0 + 50,0 50,000 00)) = $1.4 $1.45 5
4,000,000 + (200,000 × 9/12) + ( 48 480,000 × 4/12) = 4,310,000. 4,310,000 + [($6,000,000 ÷ $1,000) × 40 × 3/12] = 4,370,000.
$4,500,000 + ($12,000,000 × .06 × .7) —————————————————— = $2.35. 1,200,000 + (400,000 4/12) + 800,000 1,800,000 + (150,000 × 6/12) + (300,000 × 3/12) = 1,950,000 1,950,000 + (6,000 × 40 × 9/12) = 2,130,000. $600,000 + ($2,400,000 × .09 × .7) ———————————————— = $2.95. 150,000 + 75,000 + 30,000 30,000 × $20 ÷ $25 = 24,000
30,000 – 24,000 = 6,000.
112.
d
90,000 – (90,000 × $37 ÷ $50) = 23,400 300,000 + 23,400 = 323,400.
DERIVATIONS — DERIVATIONS — Earnings Per Share, CPA Adapted
113.b
$620,000 – $80,000 ————————— = $1.80. 300,000
116.b 116.b
560,0 560,000 00 + (40, (40,000 000 × 6/1 6/12) 2) + [32,0 [32,000 00 – (32,0 (32,000 00 × $15 $15 ÷ $20)] $20)] = 588, 588,000 000..
118.
d
Conceptual.
b
119.
a
Conceptual.
117.
114.
b
$400,000 – (10,000 × $100 × .05) ——————————————— = $1.94. ——————————————— 180,000
Conceptual.
115.
d
$3,400,000 – $200,000 ——————————– = $1.28. 2,400,000 + 100,000
EXERCISES Ex. 16-120 —Convertible Bonds. Dahl Co. issued $5,000,000 of 12%, 5-year convertible bonds on December 1, 2006 for $5,020,800 $5,020,800 plus accrued interest. The bonds were dated April 1, 2006 with interest payable April 1 and October 1. Bond premium is amortized each interest period on a straight-line straight-line basis. Dahl Co. has a fiscal year end of September 30.
On October 1, 2007, $2,500,000 $2,500,000 of these bonds were converted into 35,000 shares of $15 par common stock. Accrued interest was paid in cash at the time of conversion. Instructions (a) Prepare the entry to to record the interest interest expense at April April 1, 2007. Assume Assume that interest interest payable was was credited when the bonds were issued issued (round to to nearest dollar). (b) Prepare the entry to to record the conversion conversion on October 1, 2007. Assume Assume that the entry entry to record amortization amortization of the the bond premium premium and interest interest payment has been been made. Solution 16-120 (a) Intere Interest st Payabl Payable. e.... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ..... .. 100,0 100,000 00 Interest Interest Expense Expense...... ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............. ....... 198,400 198,400 Premium Premium on Bonds Bonds Payable. Payable....... ............ ............ ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............... ............. .... 1,600 1,600 Cash Cash.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 300, 300,00 000 0 Calculations: Issuance price Par value Total premium Months remaining Premium per month Premium amortized (4 × $400) (b)
$5,020,800 5,000,000 $ 20,800 52 $400 $1,600
Bonds Bonds Payable. Payable....... ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... .............. .................... ............ Premium Premium on Bonds Bonds Payable. Payable....... ............ ............ ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............... ............. .... Comm Common on Stoc Stock k (35, (35,00 000 0 × $15) $15).. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Paid Paid-i -in n Cap Capit ital al in Exce Excess ss of Par Par.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Calculations: Premium related to 1/2 of the bonds Less premium amortized Premium remaining
$10,400 2,000 $ 8,400
2,500,00 2,500,000 0 8,400 8,400 525, 525,00 000 0 1,98 1,983, 3,40 400 0
($20,800 ÷ 2) [($10,400 ÷ 52) × 10]
Ex. 16-121 —Convertible Bonds. Linn Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value common stock that had a market price of $40 per share. How should Linn Co. account for the conversion of the bonds into common stock under the book value method? Discuss the rationale for this method. Solution 16-121 To account for the conversion of bonds under the book value method, Bonds Payable should be debited for the face value, Premium on Bonds Payable should be debited, and Common Stock should be credited at par for the shares issued. Using the book value method, no gain (loss) on conversion is recorded. The amount to be recorded for the stock is equal to the book (carrying) value (face value plus unamortized premium) premium) of the bonds. Paid-in Capital in Excess of Par would be credited for the difference between the book value of the bonds and the par value of the stock issued. The rationale for the book value method is that the conversion is the completion of the transaction initiated when the bonds were issued. Since this is viewed as a transaction with stockholders, no gain (loss) should be recognized.
Ex. 16-122 —Convertible Debt and Debt with Warrants (Essay). What accounting treatment treatment is required for convertible debt? Why? What accounting treatment treatment is required for debt issued with stock warrants? Why? Solution 16-122 Convertible debt is treated solely as debt. One reason is that the debt and conversion option are inseparable. The holder cannot sell one and retain the other. The two choices are mutually exclusive. Another reason is that the valuation of the conversion option or the debt security without the conversion option is subjective because these values are not established separately in the marketplace.
When debt is issued with stock warrants, the warrants are given separate recognition. After issue, the debt and the detachable warrants trade separately. The proceeds may be allocated to the two elements based on the relative fair values of the debt security without the warrants and the warrants at the time of issuance. The proceeds allocated to the warrants should be accounted for as paid-in capital.
Ex. 16-123 —Stock options. Prepare the necessary entries from 1/1/07-2/1/09 for the following events using the fair value method. If no entry is needed, write "No Entry Necessary."
1.
On 1/1/07, the stockholders stockholders adopted adopted a stock option plan for top executives executives whereby each might might receive rights to purchase up to 12,000 12,000 shares of common stock stock at $40 per share. The par value is $10 per share. share.
2.
On 2/1/07, options options were granted to each of five executives to to purchase 12,000 shares. shares. The options were non-transferable non-transferable and the executive had to remain remain an employee of the company to to exercise the option. The options options expire on 2/1/09. It is assumed that the options were for services performed equally in 2007 and 2008. The Black-Scholes option pricing model determines total compensation expense to be $1,300,000.
3. At 2/1/09, four executives exercised exercised their options. options. The fifth fifth executive chose chose not to exercise exercise his options, options, which therefore therefore were forfeited. Solution 16-123 1. 1/1/07 No entry necessary. 2.
2/1/07 No entry necessary. Compens Compensatio ation n Expense. Expense....... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............ ............ ............ ............ ................... .................. ..... Paid Paid-i -in n Capi Capita tal— l—St Stoc ock k Opti Option onss.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Compens Compensatio ation n Expense. Expense....... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............ ............ ............ ............ ................... .................. ..... Paid Paid-i -in n Capi Capita tal— l—St Stoc ock k Opti Option onss.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....
3.
2/1/09 Cash (4 × 12,000 12,000 × $40) .............. .................... ............ ............ ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ .............. ............... ....... Paid-in Paid-in Capital— Capital—Stoc Stock k Options Options ($1,300,0 ($1,300,000 00 × 4/5) ............ .................. ............ ............ ............ ............ ........... ........... ............ ................. ............. .. Comm Common on Stoc Stock. k... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. Paid Paid-i -in n Cap Capit ital al in Exce Excess ss of Par Par.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Paid-in Paid-in Capital— Capital—Stoc Stock k Options Options...... ............ ............ ............ ............ ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ............. .............. ...... Pa id id -i -in Ca pi pita l f ro ro m Ex Exp ir ir ed ed S to toc k O pt ption s. s.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... .... .... .... .... .... ....
12/31/07 650,000 650,000 650, 650,00 000 0 12/31/08 650,000 650,000 650, 650,00 000 0
1,920,00 1,920,000 0 1,040,00 1,040,000 0 480, 480,00 000 0 2,48 2,480, 0,00 000 0 260,000 260,000 26 0, 0,0 00 00
outstanding. Ex. 16-124 —Weighted average shares outstanding. On January 1, 2007, Yarrow Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2for-1 stock split. On October 1, the corporation purchased on the market 600,000 of its own outstanding shares and retired them. Instructions Compute the weighted average number of shares to be used in computing earnings per share for 2007. Solution 16-124 Increase Months (Decrease) Outstanding Outstanding Jan. 1 — 1,000,000 2 March 1 150,000 1,150,000 4 July 1 1,150,000 2,300,000 3 Oct. 1 (600,000) 1,700,000 3 12 (25,200,000 ÷ 12)
2/1 2/1
Share Months 4,000,000 9,200,000 6,900,000 5,100,000 25,200,000 2,100,000
Per Share. (Essay) Ex. 16-125 —Earnings Per Define the following: (a) The compu computat tatio ion n of earning earningss per comm common on share share (b) (b) Comp Comple lex x capit capital al stru struct ctur uree (c) (c) Basi Basicc eear arni ning ngss per per share share (d) (d) Dilu Dilute ted d earn earnin ings gs per per sha share re Solution 16-125 (a) Earnings per common share share is computed computed by dividing dividing net income less preferred dividends dividends by the the weighted average of common common shares shares outstanding. outstanding. (b) A complex capital capital structure exists exists when a corporation corporation has convertible convertible securities, securities, options, options, warrants, or other other rights that upon conversion conversion or exercise could could dilute earnings earnings per share. (c) Basic earnings earnings per share is earnings per share computed based on the common common shares outstanding outstanding during the period. period. (d) Diluted earnings earnings per share is earnings earnings per share computed computed based on common common stock and all potentially potentially dilutive common shares shares that were outstanding outstanding during during the period.
Ex. 16-126 —Earnings per share. Ramirez Corporation has 400,000 shares of common stock outstanding throughout 2007. In addition, the corporation has 5,000, 20-year, 7% bonds issued at par in 2005. Each $1,000 bond is convertible into 20 shares of common stock after 9/23/08. During the year 2007, the corporation corporation earned $600,000 after deducting all expenses. expenses. The tax rate was 30%. Instructions Compute the proper earnings per share for 2007.
Solution 16-126
Ear ni nings per share:
Net income $600,000 ————————— = ———— = $1.50 Outs Outsta tand ndin ing g shar shares es 400, 400,00 000 0
Earnings per share assuming bond conversion:
Net income + Interest after taxes ——————————————— Assumed outstanding shares
$600,000 + $245,000 ($350,000 × .7 = $245,000); —————————— = $1.69 400,000 + 100,000 Therefore the bonds are antidilutive, and earnings per common share outstanding of $1.50 should be reported.
Note that the convertible security is antidilutive: Bond interest after taxes ————————————— = Assumed incremental shares
$245,000 ———— = $2.45 100,000
Ex. 16-127 —Diluted earnings per share. Brewer Company had 400,000 shares of common stock outstanding during the year 2007. In addition, at December 31, 2007, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise (options granted in 2005). The average market price during 2007 was $50. Instructions Compute the number of shares to be used in determining diluted earnings per share for 2007. Solution 16-127 Shares outstanding 400,000 Add: Assumed issuance 90,000 490,000 Deduct: Proceeds/Average market price ($3,600,000 ÷ $50) (72,000) Number of shares 418,000
*Ex. 16-128 —Stock appreciation rights. On January 1, 2006, Rye Co. established a stock appreciation appreciation rights plan for its executives. They could receive cash at any time during the next four years equal to the difference between the market price of the common stock and a preestablished price of $16 on 300,000 SARs. The market price is as f ollows: 12/31/06—$21; 12/31/06—$21; 12/31/07—$18; 12/31/07—$18; 12/31/08—$19; 12/31/08—$19; 12/31/09—$20. On December 31, 2008, 50,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2009. Instructions (a) Prepare a schedule that that shows the amount amount of compensation compensation expense for each of the four four years starting with 2006. 2006. (b) Prepare Prepare the journa journall entry at 12/31 12/31/07 /07 to record record compens compensatio ation n expense. expense. (c) Prepare Prepare the journa journall entry at 12/31 12/31/09 /09 to record record the the exercise exercise of the remain remaining ing SARs. SARs. *Solution 16-128 (a) Schedule of Compensation Expense 300,000 SARs
Date Date 12/31/06
Market Set Price Price $21
Value Price Price $16
Percent of SARs SARs $1,500,000
Accrued Accrue Accrued d 25%
12/31/07
18
16
600,000
50%
12/31/08
19
16
900,000
75%
12/31/09
20
16
1,000,000 ($4 × 250,000)
100%
*Solution 16-128 (cont.) (b) Liabi Liabilit lity y Under Under Stock Stock Apprec Appreciat iatio ion n Plan Plan... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ....... ... Comp Compen ensa sati tion on Expe Expens nsee.... ...... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....
(c)
Liabi Liabilit lity y Under Under Stock Stock Apprec Appreciat iatio ion n Plan. Plan.... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ....... ........ ...... .. Cash Cash.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ..... ...... ...... ...
to Date Date Expen Expense se $375,000 (75,000) (75,000) 300,000 375,000 675,000 325,000 1,000,000
$375,000 (75,000) 375,000 325,000
75,000 75,000 75,0 75,000 00 1,000, 1,000,000 000 1,00 1,000, 0,00 000 0
PROBLEMS
Pr. 16-129 —Convertible bonds and stock warrants. For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions. 1. On August 1, 2007, Ryan Corporation Corporation called its 10% convertible convertible bonds for conversion. conversion. The $8,000,000 par bonds bonds were converted into 320,000 320,000 shares of $20 par common common stock. On August 1, there there was $700,000 of unamortized premium applicable to the bonds. The fair market value of the common stock was $20 per share. Ignore all interest payments. 2. Garnett, Inc. decides to to issue convertible bonds bonds instead of common stock. stock. The company issues issues 10% convertible bonds, bonds, par $3,000,000, $3,000,000, at 97. The investment investment banker indicates that if if the bonds had not been convertible convertible they would have sold at 94. 3. Lopez Company Company issues $5,000,000 $5,000,000 of bonds bonds with a coupon coupon rate of 8%. To help help the sale, detachable detachable stock warrants warrants are issued at the the rate of ten warrants for each $1,000 bond bond sold. It is estimated estimated that the value of the the bonds without the warrants is $4,935,000 and the value of the warrants is $315,000. The bonds with the warrants sold at 101. Solution 16-129 1. Bonds Bonds Payable Payable ............ .................. ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ .............. .................... .............8,0 .8,000,0 00,000 00 Premium Premium on Bonds Bonds Payabl Payable.... e.......... ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............ ............. .................... ............. 700,000 700,000 Comm Common on Stoc Stock. k... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .. 6,40 6,400, 0,00 000 0 Paid Paid-i -in n Capi Capita tall in Exc Exces esss of Par Par.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... 2,30 2,300, 0,00 000 0
2.
3.
Cash...... Cash............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............ ............... ..................... ............ Discount Discount on Bonds Bonds Payable.. Payable........ ............ ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ................ ...................... ............ Bond Bondss Paya Payabl ble. e... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ....
2,910,00 2,910,000 0 90,000 90,000
Cash...... Cash............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ............ ............... ..................... ............ Discount Discount on Bonds Bonds Payabl Payable... e......... ............ ........... ........... ............ ............ ............ ............ ............ ............ ............ ........... ........... ............ ............ ................. ..................... .......... Bond Bondss Paya Payabl ble. e... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... Paid Paid-i -in n Capi Capita tal— l—St Stoc ock k Warr Warran ants ts.. .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... .... ($315,000 ÷ $5,250,000 × $5,050,000 = $303,000)
5,050,00 5,050,000 0 253,000 253,000
3,00 3,000, 0,00 000 0
5,00 5,000, 0,00 000 0 303, 303,00 000 0
Pr. 16-130 —Earnings per share. Adcock Corp. had $500,000 net income in 2007. On January 1, 2007 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 shares of treasury stock. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2007. The tax rate is 40%.
During 2007, there were 40,000 shares of convertible preferred stock outstanding. outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock. Adcock issued $2,000,000 of 8% convertible bonds at face value during 2006. Each $1,000 bond is convertible into 30 shares of common stock. Instructions Compute diluted earnings per share for 2007. Complete the schedule and show all computations.
Net Income
Security
Adjustment
Adjusted Net Income
Shares
Adjusted Net Income $360,000 360,000 456,000 596,000
Shares 200,000 205,000 211,000 271,000
Adjustment
Adjusted Shares
EPS
Solution 16-130
Security Com. Stock Options Bonds Preferred a
Net Income $500,000
Adjustment $(140,000)
360,000 456,000
96,000c 140,000
20,000 × 3/4 = 30,000 × 1/3 =
15,000 (10,000) 5,000
b
$1,200,000 ÷ $50 =
Adjustment 5,000a 6,000 b 60,000 120,000
SA
30,000 (24,000) 6,000
(or) [ (5 (50 – 40) ÷ 50] × 30,000 = 6,000 SA SA
Adjusted Shares 205,000 211,000 271,000 391,000
EPS $1.76 1.71 1.68 1.52
c
$2,000 $2,000,0 ,000 00 × .08 × .6 = $96,0 $96,000— 00———— ——— = $1.60 $1.60
$96,000 ———— ———— = $1.1 $1.17 7 60,000
$140,000 120,000
Pr. 16-131 —Basic and diluted EPS. Assume that the following data relative to Eddy Company for 2007 is available: Net Income
Transactions in Common Shares Jan. 1, 2007, Beginning number Mar. 1, 2007, Purchase of treasury shares June 1, 2007, Stock split 2-1 Nov. 1, 2007, Issuance of shares
$2,100,000 Change
Cumulative 700,000 640,000 1,280,000 1,400,000
(60,000) 640,000 120,000
8% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of common (adjusted for split). Stock Options Exercisable at the option price of $25 per share. Average market price in 2007, $30 (market price and option price adjusted for split). Instructions (a) Compute Compute the the basic earnin earnings gs per share share for 2007. 2007. (Round (Round to to the nearest nearest penny.) penny.) (b) Compute Compute the the diluted diluted earnings earnings per per share for for 2007. 2007. (Round (Round to the neares nearestt penny.) penny.) Solution 16-131 Computation Computation of weighted average shares outstanding during the year: January 1 Outstanding March 1 Repurchase (5/6 × 60,000)
June 1 November 1
2-for-1 split Issued (1/6 × 120,000)
Additional shares for purposes of diluted earnings per share: Potentially dilutive securities 8% convertible preferred stock Stock options Proceeds from exercise of 60,000 options (60,000 × $25) Shares issued upon exercise of options Less: treasury stock purchasable with proceeds ($1,500,000 ÷ $30) Dilutive securities—additional shares
(a)
$2,100,000 – $80,000 Basic Basic earn earning ingss per per share share:: —————— ————————— ———— — = $1.5 $1.53 3 1,320,000
( b)
Diluted earnings per share:
$2,100,000 ———–—————— = $1.37 1,320,000 + 210,000
$1,000,000
60,000 shares
700,000 (50,000) 650,000 1,300,000 20,000 1,320,000
200,000 $1,500,000 60,000 50,000
10,000 210,000
Pr. 16-132 —Basic and diluted EPS. Presented below is information related to Berry Company.
1.
Net Income [including an extraordinary gain (net of tax) of $70,000]
$230,000
2.
Capi Capita tall Stru Struct ctur uree a. Cumulati Cumulative ve 8% 8% preferr preferred ed stock, stock, $100 par, 6,000 shares issued and outstanding
$600,000
b.
c.
3. b.
$10 par commo common n stock, stock, 74,000 74,000 shares shares outsta outstandin nding g on January January 1. On April 1, 40,000 shares were issued for cash. On October 1, 16,000 shares were purchased and retired.
$1,000,000
On January January 2 of the current current year, year, Berry Berry purchase purchased d Raye Corpo Corporatio ration. n. One of the terms of the purchase was that if Berry 's net income for the following year is $2400,000 or more, 50,000 additional shares would be issued to Raye stockholders next year.
Othe Otherr Info Inform rmat atio ion n a. Average market price per share of common stock during entire year Income tax rate
$30 30%
Instructions Compute earnings per share for the current year. Solution 16-132 Income before extraordinary item Less preferred dividends Available to common before extraordinary item Add extraordinary gain (net of tax) Income available to common
$160,000 (48,000) 112,000 70,000 $182,000
Weighted average shares outstanding: outstanding: January 1 3/4 × 40,000 1/4 × 16,000
74,000 30,000 (4,000) 100,000
Basic earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net income
$1.12 (a) .70 ( b) $1.82 (c)
Calculations: (a)
$112,000 ———— 100,000
$70,000 ———— 100,000
( b)
Diluted earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net Income
(c)
$182,000 ———— 100,000
$ .75 (a) .46 ( b) $1.21 (c)
Calculations: (a)
$112,000 ———————— 100,000 + 50,000
(b)
$70,000 ———— 150,000
(c)
$182,000 ———————— 100,000 + 50,000
Pr. 16-133 —Basic and diluted EPS. The following information was taken from the books and records of Simonic, Inc.:
1.
Net income
2.
Capi Capita tall stru struct ctur ure: e: a. Converti Convertible ble 6% bonds. bonds. Each Each of the 300, 300, $1,000 $1,000 bonds bonds is is convertib convertible le into 50 shares of common stock at the present date and for the next 10 years. b.
$ 280,000
300,000
$10 par par common common stock, stock, 200,00 200,000 0 shares shares issued issued and outstan outstanding ding during the entire year.
2,000,000
c.
Stock Stock warrants warrants outsta outstandin nding g to buy 16,00 16,000 0 shares shares of common common stock stock at $20 per share. 3. Othe Otherr info inform rmat atio ion: n: a. Bonds converted during the year b. Income tax rate c. Converti Convertible ble debt was outstand outstanding ing the entire entire year year d. Average market price per share of common stock during the year e. Warrants Warrants were outstand outstanding ing the entire entire year year f. Warrants exercised during the year Instructions Compute basic and diluted earnings per share. Solution 16-133 Basic EPS = $280,000 ÷ 200,000 sh. = $1.40
Security Com. Stock Warrants Conv. Bonds
Net Income $280,000 280,000 280,000
Adjustment — — $12,6002
Adjusted Net Income $280,000 280,000 292,600
16,000 1
320,000 ———— = 32
(10,000) 6,000
2
$300,000 .06 .7 = $12,600
SA $12,600 ———— = $.84 15,000
Shares 200,000 200,000 206,000
None 30% $32 None
Adjustment — 6,0001 15,000
Adjusted Shares 200,000 206,000 221,000
Diluted EPS $1.40 1.36 1.32
