Chapter 19
Share-Based Compensation and Earnings per Share
Exercise 19-1Requirement 1 $25.50 fair value per share x 12 mill millio ion n shar shares es gran grante ted d = $306 $306 million million fair value value of of award award Requirement 2
no entry Requirement 3 ($ in millions)
Compensation expense ($306 million ÷ 3 years). . 102 Paid-i id-in n capit pital – res restrict ricteed stoc stock k... ....... .......... ...... .... .... .. 102 Requirement 4
$25.50 x 12 million x 80% = $24 $244.8 million lion
fair value per share shares granted 100% – 20% forfeiture rate fair fair value lue of awar award d
.
Alternate Eercises Eercises an! "ro#lems
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Requirement 1
Exercise 19-2 At January 1, 2013, the estimated value of the award is: $7 estimated fair value per option x 75,000 options granted = $525,000 total compensation Requirement 2
Compensation expense ($525,000 ÷ 5 years)................................105,000 Paid-in capital – stock options ............................................. 105,000 Requirement 3
The company should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes. 2014
Compensation expense ([$525 x 90% x 2/5] – $105)............... Paid-in capital –stock options ..............................................
84 84
The expense in each of the remaining three years, 2015-20142011!-2, "ould #e !4.5 million $%&525 x !0'( – $105 – $84 = $283.5 ÷ 3) )ote that this approach is contrary to the usual "ay companies account for changes in estimates. *or instance, assume a company ac+uires a 5-year deprecia#le asset having no estimated residual value. The &525 million deprecia#le cost "ould #e depreciated straight-line at &105 million over the five-year useful life. f the estimated residual value changes after one year to 10' of cost, the ne" estimated deprecia#le cost of &42.5 million "ould #e reduced #y the &105 million depreciation recorded the first year, and the remaining &.5 million "ould #e depreciated e+ually, &!1./5 million per year, over the remaining four years.
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Exercise 19-3
1. EPS in 2013
(amounts in millions, except per share amount) net income
Earnings Per Share
$1,200 $1,200 ————————————————————————— = –––– = $2.00 606 – 18 (10 / 12) + 18 (2 / 12) + 72 (1 / 12) 600 shares at Jan. 1
treasury shares
treasury shares sold
new shares
2. EPS in 2014 (amounts in thousands, except per share amount) net income
Earnings Per Share
$1,200 $1,200 ————————————————————————— = –––– = $.88 (606 – 18 + 18 + 72) x (2.00) 1,356 shares at Jan. 1
stock dividend adjustment
3. 2013 EPS in the 2014 comparative financial statements (amounts in thousands, except per share amount) net income
Earnings Per Share
$1,200 $1,200 ————————————————————————— = –––– = $1.00 600 x (2.00) 1,200 weighted average shares as previously calculated
stock dividend adjustment
PROBLEMS Alternate Eercises an! "ro#lems
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1. Net loss per share for the year ended December 31, Problem 19-1 2013:
(amounts in millions, except per share amount) net loss
preferred dividends – $2801
Net Loss Per Share
– $280 – $560 —————————————————————————— = ——— = ($.46) 1,200 (1.05) – 60 (8 / 12) (1.05) + 24 (4 / 12) 1,226 shares at Jan. 1
treasury shares
new shares
↑___ stock dividend ___↑ adjustment
2.Per share amount of income or loss from continuing operations for the year ended December 31, 2013: (amounts in millions, except per share amount)
operating income $5202
Income from Continuing Operations Per Share
preferred dividends – $2801
$240 ————————————————————————— = ——— = $.19 1,200(1.05) – 60 (8 / 12) (1.05) + 24 (4 / 12) 1,226 shares at Jan. 1
treasury shares
new shares
↑___ stock dividend ___↑ adjustment 1 40,000 shares x $100 x 7% = $280,000 2 $800,000 – $280,000 = $520,000
Problem 19-1 (concluded)
3. 2013 and 2012 comparative income statements:
(amounts in millions, except per share amount)
2013
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2012
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Earnings (Loss) Per Common Share:
Income (loss) from operations before extraordinary items
$ .19
Extraordinary loss from litigation settlement
$.71
(.65)
Net income (loss)
($ .46)
$.71
The weighted average number of common shares in 2012 should be adjusted for the stock dividend in 2013 for the purpose of reporting 2012 EPS in subsequent years for comparative purposes:
Note:
net income
Earnings Per Share
$900 $900 ——————————— = ——— 1,200 (1.05) 1,260 shares at Jan. 1
stock dividend adjustment
Problem 19-2 net income
= $.71
(amounts in millions, except per share amount)
preferred dividends
$1,050 – $39 $1,011 ——————————————————————————— = —— 300(1.04) + 30 (10 / 12) (1.04) – 2 (6 / 12) 337 shares at Jan. 1
new shares
= $3.00
shares retired
↑___ stock dividend ___↑ adjustment
Problem 19-3
Alternate Eercises an! "ro#lems
The options issued in 2012 are not considered when calculating 2013 EPS because the exercise price ($34) is not less than the 2013 average market price of $32 (although they © The McGraw-Hill Companies, Inc., 2013 1$-)
would have been considered when calculating 2011 or 2012 EPS if the average price those years had been more than $34). The options issued in 2013 do not affect the calculation of 2013 EPS for t"o reasons related to their #eing issued at ecem#er 1. *irst, the exercise price $&2 is e+ual to the 201 average maret price of &2. 3hile they are not antidilutive, neither are they dilutive. econd, even if the exercise price had #een less than the maret price, these options "ould #e excluded. ptions are assumed exercised at the #eginning of the year or "hen granted, "hichever is later 6 "hen granted, in this case. o, the fraction of the year the shares are assumed outstanding is 0712, meaning no increase in the "eighted-average shares. The options issued in 2011 are considered exercised for 4 million shares when calculating 2013 EPS because the exercise price ($24) is less than the 2013 average market price of $32. Treasury shares are assumed repurchased at the average price for diluted EPS: x
÷
4 million shares $24 (exercise price) $96
million
$32 (average market price) 3 million shares
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Problem 19-3 (concluded) (amounts in millions, except per share amounts) Basic EPS net income
preferred dividends
$1,050 – $39 $1,011 ——————————————————————————— = —— 300(1.04) + 30 (10 / 12) (1.04) – 2 (6 / 12) 337 shares at Jan. 1
new shares
= $3.00
shares retired
↑___ stock dividend ___↑ adjustment
Diluted EPS net
preferred
income
dividends
$1,050 – $39 + $40 – 40%($40) $1,035 ———————————————————————————— = — = $2.85 300 (1.04)+ 30 (10 / 12) (1.04) – 2 (6 / 12)+ (4 – 3) + 13* + 12** 363 shares at Jan. 1
new shares
shares retired
exercise of options
contingent shares
conversion of bonds
↑___ stock dividend ___↑ adjustment
* The contingently issuable shares are considered issued when calculating diluted EPS because the condition for issuance (RW net income > $250 million) currently is being met. ** The bonds are considered converted when calculating diluted EPS: 400,000 bonds x 30 shares = 12 million shares upon conversion. Interest = $400 million x 10% = $40 million.
Problem 19-4
Alternate Eercises an! "ro#lems
(amounts in millions, except per share amounts)
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Basic EPS net income
preferred dividends – $80*
$1,300
$1,220
—————————————————————————————————— = ——— = $1.37 880 + 32 (3 / 12) 888 shares new at Jan. 1 shares
Diluted EPS net income
$1,300
preferred dividends – $80*
preferred dividends + 80*
$1,300
———————————————————————————————— = ——— = $1.33 880 + 32 (3 / 12) + (40 – 30**)
978 shares at Jan. 1
*8
new shares
exercise of options
conversion of preferred shares
million shares x $100 par x 10% = $80 million
**Assumed
purchase of treasury shares
40 million shares x $30 (exercise price) $1,200 million $40 (average market price) ÷ 30 million shares
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