CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE TRUE-FALSE—Dilutive Securities—Coce!tu"l As#er T F T F F T F T F T F F T F T F T. F. T F
No$ Descri!tio 1. Convertible debt and IFRS requirements. 2. Recognizing gain/loss on debt conversion. 3. Reporting additional consideration to encourage conversion. . %. &. ). *. +. 1,. 11. 12. 13. 1. 1%. 1&. 1). 1*. 1+. 2,.
!"ercise o# convertible pre#erence s$ares. Convertible pre#erence s$ares e"ercise. 'llocating proceeds bet(een debt and detac$able (arrants. 'ccounting #or non detac$able (arrants. Intrinsic value o# a s$are option. Compensation e"pense in #air value met$od. Service period in s$are option plans. 'ccounting #or none"ercise o# s$are options. '##ect o# service condition on compensation e"pense. Cumulative pre#erence s$ares and !-S. Restating s$ares #or s$are dividends and s$are splits. S$are dividend and (eig$tedaverage s$ares outstanding. -re#erred dividends and income #rom con#inuing operations. Reporting !-S in comple" capital structure. ilutive s$are options. Contingentl0 issuable s$ares. Reporting !-S #or income #rom continuing operations.
%ULTIPLE CH&ICE—Dilutive Securities' Coce!tu"l As#er d d b c d b d b d b d d d c b c c d c a
N o$ 21. 22. 23. S 2. S 2%. 2&. 2). 2*. S 2+. 3,. 31. 32. 33. 3. S 3%. 3&. 3). 3*. S 3+. ,.
Descri!tio ature o# convertible bonds. Recording conversion o# bonds. Classi#ication o# additional consideration a s(eetener. Reasons #or issuing convertible debt. 'ccounting #or convertible debt converted be#ore maturit0. Convertible b onds c$aracteristics. 4aluingC onvertible bonds. Convertible pre#erence s$ares. 'ccounting #or conversion o# pre#erence s$ares. Recording conversion o# pre#erence s$ares. 5onds issued (it$ detac$able s$are (arrants. ebt equit0 #eatures o# debt issued (it$ s$are (arrants. 5onds issued (it$ detac$able s$are (arrants. istribution o# s$are rig$ts. i##erence bet(een convertible debt and s$are (arrants. -reparation o# memorandum entr0. 'd6ustment o# total compensation. C$aracteristics o# restricted s$ares. C$aracteristics o# noncompensator0 s$are option plan. 7easurement o# compensation in s$are option.
Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
16 -
%ULTIPLE CH&ICE—Dilutive Securities' Coce!tu"l /cot$0 As#er c a d a d b b
N o$ 1. 2. 3. 8. 8%. 8&. 8).
Descri!tio Recognition o# compensation e"pense in a s$are option plan. Compensation e"pense in a s$are option plan. !mplo0ee s$are purc$ase plans. Compensation e"pense in a incentive s$are appreciation rig$ts plan. S$are appreciation rig$ts plan. Incentive s$are option plan. S$arebased liabilit0 a(ards.
%ULTIPLE CH&ICE—Dilutive Securities' Co+!ut"tio"l As#er a b a b c b c a b d c d b c
N o$ *. +. %,. %1. %2. %3. %. %%. %&. %). %*. %+. &,. &1.
Descri!tio Conversion o# convertible bonds. Conversion o# convertible bonds. !"ercise o# s$are purc$ase rig$ts. Conversion o# convertible bonds. Computation o# convertible debt liabilit0 component. Recording issuance o# convertible bonds. Recording conversion o# convertible bonds. Recording settlement o# bonds at maturit0. 'ccounting #or induced conversion o# debt. Recording issuance o# convertible bonds. Recording repurc$ase o# convertible pre#erence s$ares. Conversion o# convertible pre#erence s$ares. 5onds issued (it$ detac$able s$are (arrants. 5onds issued (it$ detac$able s$are (arrants.
c c b b c b b c c b b d d c c c c
&2. &3. &. &%. &&. &). &*. &+. ),. )1. )2. )3. ). )%. )&. )). )*. )+.
5onds issued (it$ detac$able s$are (arrants. Recording s$are premium #rom s$are (arrants. 5onds issued (it$ detac$able s$are (arrants. 5onds issued (it$ detac$able s$are (arrants. 5onds issued (it$ detac$able s$are (arrants. Recording paidin capital #rom s$are (arrants. etermine compensation e"pense in a s$are option plan. etermine compensation e"pense in a s$are option plan. Impact o# s$are options on net income. etermine compensation e"pense in a s$are option plan. etermine compensation e"pense in a s$are option plan. etermine compensation e"pense in a s$are option plan. etermine s$are premium amount in a s$are option plan. etermine compensation e"pense in a s$are option plan. et income e##ect in a s$are option plan. etermine compensation e"pense in a s$are option plan. Impact o# s$are options on s$are$olders9 equit0.
b a c b d
*,. *1. *2. *3. *.
etermine compensation e"pense in a s$are option plan. etermine compensation e"pense in a s$are option plan. Issuance o# treasur0 s$are in a s$are option plan. Computation o# compensation e"pense in restricted s$are plan. Computation o# compensation e"pense in s$arepurc$ase plan.
ilutive Securities and !arnings per S$are
16 - 2
%ULTIPLE CH&ICE—Dilutive Securities' Co+!ut"tio"l /cot$0 As#er b b a
N o$ 8*%. 8*&. 8*).
Descri!tio Compensation e"pense recognized in #irst 0ear in an S'R plan. Compensation e"pense recognized in second 0ear in an S'R plan. Compensation e"pense recognized in t$ird 0ear in an S'R plan.
-
T$ese questions also appear in t$e -roblemSolving Survival :uide. T$ese questions also appear in t$e Stud0 :uide. 8T$is topic is dealt (it$ in an 'ppendi" to t$e c$apter. S
%ULTIPLE CH&ICE—Dilutive Securities' CPA A,"!te, As#er d a c c
N o$ **. *+. +,. 8+1.
Descri!tio Cas$ proceeds #rom issuance o# convertible bonds. 5ond issue (it$ detac$able s$are (arrants. Compensation e"pense in a s$are option plan. Compensation e"pense recognized in an S'R plan.
%ULTIPLE CH&ICE—E"ris Per S."re' Coce!tu"l As#er c d d c b b d b a d a b d d
N o$ +2. +3. +. +%. S +&. +). +*. ++. 1,,. 1,1. 1,2. 1,3. 1,. 81,%.
Descri!tio Simple capital structure. Computing !-S #or a simple capital structure. Computation o# (eig$tedaverage s$ares outstanding. !##ect o# treasur0 s$ares on !-S. Reporting !-S b0 companies. iluted !-S and conversion o# bonds. iluted!-S. ilutive convertible securities. Cumulative convertible pre#erence s$ares income ad6ustment. Treasur0 s$are met$od. Treasur0 s$are met$od. Treasur0 s$are met$od. 'ntidilutive securities. !-S calculation (it$ t(o dilutive convertible securities.
%ULTIPLE CH&ICE—E"ris Per S."re' Co+!ut"tio"l As#er c c b b c a c c d b
N o$ 1,&. 1,). 1,*. 1,+. 11,. 111. 112. 113. 11. 11%.
Descri!tio ;eig$ted average number o# common s$ares outstanding. ;eig$ted average number o# common s$ares outstanding. ;eig$ted average number o# common s$ares outstanding. ;eig$ted average number o# s$ares outstanding. etermination o# s$ares used in computing !-S. Computation o# earnings per s$are. 5asic !-S (it$ convertible pre#erence s$ares. !-S and a s$are split. ;eig$ted average number o# common s$ares outstanding. iluted !-S and t$e treasur0 s$are met$od.
16 - 4
Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
%ULTIPLE CH&ICE—E"ris Per S."re' Co+!ut"tio"l /cot$0 As#er b c d c d c c b c b b d c b b b c a c b c d
N o$ 11&. 11). 11*. 11+. 12,. 121. 122. 123.
Descri!tio iluted !-S (it$ convertible bonds. iluted !-S and contingent issuances. 5asic!-S. iluted !-S (it$ convertible bonds and pre#erence s$ares. umber o# s$ares in computing diluted !-S. iluted!-S. !-S and contingent issuances. iluted !-S (it$ convertible bonds.
12. 12%. 12&. 12). 12*. 12+. 13,. 131. 132. 133. 13. 13%. 13&. 13).
iluted !-S (it$ convertible bonds. iluted!-S. 5asic !-S (it$ convertible bonds and convertible pre#erence s$ares. iluted!-S. enominator in computing basic !-S and !-S (it$ convertible bonds. S$ares outstanding #or basic !-S and !-S. 5asic !-S (it$ convertible pre#erence s$ares. iluted !-S (it$ convertible bonds. 5asic !-S and !-S (it$ convertible bonds issued during 0ear. 5asic !-S (it$ convertible pre#erence s$ares and convertible bonds. !-S (it$ convertible pre#erred stoc< and convertible bonds. !-S and t$e treasur0 s$are met$od. !-S using t$e treasur0 s$are met$od.
%ULTIPLE CH&ICE—E"ris Per S."re' CPA A,"!te, As#er b b d b b d a
N o$ 13*. 13+. 1,. 11. 12. 13. 1.
Descri!tio etermine earnings per s$are. etermine earnings per s$are. etermine diluted !-S. umber o# s$ares to calculate diluted !-S. !-S (it$ convertible securities. !##ect o# dividends on nonconvertible pre#erence s$ares. =I# converted= met$od.
E3ERCISES Ite+ !1&1% !1&1& !1&1) !1&1* !1&1+ !1&1%, !1&1%1 !1&1%2 8!1&1%3
Descri!tio Issuance> conversion> and repurc$ase o# convertible bonds. Convertible bo nds essa0. Issuance> conversion> and repurc$ase o# convertible bonds. Issuance and conversion o# bonds. Stoc< options. ;eig$ted average s$ares outstanding. !arnings per s$are. iluted earnings per s$are. S$are appreciation rig$ts.
ilutive Securities and !arnings per S$are
16 -
PR&(LE%S Ite+ -1&1% -1&1%% -1&1%& -1&1%) -1&1%*
Descri!tio Convertible bonds and s$are (arrants. !arnings per s$are. 5asic and diluted earnings per s$are. 5asic and diluted earnings per s$are. 5asic and diluted earnings per s$are.
CHAPTER LEARNING &(5ECTIVES 1.
escribe t$e accounting #or t$e issuance> conversion> and retirement o# convertible securities.
2.
!"plain t$e accounting #or convertible pre#erence s$ares.
3.
Contrast t$e accounting #or s$are (arrants and s$are (arrants issued (it$ ot$er securities.
.
escribe t$e accounting #or s$are compensation plans under IFRS.
%.
iscuss t$e controvers0 involving s$are compensation plans.
&.
Compute earnings per s$are in a simple capital structure.
).
Compute earnings per s$are in a comple" capital structure.
8*.
!"plain t$e accounting #or s$areappreciation rig$ts plans.
8+.
Compute earnings per s$are in a comple" situation.
16 - 6
Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
S?77'R@ AF B!'RI: A5!CTI4!S 5@ D?!STIAS
1. 2. 3. 21.
TF TF TF 7C
22. 23. S 2. S 2%.
7C 7C 7C 7C
2&. 2). *. +.
. %.
TF TF
2*. 2+.
7C 7C
3,. %*.
&. ). *. 31.
TF TF TF 7C
32. 33. 3. S 3%.
7C 7C 7C 7C
3&. 3%. &,. &1.
+. 1,. 11. 12. 3).
TF TF TF TF 7C
3*. 3+. ,. 1. 2.
7C 7C 7C 7C 7C
3. &+. ),. )1. )2.
13. 1. 1%.
TF TF TF
+2. +3. +.
7C 7C 7C
S +&. 1,&. 1,).
1&.
TF
+%.
7C
1,*.
1). 1*. 1+. 2,. +). +*. ++.
TF TF TF TF 7C 7C 7C
1,,. 1,1. 1,2. 1,3. 1,. 11. 11%.
7C 7C 7C 7C 7C 7C 7C
11&. 11). 11*. 11+. 12,. 121. 122.
. %.
7C 7C
&. ).
7C 7C
*%. *&.
1,%.
7C
S
-
S
oteE TF TrueFalse 7C 7ultiple C$oice ! !"ercise - -roblem
Le"ri 7C %,. 7C %1. 7C %2. 7C %3. Le"ri 7C %+. 7C 1*. Le"ri 7C &2. 7C &3. 7C &. 7C &%. Le"ri 7C )3. 7C ). 7C )%. 7C )&. 7C )). Le"ri 7C 1,+. 7C 11,. 7C 111.
&78ective 1
7C %. 7C %%. 7C %&. 7C %). &78ective 7C ! &78ective 2 7C &&. 7C &). 7C &*. 7C *+. &78ective 4 7C )*. 7C )+. 7C *,. 7C *1. 7C *2. &78ective 6 7C 113. 7C 13*. 7C 13+.
7C 7C 7C 7C
**. 1%. 1&. 1).
7C ! ! !
7C 7C 7C 7C
1). 1*. 1%.
! ! -
7C 7C 7C 7C 7C
*3. *. +,. 1+.
7C 7C 7C !
7C 7C 7C
1%&. 1%).
-
7C 112. 7C 1,. Le"ri &78ective 9 7C 123. 7C 13,. 7C 12. 7C 131. 7C 12%. 7C 132. 7C 12&. 7C 133. 7C 12). 7C 13. 7C 12*. 7C 13%. 7C 12+. 7C 13&. Le"ri &78ective :; 7C *). 7C 1%3. 7C +1. 7C Le"ri &78ective <;
7C 13). 11. 12. 13. 1. 1%1. 1%2.
7C 7C 7C 7C 7C ! !
7C 7C 7C 7C 7C 7C 7C !
1*. 1%.
! -
1%%. 1%&. 1%). 1%*.
-
ilutive Securities and !arnings per S$are
16 - 9
TRUE-FALSE—Coce!tu"l 1.
IFRS requires t$at convertible debt be sep arated into its liabilit0 and eq uit0 components #or accounting purposes.
2.
Companies recognize a gain or loss on t$e conversion o# convertible debt be#ore maturit0.
3.
;$en an issuer o##ers some #orm o# additional consideration a s(eet ener to enco urage o# its convertible debt> it reports t$e s(eetener as a current period e"pense.
.
T$e issuer o# o# t$e convertible conversion s$ares. pre#erence s$ares use s t$e #air val ue met $od to rec ord t$e
%.
Companies recognize a gain or los s ($en s$a re$olders e"ercise convertible pre#erence s$ares.
&.
' compan0 s$o uld allocate t$e proc eeds #ro m t$e sale o# debt (it $ detac$able s$a re (arrants bet(een t$e t(o securities based on t$eir a #air values.
).
on detac$able (arrants> unli
are not considered a com pound instrument #or accounting purposes.
*.
T$e intrinsic value o# a s$are option is t$e di# #erence bet(een t$e mar< et price o# t$e s$ares and t$e e"ercise price o# t$e options at t$e grant date.
+.
?nder t$e #ai r value met$od> companies compute total compensation e"pense based on t$e #air value o# options on t$e date o# e"ercise.
1,.
T$e service period in s$ar e option plans is t$e ti me bet(een t$e gra nt date and t$e vesting date.
11.
I# an emplo0ee #ails to e"ercise a s$ar e option be#ore its e"piration date> t$e compan0 s$ould decrease compensation e"pense.
12.
I# a service condition e"ists> t$e compan0 is not per mitted to ad6ust t$e est imate o# compensation e"pense.
13.
I# pre#erence s$ares are cumulative and no dividends are declared> t$e compan0 subtracts t$e current 0ear pre#erence dividend in computing earnings per s$are.
1.
;$en s$are dividends or s$are splits occur> companies must restate t$e s$ares outstand ing a#ter t$e s$are dividend or split> in order to compute t$e (eig$tedaverage number o# s$ares.
1%.
I# a s$are dividend occurs a#ter 0earend> but be#ore t$e #inancial statements> are aut$orized #or outstanding #orissuance> t$e 0ear. a compan0 must restate t$e (eig$tedaverage number o# s$ares
1&.
-re#erence divi dends are subtracted #rom net income but not income #rom cont inuing operations in computing earnings per s$are.
Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
16 - :
1).
;$en a compan0 $as a com ple" capital structure> it must report bot$ basic and diluted earnings per s$are.
1*.
In computing diluted earnings per s$a re> s$are options are cons idered dilutive ($en t$e ir option price is greater t$an t$e mar
1+.
T$e number o# contingent s$ares to be in cluded indiluted earnings per s$are is based on t$e number o# s$ares t$at (ould be issuable as i# t$e end o# t$e period (ere t$e end o# t$e contingenc0 period.
2,.
' compan0 s$ould report per s$a re amounts #or income #rom continuing operations> but not #or discontinued operations.
True-F"lse As#ers—Coce!tu"l Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
1. 2. 3. . %.
T F T F F
&. ). *. +. 1,.
T F T F T
11. 12. 13. 1. 1%.
F F T F T
1&. 1). 1*. 1+. 2,.
F T F T F
%ULTIPLE CH&ICE—Dilutive Securities' Coce!tu"l 21.
Convertible bonds a. $ave priorit0 over ot$er indebtedness. b. are usuall0 secured b0 a #irst or second mortgage. c. ma0 pa0 interest onl0 in t$e event earnings d. be e"c$anged #or equit0 securities.are su##icient to cover t$e interest.
S
22.
T$e conversion o# bonds is most commonl0 recorded b0 t$e a. incremental met$od. b. proportional met$od. c. #air value met$od. d. boo< value met$od.
23.
;$en a bond iss uer o##ers som e #orm o# additional cons ideration a Gs(eetenerH to induce conversion> t$e s(eetener is accounted #or as an a. equit0 item. b. e"pense. c. loss. d. none o# t$ese.
2.
Corporations issue convertible debt #or t(o main reasons. Ane is t$e desire to raise equit0 capital t$at> assuming conversion> (ill arise ($en t$e srcinal debt is converted. T$e ot$er is a. t$e ease (it$ ($i c$ convertible debt is sold eve n i# t$e compan0 $as a poor credit rating. b. t$e #act t$at equit0 capital $as issue costs t$at convertible debt does not. c. t$at man0 corporations can obtain #inancing at lo(er rates.
ilutive Securities and !arnings per S$are S
2%.
2&.
16 - <
d. t$at convertible bonds (ill al(a0s sell at a premium. ;$en convertible debt is not converted at maturit0 a. a gain or loss is re corded #or t$ e di##erence bet(een t$e boo< va lue o# t$e deb t and t$e present value o# t$e cas$ #lo(s. b. t$e amount srcinall0 allocated to equit0 is recorded as a gain on retirement. c. t$e amount allocated to t$e equit0 component at t$e issua nce date is recor ded as a loss on retirement. d. t$e carr0ing value o# t$e bond equals its #ace value and it is removed #rom t$e boo
S
2).
7ae ong Corp issues 1>,,,>,,, o# 1,J bonds pa0able ($ic$ ma0 be converted into 1,>,,, s$ares o# 2 par value ordinar0 s$ares. T$e mar and t$e bonds (ere issued #or total proceeds o# 1>,,,>,,,. In accounting #or t$ese bonds> 7ae ong Corp. (ill a. First assign a value o# t$e equit0 component> t$en determine t$e liabilit0 component. b. 'ssign no value to t$e equit0 comp onent since t$e conversion privilege is not separable #rom t$e bond. c. First assign a value to t$e liabilit0 component based on t$e #ace amount o# t$e bond. d. ?se t$e G(it$and(it$outH met$od to value t$e compound instrument.
2*.
Convertible pre#erence s$ares a. 're compound instruments (it$ bot$ a liabilit0 and an equit0 component. b. Include an option #or t$e $old er to conve rt pre#erence s$ares into a #i"ed numb er o# ordinar0 s$ares. c. ?se t$e G(it$and(it$outH met$od to value t$e compound instrument. d. 'll o# t$e c$oices are correct.
2+.
T$e conversion o# pre# erence s$ares into ordinar0 s$ares requires t$at an0 e"c ess o# t$e par value o# t$e ordinar0 s$ares issued over t$e carr0ing amount o# t$e pre#erence s$ares being converted s$ould be a. re#lected currentl0 in income. b. re#lected currentl0 in ot$er compre$ensive income. c. treated as a prior period ad6ustment. d. treated as a direct reduction o# retained earnings.
3,.
T$e conversion o# pre#erence s$ares ma0 be recorded b0 t$e a. incremental met$od. b. boo< value met$od. c. mar
31.
;$en t$e cas$ proceeds #rom bonds issued (it$ detac$able s$are (arrants e"ceed t$e #air value o# t$e bonds (it$out t$e (arrants> t$e e"cess s$ould be credited to a. s$are premiumKordinar0. b. retained ea rnings. c. s$are a liabilit0 account. d. premiums$are (arrants.
16 - 1= Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
-
32.
-roceeds #rom an issue o# debt securities $aving s$are (arrants s$ould not be allocated bet(een debt and equit0 #eatures ($en a. t$e #air value o# t$e (arrants is not readil0 available. b. e"ercise o# t$e (arrants (it$in t$e ne"t #e( #iscal periods seems remote. c. t$e (arrants issued (it$ t$e debt are nondetac$able. d. -roceeds s$ould be allocated bet(een debt and equit0 #or all o# t$ese.
33.
' corporation issues bond s (it$ deta c$able (ar rants. T$e amo unt to be recorded as s$are premium is pre#erabl0 a. zero. b. calculated as t$e e"cess o# t$e proceeds over t$e #ace value o# t$e bonds. c. equal to t$e mar
-
3.
T$e distribution o# s$ar e rig$ts to e"isting ordinar0 s$are$olders (ill increase s$are premium at t$e
a. b. c. d. S
3%.
ate o# Issuance o# t$e Rig$ts @es @es o o
ate o# !"ercise o# t$e Rig$ts @es o @es o
T$e ma6or di##erence bet(een convertible debt an d s$are (arrants is t$at upon e" ercise o# t$e (arrants a. t$e s$ares are $eld b0 t$e compan0 #or a de#ined period o# time be#ore t$e0 are issued to t$e (arrant $older. b. t$e $older $as to pa0 a certain amount o# cas$ to obtain t$e s$ares. c. t$e s$ares involved are rest ricted and can onl 0 be sold b0 t$e recipient a#ter a set period o# time. d. no s$are premium can be a part o# t$e transaction.
3&.
'ccording to IFRS> a compan0 ma
3).
'ccording to IFRS> once t$e total compensation is measured at t$e date o# grant a. It can be c$anged in #uture periods related to a c$ange in mar
3*.
Restricted s$ares a. 5etter align t$e emplo0ee incentives (it$ t$e companies9 incentives. b. Result in less dilution to e"isting s$are$olders. c. ever become completel0 (ort$less.
ilutive Securities and !arnings per S$are S
3+.
,.
16 - 11
d. 'll o# t$e c$oices are correct. ;$ic$ o# t$e #ollo(ing is not a c$aracteristic o# a noncompensator0 stoc< option planL a. Substantiall0 all #ulltime emplo0ees ma0 participate on an equitable basis. b. T$e plan o##ers no substantive option #eature. c. ?nlimited time period permitted #or e"ercise o# an option as long as t$e $older is still emplo0ed b0 t$e compan0. d. iscount #rom t$e mar
is granted t$e option. $as per#ormed all conditions precedent to e"ercising t$e option. ma0 #irst e"ercise t$e option. e"ercises t$e option.
1.
Compensation e"pense resulting #rom a compensator0 s$are option plan is generall0 a. recognized in t$e period o# e"ercise. b. recognized in t$e period o# t$e grant. c. allocated to t$e periods bene#ited b0 t$e emplo0eeMs required service. d. allocated over t$e periods o# t$e emplo0eeMs service li#e to retirement.
2.
T$e date on ($ic$ total compensation e"pense is computed in a s$are option plan is t$e date a. o# grant. b. o# e"ercise. c. t$at t$e mar
3.
!mplo0ee s$are purc$ase plans !S-- a. -ermit all emplo0ees to purc$ase s$ares at a discounted price. b. 're gener all0 considered noncompensator0 and result in no compensation e"pen se being recorded. c. istribute restricted s$ares to emplo0ees #or a s$ort period o# time. d. 'll o# t$e c$oices are correct regarding !S--.
8.
In accounting #or s$areappreciation rig$ts plans> compensation e"pense is generall0 a. not recognized because no e"cess o# mar
8%.
For s$are appreciation rig$ts> t$e measurement date #or comp uting compensation is t$e date a. t$e rig$ts mature. b. t$e s$are9s price reac$es a predetermined amount. c. o# grant. d. o# e"ercise.
16 - 1 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
8&.
'n e"ecutive pa0s no ta"es at time o# e"ercise in aan a. s$are appreciation rig$ts plan. b. incentive s$are option plan. c. nonquali#ied s$are option plan. d. Ta"es (ould be paid in all o# t$ese.
8).
' compan0 estimates t$e #air value o# S'Rs> using an optionpricing model> #or a. s$arebased equit0 a(ards. b. s$arebased liabilit0 a(ards. c. bot$ equit0 a(ards and liabilit0 a(ards. d. neit$er equit0 a(ards or liabilit0 a(ards.
%ulti!le C.oice As#ers—Dilutive Securities' Coce!tu"l Ite+
21. 22. 23. 2. 2%.
As$
d d b c d
Ite+
2&. 2). 2*. 2+. 3,.
As$
b d b d b
Ite+
31. 32. 33. 3. 3%.
As$
d d d c b
Ite+
3&. 3). 3*. 3+. ,.
As$
Ite+
As$
Ite+
As$
c c d c a
1. 2. 3. 8. 8%.
c a a c d
8&. 8).
b b
%ULTIPLE CH&ICE—Dilutive Securities' Co+!ut"tio"l *.
Fogel Co. $as 2>%,,>,,, o# *J convertible bond s outs tanding. !ac $ 1>,,, bond is convertible into 3, s$ares o# 3, par value ordinar0 s$ares. T$e bonds pa0 interest on anuar0 31 and ul0 31. An ul0 31> 2,12> t$e $olders o# *,,>,,, bonds e"ercis ed t$e conversion privilege. An t$at date t$e mar,,,. record> as a result o#bond t$is conversion> a. credit o# 13&>,,, to S$are -remiumKArdinar0. b. credit o# 12,>,,, to S$are -remiumKArdinar0. c. credit o# %&>,,, to on 5onds -a0able. d. loss o# *>,,,.
+.
An ul0 1> 2,12> an interest pa0ment date> &,>,,, o# -ar2,, ordinar0 s$ares o# -ar,, unamortized discount on t$e bonds. -ar&,, increase in s$are premium. c. a )>2,, increase in s$are premium. d. a >*,, increase in s$are premium.
%,.
7organ Corporation $ad t( o issues o# securities outstandingE ordinar0 s$ares and an *J convertible bond issue in t$e #ace amount o# 1&>,,,>,,,. Interest pa0ment dates o# t$e bond issue are une 3,t$ and ecem ber 31st. T$e conversion clause in t$e bond indenture entitles t$e bond$olders to receive #ort0 s$ares o# 2, par value ordinar0 s$ares in e"c$ange #or eac$ 1>,,, bond. An une 3,> 2,1,> t$e $olders o# 2>,,>,,, #ace value bonds e"ercised t$e conversion privilege. T$e mar1,, per bond and t$e mar,,,>,,,. ;$at amount
ilutive Securities and !arnings per S$are
16 - 12
s$ould 7organ credit to t$e account =s$are premiumKordinar0>= as a result o# t$is conversionL a. 33,>,,,. b. 1&,>,,,. c. 1>,>,,,. d. )2,>,,,. %1.
Bit,,, a 1,,>,,, bond issue convertible into 2>,,, ordinar0 s$ares par value ,. 't t$e time o# t$e conversion> t$e unamortized premium is 2>,,,> t$e mar,,,> and t$e s$ares are quoted on t$e mar ($at is t$e amount o# s$are premium to be recorded on t$e conversion o# t$e bondsL a. 2%>,,, b. 22>,,, c. 32>,,, d. ,>,,,
%2.
7ae ong Corp. issues 1>,,, convertible bonds at t$e beginning o# 2,11. T$e bonds $ave a #our0ear term (it$ a stated rate o# interest o# & percent> and are issued at par (it$ a #ace value o# N1>,,, per bond t$e total proceeds received #rom issuance o# t$e bonds are N1>,,,>,,,. Interest is pa0able annuall0 at ecember 31. !ac$ bond is convertible into 2%, ordinar0 s$ares (it$ a par value o# N1. T$e mar
%3.
N1>,,,>,,, N)%,>,,, N+,2>*13 N+1&>33)
7ae ong Corp. issues 1>,,, convertible bonds at t$e beginning o# 2,11. T$e bonds $ave a #our0ear term (it$ a stated rate o# interest o# & percent> and are issued at par (it$ a #ace value o# N1>,,, per bond t$e total proceeds received #rom issuance o# t$e bonds are N1>,,,>,,,. Interest is pa0able annuall0 at ecember 31. !ac$ bond is convertible into 2%, ordinar0 s$ares (it$ a par value o# N1. T$e mar $o( muc$ (ill it credit to S$are -remiumKConversion !quit0L T$e #ollo(ing present value #actors are availableE -4 Ardinar0 'nnuit0 O periods &J +J
3.&%11 3.23+)2
-4 o# 1 O periods &J .)+2,+ +J .),*3
16 - 14 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
a. b. c. d. %.
N , N+)>1*) N*3>&&3 N2%,>,,,
7ae ong Corp. issued 1>,,, convertible bonds at t$e beginning o# 2,11. T$e bonds $ave a #our0ear term (it$ a stated rate o# interest o# & percent> and are issued at par (it$ a #ace value o# N1>,,, per bond t$e total proceeds received #rom issuance o# t$e bonds are N1>,,,>,,,. Interest is pa0able annuall0 at ecember 31. !ac$ bond is convertible into 2%, ordinar0 s$ares (it$ a par value o# N1. T$e mar N+)>1*) (as credited to S$are -remiumKConversion !quit0 and t$at t$e bonds (ere not converted at maturit0. ;$at amount (ill 7ae ong credit to S$are -remiumKArdinar0 at t$e maturit0 dateL T$e #ollo(ing present value #actors are availableE a. N)%,>,,, b. N&%2>*13 c. N*)>1*) d. N3)>1*)
%%.
7ae ong Corp. issued 1>,,, convertible bonds at t$e beginning o# 2,11. T$e bonds $ave a #our0ear term (it$ a stated rate o# interest o# & percent> and are issued at par (it$ a #ace value o# N1>,,, per bond t$e total proceeds received #rom issuance o# t$e bonds are N1>,,,>,,,. Interest is pa0able annuall0 at ecember 31. !ac$ bond is convertible into 2%, ordinar0 s$ares (it$ a par value o# N1. T$e mar N+)>1*) (as credited to S$are -remiumKConversion !quit0. T$e bonds (ere not converted at maturit0 and 7ae ong pa0s o## t$e convertible debt $olders. ;$at amount (ill 7ae ong record as a gain or a loss on t$is transactionL a. N , b. N+)>1*) c. N2>2+) d. N2%,>,,,
%&.
7ae ong Corp. issued 1>,,, convertible bonds at t$e beginning o# 2,11. T$e bonds $ave a #our0ear term (it$ a stated rate o# interest o# & percent> and are issued at par (it$ a #ace value o# N1>,,, per bond t$e total proceeds received #rom issuance o# t$e bonds are N1>,,,>,,,. Interest is pa0able annuall0 at ecember 31. !ac$ bond is convertible into 2%, ordinar0 s$ares (it$ a par value o# N1. T$e mar 2,12> 7ae ong (is$es to reduce its annual interest cost. T$e compan0 agrees to pa0 t$e $older o# its convertible bonds an additional N,>,,, i# t$e0 (ill convert. 'ss uming conversion occurs> 7ae ong9s 6ournal entr0 to record t$e conversion (ill include all o# t$e #ollo(ing e"cept a. ebit 5onds -a0able N1>,,,>,,,. b. ebit S$are -remiumKArdinar0 N,>,,,. c. Credit Cas$ N,>,,,. d. Credit S$are CapitalKArdinar0 N2%,>,,,.
ilutive Securities and !arnings per S$are
16 - 1
%).
-elton> Inc. issued P2>,,,>,,, par value> )J convertible bonds at ++ #or cas $. T$e net present value o# t$e debt (it$out t$e conversion #eature is P1>+,,,>,,,. ;$at amount (ill -eloton assign to t$e equit0 #eature o# t$ese bondsL a. P1,,>,,, b. P , c. P++>,,, d. P*,>,,,
%*.
An anuar0 2> 2,1 2> Be""7ar< Co. is sues 2>,,, co nvertible pre#erence s$ares t$at $ave a par value o# N2, per s$are. T$e s$ares (ere issued at a price o# N,, per s$are. An ecember 31> 2,1> Be""7ar< Co. repurc$ases t$e convertible pre#erence s$ares #or N*2,>,,,. An t$is date> Be""7ar< (ill record a. ' loss o# N2,>,,,. b. ' credit to S$are -remiumKConversion !quit0 N,>,,,. c. ' debit to Retained !arnings N2,>,,,. d. ' credit to S$are CapitalK-re#erence N,>,,,.
%+.
In 2,11> ! Inc.> issued #or 1,3 per s$are> &,> ,,, s$ares o# 1,, par value convertible pre#erence s$ares. Ane s$are o# pre#erence s$ares can be converted into t$ree s$ares o# ! all o# t$e pre#erence s$ares (ere converted. T$e #air value o# t$e ordinar0 s$ares at t$e date o# t$e conversion (as 3, per s$are. ;$at total amount s$ould be credited to s$are premiumKordinar0 as a result o# t$e conversion o# t$e pre#erence s$ares into ordinar0 s$aresL a. 1>,2,>,,,. b. )*,>,,,. c. 1>%,,>,,,. d. 1>&*,>,,,.
&,.
An ecember 1> 2,12> Bester Compan0 issued at 1,3> t(o $un dred o# its +J > 1>,,, bonds. 'ttac$ed to eac$ bond (as one detac$able s$are (arrant entitling t$e $older to purc$ase 1, s$ares o# BesterMs ordinar0 s$ares. An ecember 1> 2,12> t$e #air value o# t$e bonds> (it$out t$e s$are (arrants> (as +%> and t$e #air value o# eac$ s$are (arrant (as %,. T$e amount o# t$e proceeds #rom t$e issuance t$at s$ould be accounted #or as t$e initial carr0ing value o# t$e bonds pa0able (ould be a. 1+%>),,. b. 1+,>,,,. c. 2,,>,,,. d. 2,&>,,,.
&1.
An 7arc$ 1> 2,12> Ruiz Corporation issued *,,>,,, o# *J nonc onvertible bonds at 1, > ($ic$ are due on Februar0 2*> 2,32. In addition> eac$ 1>,,, bond (as issued (it$ 2% detac$able s$are (arrants> eac$ o# ($ic$ entitled t$e bond$older to purc$ase #or %, one s$are o# Ruiz ordinar0 s$ares> par value 2%. T$e bonds (it$out t$e (arrants (ould normall0 sell at +%. An 7arc$ 1> 2,12> t$e #air value o# Ruiz9s ordinar0 s$ares (as , per s$are and t$e #air value o# t$e (arrants (as 2. ;$at amount s$ould Ruiz record on 7arc$ 1> 2,12 as s$are premiumKs$are (arrantsL a. ,>,,, b. 1>&,, c. )2>,,, d. *3>2,,
16 - 16 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
&2.
uring 2,1 2> :or don Compan0 issued at 1, t$r ee $undred> 1>,,, bonds due in ten 0ears. Ane detac$able s$are (arrant entitling t$e $older to purc$ase 1% s$ares o# :ordon9s ordinar0 s$ares (as attac$ed to eac$ bond. 't t$e date o# issuance> t$e mar (it$out t$e s$are (arrants> (as quoted at +&. T$e #air value o# eac$ detac$able (arrant (as quoted at ,. ;$at amount> i# an0> o# t$e proceeds #rom t$e issuance s$ould be accounted #or as part o# :ordon9s equit0L a. , b. 12>,,, c. 2>,,, d. 12>*,
&3.
An 'pril )> 2,12> Qegin Corporation sold a 2>,,,>,,,> t(ent00ear> * percent bond issue #or 2>12,>,,,. !ac$ 1>,,, bond $as t(o detac$able (arrants> eac$ o# ($ic$ permits t$e purc$ase o# one s$are o# t$e corporationMs ordinar0 s$ares #or 3,. T$e s$ares $ave a par value o# 2% per s$are. Immediatel0 a#ter t$e sale o# t$e bonds> t$e corporationMs securities $ad t$e #ollo(ing #air valuesE *Jbond(it$out(arrants ;arrants Ardinar0 S$ares
1>,,* 21 2*
;$at accounts s$ould Qegin credit to record t$e sale o# t$e bondsL a.5 onds-a0able 2>,))>&,, S$are-remiumKS$are;arrants 2>,, b.5 onds-a0able 2>,3%>2,, S$are-remiumKS$are;arrants *>*,, c. 5onds-a0able 2>,1&>,,, S$are-remiumKS$are;arrants 1,>,,, d.5 onds-a0able 2>12,>,,, ?se t$e #ollo(ing in#ormation #or questions & and &%. An 7a0 1> 2,12> -a0ne Co. issued 3,,>,,, o# )J bonds at 1,3> ($ic$ are due on 'pril 3,> 2,22. T(ent0 detac$able s$are (arrants entitling t$e $older to purc$ase #or , one s$are o# -a0ne9s ordinar0 s$ares> 1% par value> (ere attac$ed to eac$ 1>,,, bond. T$e bonds (it$out t$e (arrants (ould sell at +&. An 7a0 1> 2,12> t$e #air value o# -a0ne9s s$ares (as 3% per s$are and o# t$e (arrants (as 2. &.
An 7a0 1> 2,12> -a0ne s$ould credit S$are -remium OS$are ;arrants #or a. +>,,,. b. 12>,,,. c. 21>,,,. d. 12>3&,.
&%.
An 7a0 1> 2,12> -a0ne s$ould record bonds at pa0able a. discount o# 2+&>&,. b. discount o# 2**>,,,. c. d. discount premium o# o# 3,,>,,,. 3,+>,,,.
ilutive Securities and !arnings per S$are &&.
16 - 19
4ernon Corporation o##ered detac$able %0ear (arrants to bu0 one ord inar0 s$are par value % at 2, at a time ($en t$e s$ares (ere selling #or 32. T$e price paid #or 2>,,,> 1>,,, bonds (it$ t$e (arrants attac$ed (as 2,%>,,,. T$e mar,,,> and t$e mar,,,. ;$at amount s$ould be allocated to t$e (arrantsL a. 2,>,,, b. 2%>,,, c. 2>,,, d. 2,>%,,
?se t$e #ollo(ing in#ormation #or questions &) and &*. An 7a0 1> 2,12> 7arl0 Co. issued %,,>,,, o# )J bonds at 1,3> ($ic$ are due on 'pril 3,> 2,22. T(ent0 detac$able stoc< (arrants entitling t$e $older to purc$ase #or , one s$are o# 7arl09s ordinar0 s$ares 1% par value> (ere attac$ed to eac$ 1>,,, bond. T$e bonds (it$out t$e (arrants (ould sell at +&. An 7a0 1> 2,12> t$e #air value o# 7arl09s s$ares (as 3% per s$are and o# t$e (arrants (as 2. &).
An 7a0 1> 2,12> 7arl0 s$ould record bonds pa0able at a. %1%>,,,. b. %,,>,,,. c. *,>,,,. d. +>,,.
&*.
An 7a0 1> 2,12> 7arl0 s$ould credit S$are -remiumOS$are ;arrants #or a. 2,>&,, b. 3%>,,, c. 2,>,,, d. 1%>,,,
&+.
An ul0 1> 2,12> !llison Compan0 granted Sam ;ine> an emplo0ee> an option to bu0 ,, s$ares o# !llison Co. s$ares #or 3, per s$are> t$e option e"ercisable #or % 0ears #rom date o# grant. ?sing a #air value option pricing model> total compensation e"pense is determined to be 1>*,,. ;ine e"ercised $is option on Actober 1> 2,12 and sold $is ,, s$ares on ecember 1> 2,1,. Duoted mar 2,12. 's a result o# t$e option granted to ;ine> using t$e #air value met$od> !llison s$ould recognize compensation e"pense on its boo*,,. b. &,,. c. %,. d. ,.
),.
An anuar0 1> 2,12> Trent Compan0 granted ic< ;illiams> an emplo0ee> an option to bu0 1,, s$ares o# Trent Co. s$ares #or 3, per s$are> t$e option e"ercisable #or % 0ears #rom date o# grant. ?sing a #air value option pricing model> total compensation e"pense is determined to be +,,. ;illiams e"ercised $is option on September 1> 2,12> and sold $is
16 - 1: Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
1,, s$ares on ecember 1> (ereE anuar01 September 1 ecember 1
2,12. Duoted mar
T$e service period is #or t(o 0ears beginning anuar0 1>2,12. 's a result o# t$e option granted to ;illiams> using t$e #air value met$od> Trent s$ould recognize compensation e"pense #or 2,12 on its boo,,,. b. +,,. c. %,. d. ,. )1.
)2.
An ecember 31> 2,1,> :onzalez Compan0 granted some o# its e"ecutives options to purc$ase 1,,>,,, s$ares o# t$e compan09s 1, par ordinar0 s$ares at an option price o# %, per s$are. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be )%,>,,,. T$e options become e"ercisable on anuar0 1> 2,11> and represent compensation #or e"ecutives9 services over a t$ree0ear period beginning anuar0 1> 2,11. 't ecember 31> 2,11 none o# t$e e"ecutives $ad e"ercised t$eir options. ;$at is t$e impact on :onzalez9s net income #or t$e 0ear ended ecember 31> 2,11 as a result o# t$is transaction under t$e #air value met$odL a. 2%,>,,, in crease. b. )%,>,,, de crease. c. 2%,>,,, decrease. d. ,. An anuar0 1> 2,11 Reese Compan0 granted ac< 5uc$anan> an emplo0ee> an option to bu0 1,, s$ares o# Reese Co. s$ares #or , per s$are> t$e option e"ercisable #or % 0ears #rom date o# grant. ?sing a #air value option pricing model> total compensation e"pense is determined to be 1>2,,. 5uc$anan e"ercised $is option on September 1> 2,11> and sold $is 1,, s$ares on ecember 1> 2,11. Duoted mar 2,11. 's a result o# t$e option granted to 5uc$anan> using t$e #air value met$od> Reese s$ould recognize compensation e"pense #or 2,11 on its boo2,, d. 1>,,
)3.
An une 3,> 2,1,> @ang Corporation granted compensator0 s$are options #or 2,>,,, s$ares o# its 2 par value ordinar0 s$ares to certain o# its beginning total compensation is determined to be &>,,,. T$e options arepricing e"ercisable anuar0 1> e"pense 2,12> providing t$ose 2,13.
ilutive Securities and !arnings per S$are
16 - 1<
An anuar0 > 2,12> ($en t$e mar all options #or t$e 2,>,,, s$ares (ere e"ercised. T$e service period is #or t(o 0ears beginning anuar0 1> 2,1,. ?sing t$e #air value met$od> ($at s$ould be t$e amount o# compensation e"pense recorded b0 @ang Corporation #or t$ese options on ecember 31> 2,1,L a. &>,,, b. 32>,,, c. 1%>,,, d. , ).
In order to retain certain Smile0 Corporation granted t$em incentive s$are options on ecember 31> 2,,+. *,>,,, options (ere granted at an option price o# 3% per s$are. 7ar 2,1, & per s$are ecember 31> 2,11 %1 per s$are T$e options (ere granted as compensation #or e"ecutives9 services to be rendered over a t(o0ear period beginning anuar0 1> 2,1,. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be *,,>,,,. ;$at amount o# compensation e"pense s$ould Smile0 recognize as a result o# t$is plan #or t$e 0ear ended ecember 31> 2,1, under t$e #air value met$odL a. 1>,,>,,,. b. **,>,,,. c. *,,>,,,. d. ,,>,,,.
)%.
An anuar0 1> 2,11> Ritter Compan0 granted s$are options to o##icers and ,,, ordinar0 s$ares o# t$e compan0Ms 1 par at 2, per s$are as additional compensation #or services to be rendered over t$e ne"t t$ree 0ears. T$e options are e"ercisable during a #ive0ear period beginning anuar0 1> 2,1 b0 grantees still emplo0ed b0 Ritter. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be +,>,,,. T$e mar,,,. c. 2,>,,,. d. 3,>,,,.
)&.
An anuar0 1> 2,11> !vans Compan0 granted Tim Tel#er> an emplo 0ee> an optio n to bu0 1>,,, ordinar0 s$ares o# !vans Co. #or 2% per s$are> t$e option e"ercisab le #or % 0ears #rom date o# grant. ?sing a #air value option pricing model> total compensation e"pense is determined to be )>%,,. Tel#er e"ercised $is option on September 1> 2,11> and sold $is 1>,,, s$ares on ecember 1> 2,11. Duoted mar 2,11. 's a result o# t$e option granted to Tel#er> using t$e #air value met$od> !vans s$ould recognize compensation e"pense #or 2,11 on its boo
16 - = Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
a. b. c. d. )).
+>,,,. )>%,,. 2>%,,. 1>%,,.
An ec ember 31> 2,1,> Qessler Compan0 granted some o# its e"ecutives opt ions to purc$ase %,>,,, s$ares o# t$e compan0Ms 1, par ordinar0 s$ares at an option price o# %, per s$are. T$e options become e"ercisable on anuar0 1> 2,11> and represent compensation #or e"ecutivesM services over a t$ree0ear period beginning anuar0 1> 2,11. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be 3,,>,,,. 't ecember 31> 2,11> none o# t$e e"ecutives $ad e"ercised t$eir options. ;$at is t$e impact on QesslerMs net income #or t$e 0ear ended ecember 31> 2,11 as a result o# t$is transaction under t$e #air value met$odL a. 1,,>,,, increase b. , c. 1,,>,,, decrease d. 3,,>,,, decrease
)*.
;eiser Corp. on anuar0 1> 2,,+> granted s$are options #or ,>,,, s$ares o# its 1 , par value ordinar0 s$ares to its ,,,. T$e options are e"ercisable beginning anuar0 1> 2,12> provided t$ose 2,13. An anuar0 1> 2,12> ($en t$e mar all ,>,,, options (ere e"ercised. T$e amount o# compensation e"pense ;eiser s$ould record #or 2,11 under t$e #air value met$od is a. ,. b. ,>,,,. c. *,>,,,. d. 12,>,,,.
)+.
An ecember 31> 2,1,> ouser Compan0 granted some o# its e"ecutives opt ions to purc$ase %>,,, s$ares o# t$e compan0Ms %, par ordinar0 s$ares at an option price o# &, per s$are. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be +,,>,,,. T$e options become e"ercisable on anuar0 1> 2,11> and represent compensation #or e"ecutivesM past and #uture services over a t$ree0ear period beginning anuar0 1> 2,11. ;$at is t$e impact on ouserMs total equit0 #or t$e 0ear ended ecember 31> 2,1,> as a result o# t$is transaction under t$e #air value met$odL a. +,,>,,, decrease b. 3,,>,,, decrease c. , d. 3,,>,,, increase
*,.
An une 3,> 2,,*> orman Corporation granted compensator0 s$are options #or 3,>,,, s$ares o# its 2, par value ordinar0 s$ares to certain o# its ,,,. T$e options are e"ercisable beginning anuar0 1> 2,11> provided t$ose 2,12.
ilutive Securities and !arnings per S$are
16 - 1
An anuar0 > 2,11> ($en t$e mar all 3,>,,, options (ere e"ercised. ;$at s$ould be t$e amount o# compensation e"pense recorded b0 orman Corporation #or t$e calendar 0ear 2,1, using t$e #air value met$odL a. ,. b. 1>,,,. c. 1*,>,,,. d. 3&,>,,,. *1.
In order to retain certain ensen Corporation granted t$em incentive s$are options on ecember 31> 2,,+. %,>,,, options (ere granted at an option price o# 3% per s$are. 7ar2,1, ecember31>2,11
&pers$are %1pers$are
T$e options (ere granted as compensation #or e"ecutivesM services to be rendered over a t(o0ear period beginning anuar0 1> 2,1,. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be %,,>,,,. ;$at amount o# compensation e"pense s$ould ensen recognize as a result o# t$is plan #or t$e 0ear ended ecember 31> 2,1, under t$e #air value met$odL a. 2%,>,,,. b. %,,>,,,. c. %%,>,,,. d. 1>)%,>,,,. *2.
:rant> Inc. $ad ,>,,, treasur0 s$ares 1, par value at ecember 31> 2,1,> ($ic$ it acquired at 11 per s$are. An une > 2,11> :rant issued 2,>,,, treasur0 s$ares to emplo0ees ($o e"ercised options under :rantMs emplo0ee s$are option plan. T$e #air value per s$are (as 13 at ecember 31> 2,1,> 1% at une > 2,11> and 1* at ecember 31> 2,11. T$e s$are options $ad been granted #or 12 per s$are. T$e cost met$od is used. ;$at is t$e balance o# t$e treasur0 s$ares on :rantMs statement o# #inancial position at ecember 31> 2,11L a. 1,>,,,. b. 1*,>,,,. c. 22,>,,,. d. 2,>,,,.
*3.
An an uar0 1> 2,1 1 t$e dat e o# grant> enri< Co. issues 2>,,, s$a res o# restricted s$ares to its e"ecutives. T$e #air value o# t$ese s$ares is )%>,,,> and t$eir par value is 1,>,,,. T$e s$ares are #or#eited i# t$e e"ecutives do not complete 3 0ears o# emplo0ment (it$ t$e compan0. 'ssuming t$e service period is t$ree 0ears> $o( muc$ compensation e"pense (ill enri< Co. record on anuar0 1> 2,11L a. 2%>,,,. b. , c. 3>333. d. 21>&&).
*.
'nazazi Co. o## ers all its 1,>, ,, emplo0ees t$e opp ortunit0 to part icipate in an emplo0ee s$arepurc$ase plan. ?nder t$e terms o# t$e plan> t$e emplo0ees are entitled to purc$ase 1,, ordinar0 s$ares par value 1 per s$are at a 2, percent discount. T$e purc$ase price must be paid immediatel0 upon acceptance o# t$e o##er. In total> *>%,, emplo0ees accept t$e o##er> and eac$ emplo0ee purc$ases on average *, s$ares at 22 s$are mar 'nazazi Co. (ill record
16 - Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
a. b. c. d.
o compensation since t$e plan is used to raise capital> not compensate emplo0ees. Compensation e"pense o# %>%,,>,,,. Compensation e"pense o# 1*>),,>,,,. Compensation e"pense o# 3>),>,,,.
?se t$e #ollo(ing in#ormation #or questions *% t$roug$ *). An anuar0 1> 2,1,> Qorsa<> Inc. establis$ed a s$are appreciation rig$ts plan #or its e"ecutives. It entitled t$em to receive cas$ at an0 time during t$e ne"t #our 0ears #or t$e di##erence bet(een t$e mar,,, S'Rs. Curre nt mar2,1, ecember31>2,1, ecember31>2,11 ecember31>2,12
3%pers$are 3*pers$are 3,pers$are 33pers$are
Compensation e"pense relating to t$e plan is to be recorded over a #our0ear period beginning anuar0 1> 2,1,. 8*%.
;$at amo unt o# com pensation e"pense s$ould Qors a< rec ognize #or t$e 0ear ende d ecember 31> 2,1,L a. 1*,>,,, b. 2),>,,, c. 22%>,,, d. 1>,*,>,,,
8*&.
;$at amo unt o# com pensation e"pense s$ould Qors a< rec ognize #or t$e 0ear ende d ecember 31> 2,11L a. b. c. d.
8*).
, 3,>,,, 3,,>,,, 1%,>,,,
An ec ember 31> 2,12> 1&>,,, S'R s are e"ercised b0 e"ec utives. ;$at amount o# compensation e"pense s$ould Qorsa< recognize #or t$e 0ear ended ecember 31> 2,12L a. 2*%>,,, b. 1+%>,,, c. %*%>,,, d. )*>,,,
%ulti!le C.oice As#ers—Dilutive Securities' Co+!ut"tio"l Ite+
*. +. %,. %1. %2. %3.
As$
a b a b c b
Ite+
%. %%. %&. %). %*. %+.
As$
c a b d c d
Ite+
&,. &1. &2. &3. &. &%.
As$
b c c c c b
Ite+
&&. &). &*. &+. ),. )1.
As$
b c b b c c
Ite+
)2. )3. ). )%. )&. )).
As$
Ite+
As$
Ite+
As$
b b d d c c
)*. )+. *,. *1. *2. 8*3.
c c b a c b
8*. 8*%. 8*&. 8*).
d b b a
ilutive Securities and !arnings per S$are
16 - 2
%ULTIPLE CH&ICE—Dilutive Securities' CPA A,"!te, **.
An an uar0 2> 2,1 1> Far r Co. issued 1,0 ear convertible bonds at 1,% . uring 2,13 > t$ese bonds (ere converted into ordinar0 s$ares $aving an aggregate par value equal to t$e total #ace amount o# t$e bonds. 't conversion> t$e mar 2,11> cas$ proceeds #rom t$e issuance o# t$e convertible bonds s$ould be reported as a. s$are capital #or t$e entire proceeds. b. s$are premium #or t$e port ion o# t$e proc eeds attributable to t$e conversion #eat ure and as a liabilit0 #or t$e balance. c. a liabilit0 #or t$e entire proceeds. d. a liabilit0 #or t$e prese nt value o# t$e bonds and s$ar e premium #or t$e amou nt over t$e bonds present value.
*+.
Bang Co. issued bonds (it$ detac$able ordinar0 s$are (arrants. Anl0 t$e bonds $ad a
+,.
An anuar0 1> 2,1, > S$ar p Corp. granted an emplo0ee an opti on to purc $ase &>,,, s$ares o# S$arpMs % par value ordinar0 s$ares at 2, per s$are. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be 1,>,,,. T$e option became e"ercisable on ecember 31> 2,11> a#ter t$e emplo0ee complet ed t(o 0ears o# service. T$e mar2,1, 3, ecember31>2,11 %, For 2,11> s$ould recognize compensation e"pense under t$e #air value met$od o# a. +,>,,,. b. 3,>,,,. c. ),>,,,. d. ,.
8*1.
An anu ar0 2> 2,1 2> #or pas t services> Rosen Corp. granted en n -ine> its president> 1&>,,, s$are appreciation rig$ts t$at are e"ercisable immediatel0 and e"pire on anuar0 2> 2,13. An e"ercise> enn is entitled to receive cas$ #or t$e e"cess o# t$e mar 2,12> and % on ecember 31> 2,12. 's a result o# t$e s$are appreciation rig$ts> Rosen s$ould recognize compensation e"pense #or 2,12 o# a. ,. b. *,>,,,. c. 2,>,,,. d. *,>,,,.
%ulti!le C.oice As#ers—Dilutive Securities' CPA A,"!te, Ite+
**.
As$
d
Ite+
*+.
As$
a
Ite+
+,.
As$
Ite+
As$
c
8+1.
c
16 - 4 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
%ULTIPLE CH&ICE—E"ris Per S."re—Coce!tu"l +2.
;it$ respect to t$e computation o# earnings per s$are> ($ic$ o# t$e #ollo(ing (ould be most indicative o# a simple capital structureL a. Ardinar0 s$ares> pre#erence s$ares> and convertible securities outstanding in lots o# even t$ousands b. !arnings derived #rom one primar0 line o# business c. A(ners$ip interest consisting solel0 o# ordinar0 s$ares d. one o# t$ese
+3.
In computing earnings per s$are #or a simple capital structure> i# t$e pre#erence s$ares are cumulative> t$e amount t$at s$ould be deducted as an ad6ustment to t$e numerator earnings is t$e a. pre#erence dividends in arrears. b. pre#erence dividends in arrears times one minus t$e income ta" rate. c. annual pre#erence dividend times one minus t$e income ta" rate. d. none o# t$ese.
+.
In computations o# (eig$ted average o# s$ar es outstanding> ($en a s$ar e dividend or stoc< split occurs> t$e additional s$ares are a. (eig$ted b0 t$e number o# da0s outstanding. b. (eig$ted b0 t$e nu mber o# mont$s outstanding. c. considered outstanding at t$e beginning o# t$e 0ear. d. considered outstanding at t$e beginning o# t$e earliest 0ear reported.
+%.
;$at e##ect (ill t$e acquisition o# treasur0 s$ares $ave on s$are$oldersM equit0 and earnings per s$are> respectivel0L a. ecrease and no e##ect b. Increase and no e##ect c. ecrease and increase d. Increase and decrease
S
+&.
ue to t$e importance o# earnings per s$are in#ormation> it is required to be reported b0 all -ublic C ompanies onpublic C ompanies a. @es @es b. @es o c. o o d. o @es
-
+).
' convertible bond issue s$ould be included in t$e diluted earnings per s$are computation as i# t$e bonds $ad been converted into ordinar0 s$ares> i# t$e e##ect o# its inclusion is a. b. c. d.
+*.
ilutive @es @es o o
'ntidilutive @es o @es o
;$en computing diluted earnings per s$are> convertible bonds are a. ignored. b. assumed converted ($et$er t$e0 are dilutive or antidilutive. c. assumed converted onl0 i# t$e0 are antidilutive. d. assumed converted onl0 i# t$e0 are dilutive.
ilutive Securities and !arnings per S$are ++.
1,,.
16 -
ilutive convertible securities must be used in t$e computation o# a. basic earnings per s$are onl0. b. diluted earnings per s$are onl0. c. diluted and basic earnings per s$are. d. none o# t$ese. In computing earnings per s$are> t$e equivalent number o# s$ares o# convertible pre#erence s$ares are added as an ad6ustment to t$e denominator number o# s$ares outstanding. I# t$e pre#erence s$ares are cumulative> ($ic$ amount s$ould t$en be added as an ad6ustment to t$e numerator net earningsL a. 'nnual pre#erence dividend b. 'nnual pre#erence dividend times one minus t$e income ta" rate c. 'nnual pre#erence dividend times t$e income ta" rate d. 'nnual pre#erence dividend divided b0 t$e income ta" rate
1,1.
In t$e dilu ted earnings per s$are computation> t$e treasur0 s$ar e met$od is used #or options and (arrants to re#lect assumed reacquisition o# ordinar0 s$ares at t$e average mar t$e computation (ould a. #airl0 present diluted earnings per s$are on a prospective basis. b. #airl0 present t$e ma"imum potential dilution o# diluted earnings per s$are on a prospective basis. c. re#lect t$e e"cess o# t$e number o# s$ares assumed issued over t$e number o# s$ares assumed reacquired as t$e potential dilution o# earnings per s$are. d. be antidilutive.
1,2.
In appl0ing t$e treasur0 s$are met$od to determine t$e dilutive e##ect o# s$are options and (arrants> t$e proceeds assumed to be received upon e"ercise o# t$e options and (arrants a. are used to calc ulate t$e number o# ordinar0 s$ar es repurc$ased at t$e average mar ($en computing diluted earnings per s$are. b. are added> net o# ta"> to t$e numerator o# t$e calculation #or diluted earnings per s$are. c. are disregarded in t$e computation o# earni ngs per s$ar e i# t$e e"ercise price o# t$e options and (arrants is less t$an t$e ending mar
1,3.
;$en appl0ing t$e treasur0 s$are met$od #or diluted earnings per s$are> t$e mar
1,.
'ntidilutive securities a. s$ould be inclu ded in t$e compu tation o# dilut ed earnings per s$ar e but not basic earnings per s$are. b. are t$ose ($ose inc lusion in earnings per s$are com putations (ould cause bas ic earnings per s$are to e"ceed diluted earnings per s$are. c. include s$are options and (arra nts ($ose e"ercise price is less t$an t$e avera ge mar
16 - 6 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
81,%. 'ssume t$ere are t(o dilutive convertible securities. T$e one t$at s$ould be used #irst to recalculate earnings per s$are is t$e securit0 (it$ t$e a. greater earnings ad6ustment. b. greater earnings per s$are ad6ustment. c. smaller earnings ad6ustment. d. smaller earnings per s$are ad6ustment.
%ulti!le C.oice As#ers—E"ris Per S."re—Coce!tu"l Ite+
+2.
As$
c
Ite+
+.
As$
d
Ite+
+&.
As$
b
Ite+
+*.
As$
Ite+
As$
Ite+
As$
Ite+
As$
d
1,,.
a
1,2.
a
1,.
d
b
81,
d
+3. d +%. c +). b ++. b 1,1. d 1,3. Solution to 7ultiple C$oice question #or ($ic$ t$e ans(er is Gnone o# t$ese.H +3.
annual pre#erred dividend.
ilutive Securities and !arnings per S$are
16 - 9
%ULTIPLE CH&ICE—E"ris Per S."re—Co+!ut"tio"l 1,&.
ill Corp. $a d &,,>,,, ordinar0 s$ares outstanding on anua r0 1> issu ed +,,>,,, s$ares on ul0 1> and $ad income applicable to common stoc< o# 1>,%,>,,, #or t$e 0ear ending ecember 31> 2,12. !arnings per s$are o# ordinar0 s$ares #or 2,12 (ould be a. 1.)%. b. .*3. c. 1.,,. d. 1.1).
+).
't ec ember,,>,,, 31> 2,12> ancoc< Compan0 $ad ordinar0 s$a res t$e issued outstanding> o# ($ic$ $ad been issued and%,,>,,, outstanding t$roug$out 0earand and 1,,>,,, o# ($ic$ (ere issued on Actober 1> 2,12. et income #or t$e 0ear ended ecember 31> 2,12> (as 1>,2,>,,,. ;$at s$ould be ancoc rounded to t$e nearest penn0L a. 2.,2 b. 2.%% c. 2., d. 2.2)
1,*.
7ilo Co. $ad &,, >,,, ordinar0 s$ares outstanding on an uar0 1> issued 12&>,,, s$ares on 7a0 1> purc$ased &3>,,, s$ares o# treasur0 s$ares on September 1> and issued %>,,, s$ares on ovember 1. T$e (eig$ted average s$ares outstanding #or t$e 0ear is a. &%1>,,,. b. &)2>,,,. c. &+3>,,,. d. )1>,,,.
1,+.
An anuar0 1> 2,11> :ridle0 Corporation $ad 12% >,,, s$ares o# its 2 par val ue ordinar0 s$ares outstanding. An 7arc$ 1> :ridle0 sold an additional 2%,>,,, s$ares on t$e open mar :ridle0 purc$ased 1,>,,, s$ares and immediatel0 retired t$e s$ares. An ovember 1> 2,,>,,, s$ares (ere sold #or 2% per s$are. ;$at is t$e (eig$tedaverage number o# s$ares outstanding #or 2,11L a. %1,>,,, b. 3)%>,,, c. 3%*>333 d. 2%*>333
11,.
T$e #ollo(ing in#ormation is available #or 5arone CorporationE anuar01>2,11 'pril 1> 2,11 ul01>2,11 Actober 1> 2,11
S$aresoutstanding S$ares issued Treasur0s$arespurc$ased S$ares issued in a 1,,J stoc< dividend
1>2%,>,,, 2,,>,,, )%>,,, 1>3)%>,,,
T$e2>*2%>%,,. number o# s$ares to be used in computing earnings per ordinar0 s$are #or 2,11 is a. b. 2>)3)>%,,. c. 2>)2%>,,,. d. 1>),&>2%,.
16 - : Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
111.
't ecember 31> 2,1, Rice Compan0 $ad 3,,>,,, ordinar0 s$ares and 1,>,,, s$ares o# %J> 1,, par value cumulative pre#erence s$ares outstanding. o dividends (ere declared on eit$er t$e pre#erence or ordinar0 s$ares in 2,1, or 2,11. An anuar0 3,> 2,12> prior to t$e issuance o# its #inancial statements #or t$e 0ear ended ecember 31> 2,11> Rice declared a 1,,J s$are dividend on its ordinar0 s$ares. et income #or 2,11 (as +%,>,,,. In its 2,11 #inancial statements> RiceMs 2,11 earnings per s$are s$ould be a. 1.%,. b. 1.%*. c. 3.,,. d. 3.1).
112.
Fultz Compan0 $ad 3,,> ,,, ordinar0 s$ares issued and outs tanding at ecember 31> 2,1,. uring 2,11> no additional ordinar0 s$ares (ere issued. An anuar0 1> 2,11> Fultz issued ,,>,,, s$ares o# nonconvertible pre#erence s$ares. uring 2,11> Fultz declared and paid 1*,>,,, cas$ dividends on t$e ordinar0 s$ares and 1%,>,,, on t$e nonconvertible pre#erence s$ares. et income #or t$e 0ear ended ecember 31> 2,11> (as +&,>,,,. ;$at s$ould be FultzMs 2,11 earnings per s$are> rounded to t$e nearest penn0L a. 1.1& b. 2.1, c. 2.), d. 3.2,
113.
't ecember 31> 2,1, -ine Compan0 $ad 2,,>,,, ordinar0 s$ares and 1,>,,, s$ares o# J> 1,, par value cumulative pre#erence s$ares outstanding. o dividends (ere declared on eit$er t$e pre#erence or ordinar0 s$ares in 2,1, or 2,11. An Februar0 1,> 2,12> prior to t$e issuance o# its #inancial statements #or t$e 0ear ended ecember 31> 2,11> -ine declared a 1,,J stoc< split on its ordinar0 s$ares. et income #or 2,11 (as )2,>,,,. In its 2,11 #inancial statements> -ine9s 2,11 earnings per s$are s$ould be a. 3.,. b. 3.2,. c. 1.),. d. 1.,,.
11.
Stine Inc. $ad 3,,>,,, ordinar0 s$ares issued and outstanding at ecember 31> 2,1,. An ul0 1> 2,11 an additional 3,,>,,, s$ares (ere issued #or cas$. Stine also $ad s$are options outstanding at t$e beginning and end o# 2,11 ($ic$ allo( t$e $olders to purc$ase +,>,,, ordinar0 s$ares at 2* per s$are. T$e average mar,,, b. &1*>,,, c. %22>,,, d. &*>,,,
ilutive Securities and !arnings per S$are
16 - <
11%.
Qasravi Co. $ad net income #or 2,11 o# 3,,>,,,. T$e average number o# s$ares outstanding #or t$e period (as 2,,>,,, s$ares. T$e average number o# s$ares under outstanding options> at an option price o# 3, per s$are is 12>,,, s$ares. T$e average mar
11&.
An anuar0 2> 2,11> ;ort$ Co. issued at par 2>,,,>,,, o# )J convertible bonds. !ac$ 1>,,, bond is convertible into 1, ordinar0 s$ares. o bonds (ere converted during 2,11. ;ort$ $ad 2,,>,,, ordinar0 s$ares outstanding during 2,11. ;ort$9s 2,11 net income (as &,,>,,, and t$e income ta" rate (as 3,J. ;ort$9s diluted earnings per s$are #or 2,11 (ould be rounded to t$e nearest penn0E a. 3.+. b. 3.1). c. 3.,,. d. 3.3&.
11).
5eat0 Inc. purc$ased unbar Co. and agreed to give s$are$olders o# unbar Co. 1,>,,, additional s$ares in 2,12 i# unbar Co.9s net income in 2,11 is %,,>,,, in 2,1, unbar Co.9s net income is %2,>,,,. 5eat0 Inc. $as net income #or 2,1, o# 2,,>,,, and $as an average number o# ordinar0 s$ares outstanding #or 2,1, o# 1,,>,,, s$ares. ;$at s$ould 5eat0 report as diluted earnings per s$are #or 2,1,L a. 2.22 b. 2.,, c. 1.*2 d. 1.&)
?se t$e #ollo(ing in#ormation #or questions 11* and 11+. anson Co. $ad 2,,>,,, ordinar0 s$ares> 2,>,,, s$ares o# convertible pre#erence s$ares> and 1>,,,>,,, o# 1,J convertible bonds outstanding during 2,11. T$e pre#erence s$ares are convertible into ,>,,, ordinar0 s$ares. uring 2,11> anson paid dividends o# 1.2, per s$are on t$e ordinar0 s$ares and per s$are on t$e pre#erence s$ares. !ac$ 1>,,, bond is convertible into % ordinar0 s$ares. T$e net income #or 2,11 (as *,,>,,, and t$e income ta" rate (as 3,J. 11*.
5asic earnings per s$are #or 2,11 is rounded to t$e nearest penn0 a. 2.+. b. 3.22. c. 3.3%. d. 3.&,.
11+.
iluted earnings per s$are #or 2,11 is rounded to t$e nearest penn0 a. b. c. d.
2.)). 2.*1. 3.,%. 3.33.
16 - 2= Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
12,.
Fugate Compan0 $ad %,, >,,, ordinar0 s$ares issued and out standing at ec ember 31> 2,1,. An ul0 1> 2,11 an additional %,,>,,, s$ares (ere issued #or cas$. Fugate also $ad s$are options outstanding at t$e beginning and end o# 2,11 ($ic$ allo( t$e $olders to purc$ase 1%,>,,, ordinar0 s$ares at 2, per s$are. T$e average mar 2,11L a. 1>,3,>,,, b. *),>,,, c. )*)>%,, d. )*,>,,,
121.
S$iple0 Corporation $ad net inc ome #or t$e 0ear o# *,>,,, and a (eig$ted ave rage number o# ordinar0 s$ares outstanding during t$e period o# 2,,>,,, s$ares. T$e compan0 $as a convertible bond issue outstanding. T$e bonds (ere issued #our 0ears ago at par 2>,,,>,,,> carr0 a )J interest rate> and are convertible into ,>,,, s$ares. T$e compan0 $as a ,J ta" rate. iluted earnings per s$are are a. 1.&% b. 2.23. c. 2.3%. d. 2.%*.
122.
Colt Corporation purc$ased 7asse0 Inc. and agr eed to giv e s$are$olders o# 7asse 0 Inc. %,>,,, additional s$ares in 2,12 i# 7asse0 Inc.9s net income in 2,11 is ,,>,,, or more in 2,1, 7asse0 Inc.9s net income is 1,>,,,. Colt $as net income #or 2,1, o# *,,>,,, and $as an average number o# ordinar0 s$ares outstanding #or 2,1, o# %,,>,,, s$ares. ;$at s$ould Colt report as earnings per s$are #or 2,1,L
a. b. c. d. 123.
5asic !arnings -erS$are
iluted !arnings -erS$are
1.&, 1.% 1.&, 1.%
1.&, 1.&, 1.% 1.%
An anuar0 2> 2,12> -erez Co. issued at par 1,>,,, o# &J bonds convertible in total into 1>,,, ordinar0 s$ares o# -erezMs. o bonds (ere converted during 2,12. T$roug$out 2,12> -erez $ad 1>,,, ordinar0 s$ares o# outstanding. -erezMs 2,12 net income (as 3>,,,> and its income ta" rate is 3,J. o potentiall0 dilutive securities ot$er t$an t$e convertible bonds (ere outstanding during 2,12. -erezMs diluted earnings per s$are #or 2,12 (ould be rounded to t$e nearest penn0 a. 1.%,. b. 1.)1. c. 1.*,. d. 3.2.
ilutive Securities and !arnings per S$are
16 - 21
12.
't ec ember 31> 2,1,> Qi#er Compan0 $ad %,,>,,, ordinar0 s$a res outstanding. An Actober 1> 2,11> an additional 1,,>,,, ordinar0 s$ares (ere issued. In addition> Qi#er $ad 1,>,,,>,,, o# &J convertible bonds outstanding at ecember 31> 2,1,> ($ic$ are convertible into 22%>,,, ordinar0 s$ares. o bonds (ere converted in 2,11. T$e net income #or t$e 0ear ended ecember 31> 2,11> (as 3>,,,>,,,. 'ssuming t$e income ta" rate (as 3,J> t$e diluted earnings per s$are #or t$e 0ear ended ecember 31> 2,11> s$ould be rounded to t$e nearest penn0 a. &.%2. b. .*,. c. .%&. d. .,,.
12%.
An an uar0 2> 2,1 1> 7iz e Co. iss ued at par 3, ,>,,, o# +J conv ertible bon ds. !ac$ 1>,,, bond is convertible into 3, ordinar0 s$ares. o bonds (ere converted during 2,11. 7ize $ad %,>,,, ordinar0 s$ares outstanding during 2,11. 7ize Ms 2,11 net income (as 1&,>,,, and t$e income ta" rate (as 3,J. 7izeMs diluted earnings per s$are #or 2,11 (ould be rounded to t$e nearest penn0 a. 2.)1. b. 3.,3. c. 3.2,. d. 3.%*.
12&.
't ecember 31> 2,1,> Sager Co. $ad 1>2,,>,,, ordinar0 s$ares outstanding. In addition> Sager $ad %,>,,, s$ares o# pre#erence s$ares ($ic$ (ere convertible into )%,>,,, ordinar0 s$ares. uring 2,11> Sager paid &,,>,,, ordinar0 cas$ dividends and ,,>,,, pre#erence cas$ dividends. et income #or 2,11 (as 3>,,>,,, and t$e income ta" rate (as ,J. T$e diluted earnings per s$are #or 2,11 is rounded to t$e nearest penn0 a. 1.2. b. 1.). c. 2.%1. d. 2.*.
?se t$e #ollo(ing in#ormation #or questions 12) and 12*. Berner Co. $ad 2,,>,,, ordinar0 s$ares> 2,>,,, s$ares o# convertible pre#erence s$ares> and 1>,,,>,,, o# 1,J convertible bonds outstanding during 2,11. T$e pre#erence s$ares are convertible into ,>,,, ordinar0 s$ares. uring 2,11> Berner paid dividends o# .+, per ordinar0 s$are and 3.,, per pre#erence s$are. !ac$ 1>,,, bond is convertible into % ordinar0 s$ares. T$e net income #or 2,11 (as &,,>,,, and t$e income ta" rate (as 3,J. 12).
5asic earnings per s$are #or 2,11 is rounded to t$e nearest penn0 a. 2.21. b. 2.2. c. 2.%1. d. 2.),.
12*.
iluted earnings per s$are #or 2,11 is rounded to t$e nearest penn0 a. b. c. d.
2.1. 2.2%. 2.3%. 2.&.
16 - 2 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
12+.
@oder> Incorporated> $as 3>2,,>,,, ordinar0 s$ares out standing on ecember 31> 2,1,. 'n additional *,,>,,, ordinar0 s$ares (ere issued on 'pril 1> 2,11> and ,,>,,, more on ul0 1> 2,11. An Actober 1> 2,11> @oder issued 2,>,,,> 1>,,, #ace value> *J convertible bonds. !ac$ bond is convertible into 2, ordinar0 s$ares. o bonds (ere converted in 2,11. ;$at is t$e number o# s$ares to be used in computing basic earnings per s$are and diluted earnings per s$are> respectivel0L a. >,,,>,,, and >,,,>,,, b. >,,,>,,, and >1,,>,,, c. >,,,>,,, and >,,>,,, d. >,,>,,, and %>2,,>,,,
13,.
olte Co. $as >,,,>,,, ordinar0 s$ares outstanding on ecember 31> 2,1,. 'n additional 2,,>,,, s$ares are issued on 'pril 1> 2,11> and *,>,,, more on September 1. An Actober 1> olte issued &>,,,>,,, o# +J convertible bonds. !ac$ 1>,,, bond is convertible into , ordinar0 s$ares. o bonds $ave been converted. T$e number o# s$ares to be used in computing basic earnings per s$are and diluted earnings per s$are on ecember 31> 2,11 is a. >31,>,,, and >31,>,,,. b. >31,>,,, and >3),>,,,. c. >31,>,,, and >%%,>,,,. d. %>,*,>,,, and %>32,>,,,.
131.
't ecember 31> 2,1,> Tatum Compan0 $ad 2>,, ,>,,, ordinar0 s$ares outstanding. An anuar0 1> 2,11> Tatum issued %,,>,,, s$ares o# pre#erence s$ares ($ic$ (ere convertible into 1>,,,>,,, ordinar0 s$ares. uring 2,11> Tatum declared and paid 1>%,,>,,, ordinar0 cas$ dividends and %,,>,,, pre#erence cas$ dividends. et income #or t$e 0ear ended ecember 31> 2,11> (as %>,,,>,,,. 'ssuming an income ta" rate o# 3,J> ($at s$ould be diluted earnings per s$are #or t$e 0ear ended ecember 31> 2,11L Round to t$e nearest penn0. a. 1.%, b. 1.&) c. 2.%, d. 2.,*
132.
't ecember 31> 2,1 ,> !mle0 Compan0 $ad 1>2, ,>,,, ordinar0 s$ares outstanding. An September 1> 2,11> an additional ,,>,,, ordinar0 s$ares (ere issued. In addition> !mle0 $ad 12>,,,>,,, o# &J convertible bonds outstanding at ecember 31> 2,1,> ($ic$ are convertible into *,,>,,, ordinar0 s$ares. o bonds (ere converted in 2,11. T$e net income #or t$e 0ear ended ecember 31> 2,11> (as >%,,>,,,. 'ssuming t$e income ta" rate (as 3,J> ($at s$ould be t$e diluted earnings per s$are #or t$e 0ear ended ecember 31> 2,11> rounded to t$e nearest penn0L a. 2.11 b. 3.3* c. 2.3% d. 2.%
ilutive Securities and !arnings per S$are 133.
16 - 22
:rimm Compan0 $as 1>*,,>,,, ordinar0 s$ares outstanding on ec ember 31> 2,1 ,. 'n additional 1%,>,,, ordinar0 s$ares (ere issued on ul0 1> 2,11> and 3,,>,,, more on Actober 1> 2,11. An 'pril 1> 2,11> :rimm issued &>,,,> 1>,,, #ace value> *J convertible bonds. !ac$ bond is convertible into , ordinar0 s$ares. o bonds (ere converted in 2,11. ;$at is t$e number o# s$ares to be used in computing basic earnings per s$are and diluted earnings per s$are> respectivel0> #or t$e 0ear ended ecember 31> 2,11L a. 1>+%,>,,, and 2>13,>,,, b. 1>+%,>,,, and 1>+%,>,,, c. 1>+%,>,,, and 2>1+,>,,, d. 2>2%,>,,, and 2>3,>,,,
?se t$e #ollo(ing in#ormation #or questions 13 and 13%. In#ormation concerning t$e capital structure o# -iper Corporation is as #ollo(sE ecember 31> 2,11 2,1, Ardinar0S$ares 1%,>,,,s$ares 1%,>,,,s$ares Convertible pre#erence s$ares 1%>,,, s$ares 1%>,,, s$ares +Jconvertiblebonds 2>,,>,,, 2>,,>,,, uring 2,11> -iper paid dividends o# 1.2, per ordinar0 s$are and 3.,, per pre#erence s$are. T$e pre#erence s$ares are convertible into 3,>,,, ordinar0 s$ares. T$e +J convertible bonds are convertible into )%>,,, ordinar0 s$ares. T$e net income #or t$e 0ear ended ecember 31> 2,11> (as &,,>,,,. 'ssume t$at t$e income ta" rate (as 3,J. 13.
;$at s$ould be t$e bas ic ear nings per s$ar e #or t$e 0ear end ed ecember 31> 2,11> rounded to t$e nearest penn0L a. 2.&& b. 2.+2 c. .,, 3.), d.
13%.
;$at s$ould be t$e di luted earnings per s$are #or t$e 0ear ended ecember 31> 2,11> rounded to t$e nearest penn0L a. 3.2, b. 2.+% c. 2.*3 d. 2.3%
13&.
;arrants e"ercisable at 2, eac$ to obtain 3,>,,, ordinar0 s$ares (ere outstanding during a period ($en t$e average mar,,,. b. 2>,,,. c. &>,,,. d. )>%,,.
16 - 24 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
13).
Terr0 Corporation $ad 3,, >,,, ordinar0 s$ares outstanding at ecem ber 31> 2,1 2. In addition> it $ad +,>,,, s$are options outstanding> ($ic$ $ad been granted to certain e"ecutives> and ($ic$ gave t$em t$e rig$t to purc$ase Terr0Ms s$ares at an option price o# 3) per s$are. T$e average mar 2,12L a. 3,,>,,, b. 331>&22 c. 3&&>&,, d. 323>,,
%ulti!le C.oice As#ers—E"ris Per S."re—Co+!ut"tio"l Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
1,&. 1,). 1,*. 1,+. 11,.
c c b b c
111. 112. 113. 11. 11%.
a c c d b
11&. 11). 11*. 11+. 12,.
b c d c d
121. 122. 123. 12. 12%.
c c b c b
12&. 12). 12*. 12+. 13,.
b d c b b
131. 132. 133. 13. 13%.
b c a c b
13&. 13).
c d
%ULTIPLE CH&ICE—E"ris Per S."re—CPA A,"!te, 13*.
idde Co. $ad 3,,>,,, ordinar0 s$ares issued and outstanding at ecember 31> 2,1,. o ordinar0 s$ares (ere issued during 2,11. An anuar0 1> 2,11> idde issued 2,,>,,, s$ares o# nonconvertible pre#erence s$ares. uring 2,11> idde declared and paid 1,,>,,, cas$ dividends on t$e ordinar0 s$ares and *,>,,, on t$e pre#erence s$ares. et income #or t$e 0ear ended ecember 31> 2,11 (as &2,>,,,. ;$at s$ould be iddeMs 2,11 earnings per s$areL a. 2.,) b. 1.*, c. 1.)3 d. 1.)
13+.
't ecember 31> 2,11 and 2,1, > 7ile0 Corp. $ad 1*,>,,, ordinar0 s$ares and 1,> ,,, s$ares o# %J> 1,, par value cumulative pre#erence s$ares outstanding. o dividends (ere declared on eit$er t$e pre#erence or ordinar0 s$ares in 2,11 or 2,1,. et income #or 2,11 (as ,,>,,,. For 2,11> earnings per s$are amounted to a. 2.22. b. 1.+. c. 1.&). d. 1.11.
ilutive Securities and !arnings per S$are
16 - 2
1,.
7ars$ Co. $ad 2>,,>,,, ordinar0 s$ares outstanding on anuar0 1 and e cember 31> 2,11. In connection (it$ t$e acquisition o# a subsidiar0 compan0 in une 2,1,> 7ars$ is required to issue 1,,>,,, additional ordinar0 s$ares on ul0 1> 2,12> to t$e #ormer o(ners o# t$e subsidiar0. 7ars$ paid 2,,>,,, in pre#erence s$are dividends in 2,11> and reported net income o# 3>,,>,,, #or t$e 0ear. 7ars$Ms diluted earnings per s$are #or 2,11 s$ould be a. 1.2. b. 1.3&. c. 1.33. d. 1.2*.
11.
Fo0le> Inc.> $ad %&,>,,, ordinar0 s$ares and outstanding at ecember 31> 2,1,. An ul0 1> 2,11> an additional ,>,,, s$ares (ere issued #or cas$. Fo0le also $ad une"ercised s$are options to purc$ase 32>,,, ordinar0 s$ares at 1% per s$are outstanding at t$e beginning and end o# 2,11. T$e average mar 2,11L a. %*,>,,, b. %**>,,, c. &,*>,,, d. &12>,,,
12.
;$en computing diluted earnings per s$are> convertible securities are a. ignored. b. recognized onl0 i# t$e0 are dilutive. c. recognized onl0 i# t$e0 are antidilutive. d. recognized ($et$er t$e0 are dilutive or antidilutive.
13.
In determining diluted earnings per s$are> dividends on nonconvertible cumulative pre#erence s$ares s$ould be a. disregarded. b. added bac< to net income ($et$er declared or not. c. deducted #rom net income onl0 i# declared. d. deducted #rom net income ($et$er declared or not.
1.
T$e i#converted met$od o# comp uting earnings per s$ar e data ass umes conversion o# convertible securities as o# t$e a. beginning o# t$e earliest period reported or at time o# issuance> i# later. b. beginning o# t$e earliest period reported regardless o# time o# issuance. c. middle o# t$e earliest period reported regardless o# time o# issuance. d. ending o# t$e earliest period reported regardless o# time o# issuance.
%ulti!le C.oice As#ers—E"ris Per S."re—CPA A,"!te, Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
Ite+
As$
13*.
b
13+.
b
1,.
d
11.
b
12.
b
13.
d
1.
a
16 - 26 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
DERIVATI&NS — Dilutive Securities' Co+!ut"tio"l N o $ A s# er *. a
Deriv"tio *,,>,,, 1)%>,,, U .32 O *,, U 3, U 3, 13&>,,,.
+.
b
&,>,,, O 1>2,, U % O 2>,, 3>&,,.
%,.
a
2>,,>,,, V 1>,,, U , U 2, 1>+2,>,,, ordinar0 s$ares 2>,,>,,, V 1&>,,,>,,, U 1>,,,>,,, 1%,>,,, unamortized discount 2>,,>,,, O 1>+2,>,,, O 1%,>,,, 33,>,,,.
%1.
b
1,,>,,, 2>,,, O 2>,,, U , 22>,,,.
%2.
c
N1>,,,>,,, U .),*3 N&,>,,, U3.23+)2 N+,2>*13
%3.
b
N1>,,,>,,, U .),*3 N&,>,,, U 3.23+)2 N+,2>*13 N1>,,,>,,, O N+,2>*13 N+)>*1).
%.
c
N1>,,,>,,, N+)>1*) O 1>,,, U 2%, U N1 N*)>1*).
%%.
a
o gain or loss recorded.
%&.
b
N,>,,, pa0ment is debited to Conversion !"pense.
%).
d
W2>,,,>,,, U .++ O W1>+,,>,,, W*,>,,,.
%*.
c
N*2,>,,, O 2>,,, U N,, N2,>,,, dr. to R/!.
%+.
d
&>1*,>,,, O &,>,,, U 3 U 2% 1>&*,>,,,.
&,.
b
2,,>,,, U .+% 1+,>,,,.
&1.
c
*,,>,,, U .+% )&,>,,, *,,>,,, U 1., *32>,,, *32>,,, O )&,>,,, )2>,,,.
&2.
c
3,,>,,, U .+& 2**>,,, 3,,>,,, U 1., 312>,,, 312>,,, O 2**>,,, 2>,,,.
&3.
c
2>,,, U 1>,,* 2>,1&>,,, 2>12,>,,, O 2>,1&>,,, 1,>,,,
&.
c
3,,>,,, U .+& 2**>,,, 3,,>,,, U 1.,3 3,+>,,, 3,+>,,, O 2**>,,, 21>,,,.
&%.
b
3,,>,,, U .+& 2**>,,,.
ilutive Securities and !arnings per S$are
16 - 29
DERIVATI&NS — Dilutive Securities' Co+!ut"tio"l /cot$0 N o $ A s# er
Deriv"tio
&&.
b
2,%>,,, O 1*,>,,, 2%>,,,.
&).
c
%,,>,,, ´ .+& *,>,,,
&*.
b
%,,>,,, ´ 1.,3 1%>,,, %,,>,,, ´ .+& *,>,,,. %1%>,,, O *,>,,, 3%>,,,.
&+.
b
1>*,, 3 &,,.
),.
c
+,, 2 %,.
)1.
c
)%,>,,, 3 2%,>,,, decrease.
)2.
b
1>2,, 2 &,,.
)3.
b
&>,,, 2 32>,,,.
).
d
*,,>,,, 2 ,,>,,,.
)%.
d
+,>,,,V 3 3,>,,,.
)&.
c
)>%,,V32>%,,.
)).
c
3,,>,,, V 3 1,,>,,,.
)*.
c
2,>,,, V 3 *,>,,,/0ear.
)+.
c
*,.
b
12 $360,000 × 1>,,,. 30
*1.
a
%,,>,,, V 2 2%,>,,,.
*2.
c
2,>,,, U 11 22,>,,,.
*3.
o compensation e"pense recorded 0et.
*.
d
2 +,,>,,,O $900,000 × 3,,>,,, increase #rom t$e credit to -aidin 3 CapitalKStoc< Aptions. A##set b0 3,,>,,, decrease #rom t$e debit to Compensation !"pense.
X*>%,, ´ *, ´ 2).%, O 22Y 3>),>,,,.
16 - 2: Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
DERIVATI&NS — Dilutive Securities' Co+!ut"tio"l /cot$0 N o $ A s# er
Deriv"tio
8*%.
b
3* O 2, U &,>,,, U .2% 2),>,,,.
8*&.
b
3, O 2, U &,>,,, U .% 3,,>,,, 3,,>,,, O 2),>,,, 3,>,,,.
8*).
a
33 O 2, U &,>,,, U .)% %*%>,,, %*%>,,, O 3,,>,,, 2*%>,,,.
DERIVATI&NS — Dilutive Securities' CPA A,"!te, N o $ A s# er **. d
Deriv"tio Conceptual.
*+.
a
Conceptual.
+,.
c
1,>,,, V 2 ),>,,,.
8+1.
c
% O 3, U 1&>,,, 2,>,,,.
DERIVATI&NS — E"ris Per S."re' Co+!ut"tio"l N o $ A s# er
Deriv"tio 1>,%,>,,, KKKKKKKKKKKK 1.,,. & &,,>,,, +,,>,,, U K 12
1,&.
c
1,).
c
1,*.
b
1,+.
b
X12%>,,, U 2 U 1.2, 3)%>,,, U 2 U 1.2, %,>,,, U 3 31,>,,, U 3 %1,>,,, U 2Y V 12 3)%>,,,.
11,.
c
X1>2%,>,,, U 3 U 2 1>%,>,,, U 3 U 2 1>3)%>,,, U 3 U 2 2>)%,>,,, U 3Y V 12 2>)2%>,,,.
111.
a
X+%,>,,, O 1,>,,, U 1,, U .,%Y V 3,,>,,, U 2 1.%,.
112.
c
+&,>,,, O 1%,>,,, KKKKKKKKKK 2.),.
1>,2,>,,, KKKKKKKKKKKK 2.,. 3 ,,>,,, 1,,>,,, U K 12 &,,>,,, 12&>,,, U */12 O &3>,,, U /12 %>,,, U 2/12 &)2>,,,.
ilutive Securities and !arnings per S$are
16 - 2<
3,,>,,,
DERIVATI&NS — E"ris Per S."re' Co+!ut"tio"l /cot$0 N o $ A s# er
Deriv"tio
113.
c
X)2,>,,, O 1,>,,,
11
d
3,,>,,, ´ &/12 &,,>,,, ´ &/12 X3% O 2*
11%.
b
X3&O3, 3&Y ´ 12>,,, 2>,,, 3,,>,,, 2,,>,,, 2>,,, 1.+.
11&.
b
2>,,,>,,, 1>,,, ´ 1, 2,>,,, 2>,,,>,,, ´ .,) ´ 1 O .3, +*>,,, &,,>,,, +*>,,, 2,,>,,, 2,>,,, 3.1).
11).
c
Since%2,>,,, > %,,>,,, include 1,>,,, s$ares in !-S 2,,>,,, 1,,>,,, 1,>,,, 1.*2.
11*.
d
X*,,>,,, O 2,>,,,
11+.
c
X*,,>,,, 1>,,,>,,, 3.,%.
12,.
d
%,,>,,, %,,>,,, U &/12 X2% O 2,/2% U 1%,>,,,Y )*,>,,,.
121.
c
X*,>,,, 2>,,,>,,, U .,) U .&,Y V 2,,>,,, ,>,,, 2.3%.
122.
c
5asisE ilutedE
123.
b
3>,,, 1,>,,, U .,& U .), KKKKKKKKKKKKKK 1.)1. 1>,,, 1>,,,
12.
c
12%.
b
1&,>,,, 3,,>,,, U .,+ U .) KKKKKKKKKKKKKKKKK 3.,3. %,>,,, X3,,>,,, V 1>,,, U 3,Y
12&.
b
3>,,>,,, KKKKKKKKKK 1.). 1>2,,>,,, )%,>,,,
12).
d
´
´
1,, ´ .,Y 2,,>,,, ´ 2 1.),.
3% ´ +,>,,,Y &*>,,,.
Y 2,,>,,, 3.&,. ´
.1, ´ .)Y X2,,>,,, ,>,,, 1>,,, ´ %Y
*,,>,,, V %,,>,,, 1.&,. *,,>,,, V %,,>,,, %,>,,, 1.%
3>,,,>,,, 1,>,,,>,,, U .,& U .) KKKKKKKKKKKKKKKKK .%&. 3 %,,>,,, 1,,>,,, U K 22%>,,, 12
&,,>,,, O 2,>,,, U 3 KKKKKKKKKKK 2.),.
16 - 4= Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
2,,>,,,
DERIVATI&NS — E"ris Per S."re' Co+!ut"tio"l /cot$0 N o $ A s# er
Deriv"tio
12*.
c
&,,>,,, 1>,,,>,,, U .1, U .) KKKKKKKKKKKKKKKK 2.3%. 2,,>,,, %>,,, ,>,,,
12+.
b
3>2,,>,,, *,,>,,, U +/12 ,,>,,, U &/12 >,,,>,,, 5!-S >,,,>,,, 2,>,,, U 2, U 3/12 >1,,>,,, !-S.
13,.
b
>,,,>,,, 2,,>,,, U +/12 *,>,,, U /12 >31,>,,,. >31,>,,, X&>,,,>,,, V 1>,,, U , U 3/12Y >3),>,,,.
131.
b
%>,,,>,,, KKKKKKKKKK 1.&). 2>,,,>,,, 1>,,,>,,,
132.
c
>%,,>,,, 12>,,,>,,, U .,& U .) KKKKKKKKKKKKKKKKKK 2.3%. 1>2,,>,,, ,,>,,, ´ /12 *,,>,,,
133.
a
13.
c
1>*,,>,,, 1%,>,,, U &/12 3,,>,,, U 3/12 1>+%,>,,, 1>+%,>,,, &>,,, U , U +/12 2>13,>,,,. &,,>,,, O 1%>,,, U 3.,, KKKKKKKKKKKKK 3.),. 1%,>,,, &,,>,,, 2>,,>,,, U .,+ U .) KKKKKKKKKKKKKKKK 2.+%. 1%,>,,, )%>,,, 3,>,,,
13%.
b
13&.
c
3,>,,, U 2, V 2% 2>,,, 3,>,,, O 2>,,, &>,,,.
13).
d
+,>,,, O +,>,,, U 3) V %, 23>,, 3,,>,,, 23>,, 323>,,.
DERIVATI&NS — E"ris Per S."re' CPA A,"!te, No$As#er
Deriv"tio
13*.
b
&2,>,,,O*,>,,, KKKKKKKKK 1.*,. 3,,>,,,
13+.
b
,,>,,, O 1,>,,, U 1,, U .,% KKKKKKKKKKKKKKK 1.+. 1*,>,,,
ilutive Securities and !arnings per S$are 1,.
d
3>,,>,,, O 2,,>,,, KKKKKKKKKKO 1.2*. 2>,,>,,, 1,,>,,,
11.
b
%&,>,,, ,>,,, U &/12 X32>,,, O 32>,,, U 1% V 2,Y %**>,,,.
12.
b
Conceptual.
13.
d
Conceptual.
1.
a
Conceptual.
16 - 41
16 - 4 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
E3ERCISES E>$ 16-14KIssu"ce ", Coversio Re!urc."se o* Coverti7le (o,s$5arone
Corporation issues 3>,,, convertible bonds at anuar0 1> 2,11. T$e bonds $ave a t$ree 0ear li#e> and are issued at par (it$ a #ace value o# N1>,,, per bond> giving total proceeds o# N3>,,>,,,. Interest is pa0able annuall0 at & percent. !ac$ bond is convertible into 2%, ordinar0 s$ares par value o# N1. ;$en t$e bonds are issued> t$e mar
a Compute t$e liabilit0 and equit0 component o# t$e convertible bond on anuar0 1> 2,11. b -repare t$e 6ournal entr0 to record t$e issuance o# t$e convertible bond on anuar0 1> 2,11. c -repare t$e 6ournal entr0 to record t$e conversion on anuar0 1> 2,12. d 'ssume t$at t$e bonds (ere repurc$ased on anuar0 1> 2,12> #or N2>+1,>,,, cas$ instead o# being converted. T$e net present value o# t$e liabilit0 component o# t$e convertible bonds on anuar0 1> 2,12> is N2>*%,>,,,. -repare t$e 6ournal entr0 to record t$e repurc$ase on anuar0 1> 2,12. Solutio 16-14
a -resent 4alue o# -rincipalE N3>,,,>,,, ´ .) +3*3 ................................................................. -resent 4alue o# Interest -a0mentsE N1*,>,,, ´2.%))1, .....................................................................
N2>3*1>+, &3>*)*
-resent 4alue o# t$e Biabilit0 Component........................................
N2>*%>3&*
Fair 4alue o# Convertible ebt........................................................ BessE Fair 4alue o# Biabilit0 Component.......................................... Fair 4alue o# !quit0 Component......................................................
N3>,,,>,,, 2>*%>3&* N 1%>3&2
b Cas$............................................................................................... 5onds -a0able................................................................................ S$are -remiumKConversion !quit0...............................................
3>,,,>,,, 2>*%>3&* 1%>&32
c S$are -remiumKConversion !quit0 .............................................. 5onds -a0able N2>*%>3&* N)>&2+.......................................... S$are CapitalKArdinar0.......................................................... S$are -remiumKArdinar0....................................................... 8N1%>&32 N2>*+2>++) O N)%,>,,,
1%>&32 2>*+2>++)
d S$are -remiumKConversion !quit0 .............................................. 5onds -a0able.. .............................................................................. Cas$........................................................................................ :ain on Repurc$ase N2>*+2>++) O N2>*%,>,,,..................... 8N2>+1,>,,, O N2>*%,>,,,
&,>,,,8 2>*+2>++)
)%,>,,, 2>2+)>&2+8
2>+1,>,,, 2>++)
ilutive Securities and !arnings per S$are
16 - 42
E>$ 16-146KCoverti7le (o,s$
Qoc$ Co. sold convertible bonds at a premium. Interest is paid on 7a0 31 and ovember 3,. An 7a0 31> a#ter interest (as paid> 1,,> 1>,,, bonds are tendered #or conversion into 3>,,, s$ares o# 1, par value ordinar0 s$ares t$at $ad a mar
To account #or t$e conversion o# bonds under t$e boo< value met$od> 5onds -a0able s$ould be debited #or t$e carr0ing value> and S$are CapitalOArdinar0 s$ould be credited at par #or t$e s$ares issued. ?sing t$e boo< value met$od> no gain loss on conversion is recorded. T$e amount to be recorded #or t$e s$ares is equal to t$e boo< carr0ing value #ace value plus unamortized premium o# t$e bonds. S$are -remiumOArdinar0 (ould be credited #or t$e di##erence bet(een t$e boo< value o# t$e bonds and t$e par value o# t$e s$ares issued. T$e rationale #or t$e boo< value met$od is t$at t$e conversion is t$e completion o# t$e transaction initiated ($en t$e bonds (ere issued. Since t$is is vie(ed as a transaction (it$ s$are$olders> no gain loss s$ould be recognized. E>$ 16-149 /Issu"ce' Coversio' Re!urc."se o* Coverti7le (o,s0An anuar0 1> 2,11>
Bin Compan0 issued a convertible bond (it$ a par value o# 1,,>,,, in t$e mar,,,. T$e bonds are convertible into 12>,,, ordinar0 s$ares o# 1 per s$are par value. T$e bond $as a %0ear li#e and $as a stated interest rate o# 1,J pa0able annuall0. T$e mar 2,11> is *J. T$e liabilit0 component o# t$e bond is computed to be 1,)>+*&. T$e #ollo(ing bond amortization sc$edule is provided #or t$is bond. EFFECTIVE-INTEREST %ETH&D 1=? (&ND DISC&UNTEDAT :?
ate 1/1/11 12/31/11 12/31/12 12/31/13 12/31/1 12/31/1%
Cas$ -aid 1,>,,, 1,>,,, 1,>,,, 1,>,,, 1,>,,,
Interest !"pense *>&3* *>%3, *>12 *>2*& *>1*
-remium 'mortized 1>3&2 1>), 1>%** 1>)1 1>*%2
Carr0ing 'mount o# 5onds 1,)>+*& 1,)>+*& 1,&>&2 1,%>1% 1,3>%&& 1,,>,,,
Istructios
a -repare t$e 6ournal entr0 to record t$e issuance o# t$e convertible bond on anuar0 1> 2,11. b 'ssume t$at t$e bonds (ere converted on ecember 31> 2,13. T$e #air value o# t$e liabilit0 component o# t$e bond is determined to be 1,*>,,, on ecember 31> 2,13.-repare t$e 6ournal entr0 to record t$e conversion on ecember 31> 2,13. 'ssume t$at t$e accrual o# interest related 2,13 $as been c 'ssume t$at t$etoconvertible bondsrecorded. (ere repurc$ased on ecember 31> 2,13> #or 111>,,, instead o# being converted. 's indicated> t$e liabilit0 component o# t$e bond is determined to be 1,*>,,, on ecember 31> 2,13. 'ssume t$at t$e accrual o# interest related to 2,13 $as been recorded.
16 - 44 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio Solutio 16-149
a Cas$............................................................................................... 5onds -a0able................................................................................ S$are -remiumKConversion !quit0.......................................
12,>,,,
b S$are -remiumKConversion !quit0............................................... 5onds -a0able................................................................................ S$are CapitalKArdinar0 12>,,, ´ 1.................................... S$are -remiumKArdinar0......................................................
12>,1 1,3>%&&
1,)>+*& 12>,1
12>,,, 1,3>%*,
c Computation or lossE -resent valueo#o#gain liabilit0 component 't 12/31/13................................................................................... BessE Carr0ing value #rom above.................................................. Boss................................................................................................
1,*>,,, 1,3>%&& >3
'd6ustment to equit0E Fair value o# convertible bonds (it$ bot$ liabilit0 and equit0................................................ BessE Biabilit0 component........................................................ 'd6ustment to S$are -remiumOOConversion
111>,,, 1,*>,,, 3>,,,
S$are -remiumOOConversion !quit0.............................................. 5onds -a0able................................................................................ Boss on Repurc$ase....................................................................... Cas$........................................................................................
3>,,, 1,3>%&& >3 111>,,,
E>$ 16-14: Issuance and Conversion o# 5onds For eac$ o# t$e unrelated transactions described
belo(> present t$e entr0ies required to record eac$ transactionE 1. 2. 3.
5aden Corp. issued N%>,,,>,,, par value 1,J convertible bonds at ++. I# t$e bonds $ad not been convertible> t$e compan09s investment ban,,,>,,, par value 1,J bonds at +*. Ane s$are (arrant (as issued (it$ eac$ N1,, par value bond. 't t$e time o# issuance> t$e (arrants (ere selling #or N. T$e net present value o# t$e bonds (it$out t$e (arrants (as N>*,,>,,,. ac Inc. called its convertible debt in 2,1,. 'ssume t$e #ollo(ing related to t$e transactionE T$e 11J N%>,,,>,,, par value bonds (ere converted into %,, s$ares o# N1 par value ordinar0 s$ares on ul0 1> 2,1,. T$e carr0ing amount o# t$e debt on ul0 1 (as N>*,,>,,,. T$e S$are -remiumOOConversion !quit0 account $ad a balance o# N1>,,,>,,, and t$e compan0 paid an additional N3%>,,, to t$e bond$olders to induce conversion o# all t$e bonds. T$e compan0 records t$e conversion using t$e boo< value met$od.
ilutive Securities and !arnings per S$are
16 - 4
Solutio 16-14:
1. Cas$ N%>,,,>,,, ´ .++................................................................. 5onds -a0able N%>,,,>,,, ´ .+%............................................ S$are -remiumKConversion !quit0.........................................
>+%,>,,,
2. Cas$ N%>,,,>,,, ´ .+*................................................................. 5onds -a0able.......................................................................... S$are -remiumOOS$are ;arrants.............................................
>+,,>,,,
3.
>)%,>,,, 2,,>,,,
>*,,>,,, 1>,,,>,,,
S$are -remiumOOConversion !quit0..............................................
1,,>,,,
Conversion !"p ense...................................................................... 5onds -a0able............................................................................... S$are CapitalOOArdinar0........................................................... S$are -remiumOOArdinar0........................................................ Cas$..........................................................................................
3%>,,, >*,,>,,, %,,>,,, >,,>,,, )%>,,,
8XN>*,,>,,, N1,,>,,, O N%,,>,,,Y E>$ 16-14
-repare t$e necessar0 entries #rom 1/1/1,2/1/12 #or t$e #ollo(ing events using t$e #air value met$od. I# no entr0 is needed> (rite =o !ntr0 ecessar0.= 1. An 1/1/1,> t$e s$are$ olders adopt ed a s$are option plan #or top e"ec utives ($ereb0 eac$ mig$t receive rig$ts to purc$ase up to 12>,,, ordinar0 s$ares at , per s$are. T$e par value is 1, per s$are. 2. An 2/1/1,> options (ere granted eac$ o# #ive e"ecutives to purc$ase 12>,,, s$ares. T$e options (ere nontrans#erable andtot$e e"ecutive $ad to remain an emplo0ee o# t$e compan0 to e"ercise t$e option. T$e options e"pire on 2/1/12. It is assumed t$at t$e options (ere #or services per#ormed equall0 in 2,1, and 2,11. T$e 5lac<Sc$oles option pricing model determines total compensation e"pense to be 1>3,,>,,,. 3. 't 2/1/12> #our e"ecutives e"ercised t$eir options. T$e #i#t$ e"ecutive c$ose not to e"ercise $is options> ($ic$ t$ere#ore (ere #or#eited. Solutio 16-14<
1.
1/1/1, o entr0 necessar0.
2.
2/1/1, o entr0 necessar0. 12/31/1, Compensation !"pense............................................................... S$are -remiumKS$are Aptions....................................... 12/31/11 Compensation !"pense............................................................... S$are -remiumKS$are Aptions.......................................
&%,>,,,
&%,>,,,
&%,>,,, &%,>,,,
16 - 46 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio Solutio 16-14< Cont.
3.
2/1/12 Cas$ U 12>,,, U , .............................................................. 1>+2,>,,, S$are -remiumKS$are Aptions 1> 3,,>,,, U /% ........... ........ 1>,,>,,, S$are CapitalKArdinar0................................................... S$are -remiumKArdinar0................................................ S$are -remiumKS$are Aptions.................................................. S$are -remiunK!"pired S$are Aptions...........................
*,>,,, 2>*,>,,,
2&,>,,, 2&,>,,,
E>$ 16-1=K;eig$ted average s$ares outstanding.
An anuar0 1> 2,12> ;arren Corporation $ad 1>,,,>,,, ordinar0 s$ares outstanding. An 7arc$ 1> t$e corporation issued 1%,>,,, ne( s$ares to raise additional capital. An ul0 1> t$e corporation declared and issued a 2#or1 s$are split. An Actober 1> t$e corporation purc$ased on t$e mar,,, o# its o(n outstanding s$ares and retired t$em. Istructios
Compute t$e (eig$ted average number o# s$ares to be used in computing earnings per s$are #or 2,1,.
Solutio 16-1=
an. 1 7arc$1 ul0 1 Act.1
Increase ecrease K 1%,>,,, 1>1%,>,,, &,,>,,,
7ont$s Autstanding 2
Autstanding 1>,,,>,,, 1>1%,>,,, 2>3,,>,,, 1>),,>,,,
3 3 12 2%>2,,>,,,V12
2/1 2/1
S$are7ont$s >,,,>,,, +>2,,>,,, &>+,,>,,, %>1,,>,,, 2%>2,,>,,, 2>1,,>,,,
E>$ 16-11K!arnings per s$are.
Santana Corporation $as ,,>,,, ordinar0 s$ares outstanding t$roug$out 2,12. In addition> t$e corporation $as %>,,,> 2,0ear> )J bonds issued at par in 2,1,. !ac$ 1>,,, bond is convertible into 2, ordinar0 s$ares a#ter +/23/13. uring t$e 0ear 2,12> t$e corporation earned &,,>,,, a#ter deducting all e"penses. T$e ta" rate (as 3,J. Istructios
Compute t$e proper earnings per s$are #or 2,12.
ilutive Securities and !arnings per S$are
16 - 49
Solutio 16-11
et income &,,>,,, !arnings per s$areE KKKKKKKKK KKKK 1.%, Autstanding s$ares ,,>,,, et income Interest a#ter ta"es !arnings per s$are assuming bond conversionE KKKKKKKKKKKKKKK 'ssumed outstanding s$ares &,,>,,, 2%>,,, 3%,>,,, U .) 2%>,,, KKKKKKKKKK 1.&+ ,,>,,, 1,,>,,, T$ere#ore t$e bonds are antidilutive> and earnings per s$are outstanding o# 1.%, s$ould be reported. ote t$at t$e convertible securit0 is antidilutiveE 5ond interest a#ter ta"es 2%>,,, KKKKKKKKKKKKK KKKK 2.% 'ssumed incremental s$ares 1,,>,,, E>$ 16-1Kiluted earnings per s$are.
unbar Compan0 $ad ,,>,,, ordinar0 s$ares outstanding during t$e 0ear 2,11. In addition> at ecember 31> 2,11> +,>,,, s$ares (ere issuable upon e"ercise o# e"ecutive s$are options ($ic$ require a , cas$ pa0ment upon e"ercise options granted in 2,,+. T$e average mar
Compute t$e number o# s$ares to be used in determining diluted earnings per s$are #or 2,11. Solutio 16-1
S$ares outstanding 'ddE 'ssumed issuance eductE -roceeds/'verage mar&,,>,,, V %, umber s$ares o#
,,>,,, +,>,,, +,>,,, )2>,,, 1*>,,,
16 - 4: Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio ;E>$ 16-12KS$are appreciation rig$ts.
An anuar0 1> 2,,+> Arr Co. establis$ed a s$are appreciation rig$ts plan #or its e"ecutives. T$e0 could receive cas$ at an0 time during t$e ne"t #our 0ears equal to t$e di##erence bet(een t$e mar,,, S'Rs. T$e #air value o# t$e S'Rs is estimate as #ollo(sE 12/31/,+K% 12/31/1,K2 12/31/11K3 12/31/12K . An ecember 31> 2,11> %,>,,, S'Rs are e"ercised> and t$e remaining S'Rs are e"ercised on ecember 31> 2,12. Istructios
a -repare a sc$edule t$at s$o(s t$e amount o# compensation e"pense #or eac$ o# t$e #our 0ears starting (it$ 2,,+. b -repare t$e 6ournal entr0 at 12/31/1, to record compensation e"pense. c -repare t$e 6ournal entr0 at 12/31/12 to record t$e e"ercise o# t$e remaining S'Rs.
;Solutio 16-12
a
Sc$eduleo#Compensation!"pense 3,,>,,, S'Rs
ate 12/31/,+
Fair 4alue %
Cumulative Compensation Recognizable 1>%,,>,,,
12/31/1,
2
&,,>,,,
12/31/11
3
+,,>,,,
12/31/12
1>,,,>,,,
Compensation -ercentage 'ccrued 'ccrued toate !"pense 2%J 3)%>,,, 3)%>,,, )%>,,, %,J 3,,>,,, )%>,,, 3)%>,,, )%J &)%>,,, 3)%>,,, 32%>,,, 1,,J 1>,,,>,,, 32%>,,,
b Biabilit0 ?nder S$are 'ppreciation -lan........................................ Compensation !"pense.................................................... c
)%>,,,
Biabilit0 ?nder S$are 'ppr eciation -lan........................................ 1>,,,>,,, Cas$.................................................................................
)%>,,, 1>,,,>,,,
ilutive Securities and !arnings per S$are
16 - 4<
PR&(LE%S Pr$ 16-14KConvertible bonds and s$are (arrants.
For eac$ o# t$e unrelated transactions described belo(> present t$e entr0ies required to record t$e bond transactions. 1. An 'ugust 1> 2,11> Bane Corporation called its 1,J convertible bonds #or conversion. T$e *>,,,>,,, par bonds (ere converted into 32,>,,, s$ares o# 2, par ordinar0 s$ares. An 'ugust 1> t$ere (as ),,>,,, o# unamortized premium applicable to t$e bonds. T$e #air value o# t$e ordinar0 s$ares (as 2, per s$are. Ignore all interest pa0ments. 2. -ac Inc. decides to issue conv ertible bonds instead o# ordinar0 s$ares. T$e compan0 issues 1,J convertible bonds> par 3>,,,>,,,> at +). T$e investment ban,,,>,,, o# bonds (it $ a coupon rate o# *J. T o $elp t$e sale> detac$able s$are (arrants are issued at t$e rate o# ten (arrants #or eac$ 1>,,, bond sold. It is estimated t$at t$e #air value o# t$e bonds (it$out t$e (arrants is >+3%>,,,. T$e bonds (it$ t$e (arrants sold at 1,1.
Solutio 16-14
1. 5onds -a0able................................................................................ *>),,>,,, S$are CapitalKArdinar0...................................................... S$are -remiumKArdinar0...................................................
&>,,>,,, 2>3,,>,,,
2. Cas$................................................................................................ 2>+1,>,,, 5onds -a0able 3>,,,>,,, ´!quit0................................... .+....................................... S$are -remiumKConversion
2>*2,>,,, +,>,,,
3. Cas$................................................................................................ %>,%,>,,, 5onds -a0able..................................................................... S$are -remiumKS$are ;arrants.......................................
>+3%>,,, 11%>,,,
Pr$ 16-1K!arnings per s$are.
Colson Corp. $ad %,,>,,, net income in 2,11. An anuar0 1> 2,11 t$ere (ere 2,,>,,, ordinar0 s$ares outstanding. An 'pril 1> 2,>,,, s$ares (ere issued and on September 1> 'dcoc< boug$t 3,>,,, treas ur0 s$are s. T$ere are 3,>,,, optio ns to bu0 ordin ar0 s$ares at , a s$are outstanding. T$e mar t$ere (ere ,>,,, s$ares o# convertible pre#erence s$ares outstanding. T$e pre#erence is 1,, par> pa0s 3.%, a 0ear dividend> and is convertible into t$ree ordinar0 s$ares. Colson issued 2>,,,>,,, o# *J convertible bonds at #ace value during 2,1,. !ac$ 1>,,, bond is convertible into 3, ordinar0 s$ares.
16 - = Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
Istructios
Compute diluted earnings per s$are #or 2,11. Complete t$e sc$edule and s$o( all computations. Securit0
et Income
'd6ust ment
'd6usted et Income
S$ares
'd6ust ment
'd6usted S$ares
!-S
Solutio 16-1
Securit0
Ard.S $ares Aptions 5onds -re#erence a
et
'd6ust
'd6usted
Income
ment
et Income
%,,>,,,
1,>,,,
3&,>,,, %&>,,,
+&>,,,c 1,>,,,
2,>,,, U 3/ 3,>,,, U 1/3
3&,>,,, 3&,>,,, %&>,,, %+&>,,,
'd6ust S$ares
2,,>,,, 2,%>,,, 211>,,, 2)1>,,,
ment
%>,,, a &>,,,b &,>,,, 12,>,,,
'd6usted S$ares
2,%>,,, 211>,,, 2)1>,,, 3+1>,,,
!-S
1.)& 1.)1 1.&* 1.%2
1%>,,, 1,>,,, %>,,, S'
b
3,>,,, 1>2,,>,,, V %, 2>,,, &>,,, S' c
2>,,,>,,, U .,* U .& +&>,,,
or X%, O , V %,Y U 3,>,,, &>,,, S' +&>,,, KKKK 1.&, &,>,,,
1,>,,, KKKK 1.1) 12,>,,,
Pr$ 16-16K5asic and diluted !-S.
'ssume t$at t$e #ollo(ing data relative to Qane Compan0 #or 2,12 is availableE et Income TransactionsinArdinar0S$ares an.1>2,12>5eginningnumber 7ar.1>2,12>-urc$aseo#treasur0s$ares une1>2,12>S$aresplit21 ov.1>2,12>Issuanceo#s$ares
2>1,,>,,, C$ange &,>,,, &,>,,, 12,>,,,
*J Cumulative Convertible -re#erence S$ares Sold at par> convertible into 2,,>,,, ordinar0 s$ares ad6usted #or split. S$are Aptions !"ercisable at t$e option price o# 2% per s$are. 'verage mar 3, mar
Cumulative ),,>,,, &,>,,, 1>2*,>,,, 1>,,>,,,
1>,,,>,,,
&,>,,, s$ares
ilutive Securities and !arnings per S$are
16 - 1
Istructios
a Compute t$e basic earnings per s$are #or 2,12. Round to t$e nearest penn0. b Compute t$e diluted earnings per s$are #or 2,12. Round to t$e nearest penn0.
Solutio 16-16
Computation o# (eig$ted average s$ares outstanding during t$e 0earE anuar01 7arc$1 une1 ovember1
Autstanding
),,>,,,
Repurc$ase%/&U&,>,,, 2#or1split Issued1/&U12,>,,,
%,>,,, &%,>,,, 1>3,,>,,, 2,>,,, 1>32,>,,,
'dditional s$ares #or purposes o# diluted earnings per s$areE -otentiall0 dilutive securities *Jconvertiblepre#erences$ares S$are options -roceeds #rom e"ercise o# &,>,,, options &,>,,, U 2% S$aresissuedupone"erciseo#options BessE treasur0 s$ares purc$asable (it$ proceeds 1>%,,>,,, V3, ilutivesecuritiesKadditionals$ares
2,,>,,, 1>%,,>,,, &,>,,, %,>,,,
1,>,,, 21,>,,,
2>1,,>,,, O *,>,,, a 5asic earnings per s$areE KKKKKKKKKK 1.%3 1>32,>,,, b iluted earnings per s$areE
2>1,,>,,, KKKOKKKKKK 1.3) 1>32,>,,, 21,>,,,
Pr$ 16-19K5asic and diluted !-S.
-resented belo( is in#ormation related to Starr Compan0. 1. et Income Xincluding a discontinued operations gain net o# ta" o# ),>,,,Y 2. Capital Structure a. Cumulative *J pre#erence s$ares> 1,, par> &>,,,s$aresissuedandoutstanding b. 1, par>>)>,,, ordinar0 s$ares outstanding on anuar0 1. An 'pril 1> ,>,,, s$ares (ere issued #or cas$. An Actober 1> 1&>,,,s$ares(erepurc$asedandretired.
23,>,,,
&,,>,,,
1>,,,>,,,
16 - Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio Pr$ 16-19 Cont.
c. An anuar0 2 o# t$e current 0ear> Starr purc$ased Aslo Corporation. Ane o# t$e terms o# t$e purc$ase (as t$at i# StarrMs net income #or t$e #ollo(ing 0ear is 2>,,>,,, or more> %,>,,, additional s$ares (ould be issued to Aslo stoc<$olders ne"t 0ear. 3. At$er In#ormation a. 'verage mar
3, 3,J
Istructios
Compute earnings per s$are #or t$e current 0ear.
Solutio 16-19
Income#romcontinuingoperations Besspre#erencedividends 'vailable to ordinar0 be#ore discontinued operations 'dd discontinued operations gain net o# ta" Incomeavailabletoordinar0 ;eig$ted average s$ares outstandingE anuar0 1 ,>,,, 3/ U 1&>,,, 1/ U
)>,,, 3,>,,, >,,, 1,,>,,,
5asic earnings per s$areE Income#romcontinuingoperations iscontinuedoperationsneto#ta" et income CalculationsE 112>,,, a KKKK 1,,>,,,
1&,>,,, *>,,, 112>,,, ),>,,, 1*2>,,,
1.12 a .), b 1.*2 c ),>,,, KKKK 1,,>,,,
b
iluted earnings per s$areE Income#romcontinuingoperations iscontinuedoperationsneto#ta" et Income
1*2>,,, KKKK 1,,>,,,
c
.)% a .& b 1.21 c
CalculationsE 112>,,, a
KKKKKKKK 1,,>,,,%,>,,,
),>,,, b
KKKK 1%,>,,,
1*2>,,, c KKKKKKKK 1,,>,,,%,>,,,
ilutive Securities and !arnings per S$are
16 - 2
Pr$ 16-1:K5asic and diluted !-S.
T$e #ollo(ing in#ormation (as ta Inc.E 1. et income
2*,>,,,
2. Capital structureE a. Convertible &J bonds. !ac$ o# t$e 3,,> 1>,,, bonds is convertible into %, ordinar0 s$ares at t$e present date and #or t$e ne"t 0ears. 1, b. 1, par> 2,,>,,, ordinar0 s$ares issued and outstanding during t$e entire 0ear.
3,,>,,, 2>,,,>,,,
c. S$are (arrants outstanding to bu0 1&>,,, ordinar0 s$ares at 2, per s$are. 3. At$er in#ormationE a. 5ondsconvertedduringt$e0ear b. Income rate ta" c. Convertible debt (as outstanding t$e entire 0ear d. 'verage mar
one 3,J 32 one
Istructios
Compute basic and diluted earnings per s$are.
Solutio 16-1:
5asic !-S 2*,>,,, V 2,,>,,, s$. 1., et 'd6ust 'd6usted Securit0 ncome I ment et Income Ard.S$ares 2*,>,,, K 2*,>,,, ;arrants 2*,>,,, K 2*,>,,, Conv. 5onds 2*,>,,, 12>&,, 2 2+2>&,,
1
2
1&>,,, 32,>,,, KKKK 1,>,,, 32 &>,,,
'd6ust 'd6usted iluted S$ares ment S$ares !-S 2,,>,,, K 2,,>,,, 1., 2,,>,,, &>,,,1 2,&>,,, 1.3& 2,&>,,, 1%>,,, 221>,,, 1.32
S'
3,,>,,, ´ .,& ´.) 12>&,,
12>&,, KKKK .* 1%>,,,
16 - 4 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
IFRS @UESTI&NS TrueF"lse
1. i:''- and ?.S. :''- $ave signi#icant di##erences in t$e reporting o# securities (it$ c$aracteristics o# debt and equit0> suc$ as convertible debt. 2. ?nder i:''-> all o# t$e procee ds o# convertible debt are recorded as longterm debt. 3. ?nder i:''-> convertible bonds are Gbi#u rcatedH Kseparated into t$e equit 0 component t$e value o# t$e conversion option o# t$e bond issue and t$e debt component. . ?nder bot$ ?.S. :''- and i:''-> t$e calculation o# basic and diluted earnings per s$are is identical. %. ?nder i:''- recording #or t$e issuance o# 5onds -a0able> t$e iscount on 5onds -a0able and t$e -aidin CapitalConvertible 5onds could be utilized. As#ers to TrueF"lseB
1. 2. 3. . %.
True False True False True
%ulti!le C.oiceB
1. ;it$ regard to recognizing stoc<based compensation a. i:''- and ?.S. :''- #ollo( t$e same model. b. i:''- and ?.S. :''- standards are undergoing ma6or re#orm on valuation issues. c. it $as been agreed t$at t$ese standards (ill not be merged due to t$e di##erences in currencies. d. t$e re#orm o# ?.S. :''- standards (ill not be addressed until i:''- standards $ave been #inalized. 2. T$e primar0 i:''- reporting standards related to #inancial instruments> including dilutive securities> is a. I'S 33. b. I'S 3+. c. IFRS 2. d. I'S 2.
ilutive Securities and !arnings per S$are
16 -
3. ;$en %>,,,>,,, in convertible bonds are issued at par (it$ *,,>,,, in value o# t$e equit0 option embedded in t$e bond> t$e i:''- 6ournal entr0 (ill include a debit o# a. *,,>,,, to -aidi n Capital K Convertible 5onds and a credit to -remium on 5onds -a0able. b. *,,>,,, to -remiu m on 5onds -a0able and a credit to -aid in Capital K Conve rtible 5onds. c. *,,>,,, to isco unt on 5ond s -a0able and a credit to -aid in Capital K Convertible 5onds. d. >2,,>,,, to Cas$ along (it$ a debit o# *,,>,,, to iscount on 5onds -a0able and a credit to 5onds -a0able and a credit to -aidin Capital K Convertible 5onds. . ;it$ regard to contracts t$at can be settled in eit$er cas$ or s$ares a. i:''- requires t$at s$are settlement must be used. b. i:''- gives companies a c$oice o# eit$er cas$ or s$ares. c. ?.S. :''- requires t$at s$are settlement must be used. d. t$e F'S5 pro6ect proposes t$at t$e I'S5 adopt t$e ?.S. :''- approac$> requiring t$at s$are settlement must be used. %. ;it$ regard to recognizing stoc<based compensation under i:''- t$e #air value o# s$a res and options a(arded to emplo0ees is recognized a. in t$e #irst #iscal period o# t$e emplo0ees9 service. b. over t$e #iscal periods to ($ic$ t$e emplo0ees9 services relate. c. in t$e last #iscal period o# t$e emplo0ees9 service ($en t$e total value can be calculated. d. a#ter last #iscal period o# t$e emplo0ees9 service ($en t$e total value can be cal culated.
As#ers to %ulti!le C.oiceB
1. 2. 3. . %.
a b c a b
S$ort 'ns(er 1. 5rie#l0 describe some o# t$e sim ilarities and di##erences bet(een ?.S. :''- and i:''(it$ respect to t$e accounting #or dilutive securities> stoc<based compensation> and earnings per s$are. 1. i:''- and ?.S. :''- are substantiall0 t$e same in t$e accounting #or dilutive securities> stoc<based compensation> and earnings per s$are. For e"ample> bot$ i:''- and ?.S. :''- #ollo( t$e same model #or recognizing stoc<based compensation. T$at is> t$e #air value o# s$ares and options a(arded to emplo0ees is recognized over t$e period to ($ic$ t$e emplo0ees9 services relate. T$e main di##erences concern 1 t$e accounting #or convertible debt. ?nder ?.S. :''all o# t$e proceeds o# convertible debt are recorded as long term debt. ?nder i:''-> convertible bonds are Gbi#urcatedH> or separated into t$e equit0 component O t$e value o# t$e conversion option O o# t$e bond issue and t$e debt component 2 a minor di##erence in !-S reporting O t$e F'S5 allo(s companies to rebut t$e presumption t$at contracts t$at can be settled in eit$er cas$ or s$ares (ill be settled in s$ares. i:''- requires t$at
16 - 6 Test (") *or Iter+e,i"te Accouti' T.irteet. E,itio
s$are settlement must be used in t$is situation 3 ot$er !-S di##erences relate to t$e treasur0 stoc< met$od and $o( t$e proceeds #rom e"tinguis$ment o# a liabilit0 s$ould be accounted #or and $o( to ma t$e I'S5 is e"amining t$e classi#ication o# $0brid securities t$e I'S5 is see t$e 5oards $ave been (or
