ch16.doc.pdf

CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE CHAPTER LEARNING OBJECTIVES 1.

Describe the accounting for the issuance, conversion, and retirement of convertible securities.

2.

Explain the accounting for convertible preference shares.

3.

Contrast the accounting for share warrants and share warrants issued with other securities.

4.

Describe the accounting for share compensation plans.

5.

Discuss the controversy involving share compensation plans.

6.

Compute earnings per share in a simple capital structure.

7.

Compute earnings per share in a complex capital structure.

*8.

Explain the accounting for share-appreciation rights plans.

*9.

Compute earnings per share in a complex situation.

16 - 2

Test Bank for Intermediate Accounting, IFRS Edition, 2e

TRUE-FALSE—Conceptual 1.

IFRS requires that convertible debt be separated into its liability and equity components for accounting purposes.

2.

Companies recognize a gain or loss on the conversion of convertible debt before maturity.

3.

When an issuer offers some form of additional consideration (a sweetener) to encourage of its convertible debt, it reports the sweetener as a current period expense.

4.

The issuer of convertible preference shares uses the fair value method to record the conversion of the shares.

5.

Companies recognize a gain or loss when shareholders exercise convertible preference shares.

6.

A company should allocate the proceeds from the sale of debt with detachable share warrants between the two securities based on their a fair values.

7.

Non-detachable warrants, unlike detachable warrants, are not considered a compound instrument for accounting purposes.

8.

The intrinsic value of a share option is the difference between the market price of the shares and the exercise price of the options at the grant date.

9.

Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise.

10.

The service period in share option plans is the time between the grant date and the vesting date.

11.

If an employee fails to exercise a share option before its expiration date, the company should decrease compensation expense.

12.

If a service condition exists, the company is not permitted to adjust the estimate of compensation expense.

13.

If preference shares are cumulative and no dividends are declared, the company subtracts the current year preference dividend in computing earnings per share.

14.

When share dividends or share splits occur, companies must restate the shares outstanding after the share dividend or split, in order to compute the weighted-average number of shares.

15.

If a share dividend occurs after year-end, but before the financial statements, are authorized for issuance, a company must restate the weighted-average number of shares outstanding for the year.

16.

Preference dividends are subtracted from net income but not income from continuing operations in computing earnings per share.

Dilutive Securities and Earnings per Share

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17.

When a company has a complex capital structure, it must report both basic and diluted earnings per share.

18.

In computing diluted earnings per share, share options are considered dilutive when their option price is greater than the market price.

19.

The number of contingent shares to be included in diluted earnings per share is based on the number of shares that would be issuable as if the end of the period were the end of the contingency period.

20.

A company should report per share amounts for income from continuing operations, but not for discontinued operations.

True-False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. T F T F F

Item 6. 7. 8. 9. 10.

Ans. T F T F T

Item 11. 12. 13. 14. 15.

Ans. F F T F T

Item 16. 17. 18. 19. 20.

Ans. F T F T F

MULTIPLE CHOICE—Dilutive Securities, Conceptual 21.

Convertible bonds a. have priority over other indebtedness. b. are usually secured by a first or second mortgage. c. pay interest only in the event earnings are sufficient to cover the interest. d. may be exchanged for equity securities.

22.

The conversion of bonds is most commonly recorded by the a. incremental method. b. proportional method. c. fair value method. d. book value method.

23.

When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounted for as a(n) a. equity item. b. expense. c. loss. d. None of these a are correct.

16 - 4 S

S

Test Bank for Intermediate Accounting, IFRS Edition, 2e

24.

Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is a. the ease with which convertible debt is sold even if the company has a poor credit rating. b. the fact that equity capital has issue costs that convertible debt does not. c. that many corporations can obtain financing at lower rates. d. that convertible bonds will always sell at a premium.

25.

When convertible debt is not converted at maturity a. a gain or loss is recorded for the difference between the book value of the debt and the present value of the cash flows. b. the amount originally allocated to equity is recorded as a gain on retirement. c. the amount allocated to the equity component at the issuance date is recorded as a loss on retirement. d. the carrying value of the bond equals its face value and it is removed from the books.

26.

Convertible bonds a. Are separated into the bond component and the expense component. b. Allow a company to issue debt financing at cheaper rates. c. Are separated into their components based on relative fair values. d. All of these answer choices are correct.

27.

Mae Jong Corp issues $1,000,000 of 10% bonds payable which may be converted into 10,000 shares of $2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will a. First assign a value to the equity component, then determine the liability component. b. Assign no value to the equity component since the conversion privilege is not separable from the bond. c. First assign a value to the liability component based on the face amount of the bond. d. Use the “with-and-without” method to value the compound instrument.

28.

Convertible preference shares a. Are compound instruments with both a liability and an equity component. b. Include an option for the holder to convert preference shares into a fixed number of ordinary shares. c. Use the “with-and-without” method to value the compound instrument. d. All of these answer choices are correct.

29.

The conversion of preference shares into ordinary shares requires that any excess of the par value of the ordinary shares issued over the carrying amount of the preference shares being converted should be a. reflected currently in income. b. reflected currently in other comprehensive income. c. treated as a prior period adjustment. d. treated as a direct reduction of retained earnings.

S


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30.

The conversion of preference shares may be recorded by the a. incremental method. b. book value method. c. market value method. d. par value method.

31.

When the cash proceeds from bonds issued with detachable share warrants exceed the fair value of the bonds without the warrants, the excess should be credited to a. Share Premium—Ordinary. b. Retained Earnings. c. A share liability account. d. Share Premium-Share Warrants.

32.

Proceeds from an issue of debt securities having share warrants should not be allocated between debt and equity features when a. the fair value of the warrants is not readily available. b. exercise of the warrants within the next few fiscal periods seems remote. c. the warrants issued with the debt are non-detachable. d. Proceeds should be allocated between debt and equity for all of these.

P

33.

A corporation issues bonds with detachable warrants. The amount to be recorded as share premium is preferably a. zero. b. calculated as the excess of the proceeds over the face value of the bonds. c. equal to the market value of the warrants. d. calculated as the excess of the proceeds over the fair value of the bonds.

P

34.

The distribution of share rights to existing ordinary shareholders will increase share premium at the

a. b. c. d. S

Date of Issuance of the Rights Yes Yes No No

Date of Exercise of the Rights Yes No Yes No

35.

The major difference between convertible debt and share warrants is that upon exercise of the warrants a. the shares are held by the company for a defined period of time before they are issued to the warrant holder. b. the holder has to pay a certain amount of cash to obtain the shares. c. the shares involved are restricted and can only be sold by the recipient after a set period of time. d. no share premium can be a part of the transaction.

36.

According to IFRS, a company makes only a memorandum entry when a. companies give warrants to executives and employees as a form of compensation. b. companies include warrants to make a security more attractive. c. companies issue rights to existing shareholders.

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Test Bank for Intermediate Accounting, IFRS Edition, 2e d. All of these answer choices are correct.

37.

According to IFRS, once the total compensation is measured at the date of grant a. it can be changed in future periods related to a change in market conditions. b. it can be changed to reflect the rise or fall in the market price of the company’s ordinary shares. c. a company is permitted to adjust the number of share options expected to the actual number of instruments vested. d. All of these answer choices are correct.

38.

Restricted shares a. better align the employee incentives with the companies’ incentives. b. result in less dilution to existing shareholders. c. never become completely worthless. d. All of these choices are correct.

Dilutive Securities and Earnings per Share S

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39.

Which of the following is not a characteristic of a noncompensatory stock option plan? a. Substantially all full-time employees may participate on an equitable basis. b. The plan offers no substantive option feature. c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. d. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

40.

The date on which to measure the compensation element in a share option granted to a corporate employee ordinarily is the date on which the employee a. is granted the option. b. has performed all conditions precedent to exercising the option. c. may first exercise the option. d. exercises the option.

41.

Compensation expense resulting from a compensatory share option plan is generally a. recognized in the period of exercise. b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. allocated over the periods of the employee's service life to retirement.

42.

The date on which total compensation expense is computed in a share option plan is the date a. of grant. b. of exercise. c. that the market price coincides with the option price. d. that the market price exceeds the option price.

43.

Employee share purchase plans (ESPP) a. Permit all employees to purchase shares at a discounted price. b. Are generally considered noncompensatory and result in no compensation expense being recorded. c. Distribute restricted shares to employees for a short period of time. d. All of these answer choices are correct regarding ESPP.

*44.

In accounting for share-appreciation rights plans, compensation expense is generally a. not recognized because no excess of market price over the option price exists at the date of grant. b. recognized in the period of the grant. c. allocated over the service period of the employees. d. recognized in the period of exercise.

*45.

For share appreciation rights that are a liability award, the measurement date for computing compensation is the date a. the rights mature. b. the share’s price reaches a predetermined amount. c. of grant. d. of exercise.

*46.

An executive pays no taxes at time of exercise in a(an) a. share appreciation rights plan. b. incentive share option plan. c. nonqualified share option plan. d. Taxes would be paid in all of these.

16 - 8 *47.

Test Bank for Intermediate Accounting, IFRS Edition, 2e A company estimates the fair value of SARs, using an option-pricing model, for a. share-based equity awards. b. share-based liability awards. c. both equity awards and liability awards. d. neither equity awards or liability awards.

Multiple Choice Answers—Dilutive Securities, Conceptual Item

21. 22. 23. 24. 25.

Ans.

d d b c d

Item

26. 27. 28. 29. 30.

Ans.

b d b d b

Item

31. 32. 33. 34. 35.

Ans.

d d d c b

Item

36. 37. 38. 39. 40.

Ans.

c c d c a

Item

Ans.

Item

Ans.

41. 42. 43. *44. *45.

c a a c d

*46. *47.

b c

MULTIPLE CHOICE—Dilutive Securities, Computational 48.

Fogel Co. has $2,500,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value ordinary shares. The bonds pay interest on January 31 and July 31. On July 31, 2016, the holders of $800,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the ordinary shares was $36. The total unamortized bond premium at the date of conversion was $175,000. Fogel should record, as a result of this conversion, a a. credit of $136,000 to Share Premium—Ordinary. b. credit of $120,000 to Share Premium—Ordinary. c. credit of $56,000 to on Bonds Payable. d. loss of $8,000.

49.

On July 1, 2016, an interest payment date, $60,000 of Parks Co. bonds were converted into 1,200 ordinary shares of Parks Co. each having a par value of $45 and a fair value of $54. There is $2,400 unamortized discount on the bonds. Parks would record a. no change in share premium. b. a $3,600 increase in share premium. c. a $7,200 increase in share premium. d. a $4,800 increase in share premium.

50.

Morgan Corporation had two issues of securities outstanding: ordinary shares and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value ordinary shares in exchange for each $1,000 bond. On June 30, 2015, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the shares was $35. The total unamortized bond discount at the date of conversion was $1,000,000. What amount should Morgan credit to the account “Share Premium—Ordinary,” as a result of this conversion? a. $330,000. b. $160,000. c. $1,440,000. d. $720,000.


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51.

Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 ordinary shares (par value $40). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the shares are quoted on the market at $60 per share. If the bonds are converted into ordinary shares, what is the amount of share premium to be recorded on the conversion of the bonds? a. $25,000 b. $22,000 c. $32,000 d. $40,000

52.

Mae Jong Corp. issues 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. Compute the liability component of Mae Jong’s convertible debt. The following present value factors are available: PV Ordinary Annuity–4 periods 6% 3.46511 9% 3.23972 PV of 1–4 periods 6% .79209 9% .70843 a. b. c. d.

53.

€1,000,000 €750,000 €902,813 €916,337

Mae Jong Corp. issues 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. When Mae Jong records the issuance of these bonds, how much will it credit to Share Premium—Conversion Equity? The following present value factors are available: PV Ordinary Annuity – 4 periods 6% 3.46511 9% 3.23972 PV of 1 – 4 periods 6% .79209 9% .70843 a. b. c. d.

€ -0€97,187 €83,663 €250,000

16 - 10 Test Bank for Intermediate Accounting, IFRS Edition, 2e 54.

Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. Assume that at the issuance date, €97,187 was credited to Share Premium—Conversion Equity and that the bonds were not converted until maturity. What amount will Mae Jong credit to Share Premium—Ordinary at the maturity date? a. €750,000 b. €652,813 c. €847,187 d. €347,187

55.

Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. Assume that at the issuance date, €97,187 was credited to Share Premium—Conversion Equity. The bonds were not converted at maturity and Mae Jong pays off the convertible debt holders. What amount will Mae Jong record as a gain or a loss on this transaction? a. € -0b. €97,187 c. €24,297 d. €250,000

56.

Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. On December 31, 2012, Mae Jong wishes to reduce its annual interest cost. The company agrees to pay the holder of its convertible bonds an additional €40,000 if they will convert. Assuming conversion occurs, Mae Jong’s journal entry to record the conversion will include all of the following except a. Debit Bonds Payable €1,000,000. b. Debit Share Premium—Ordinary €40,000. c. Credit Cash €40,000. d. Credit Share Capital—Ordinary €250,000.

57.

Pelton, Inc. issued £2,000,000 par value, 7% convertible bonds at 99 for cash. The net present value of the debt without the conversion feature is £1,9000,000. What amount will Peloton assign to the equity feature of these bonds? a. £100,000 b. £ - 0 c. £99,000 d. £80,000


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58.

On January 2, 2014, LexxMark Co. issues 2,000 convertible preference shares that have a par value of €20 per share. The shares were issued at a price of €400 per share. On December 31, 2016, LexxMark Co. repurchases the convertible preference shares for €820,000. On this date, LexxMark will record a. A loss of €20,000. b. A credit to Share Premium—Conversion Equity €40,000. c. A debit to Retained Earnings €20,000. d. A credit to Share Capital—Preference €40,000.

59.

In 2015, Eklund, Inc., issued for $103 per share, 60,000 shares of $100 par value convertible preference shares. One share of preference shares can be converted into three shares of Eklund's $25 par value ordinary shares at the option of the preference shareholder. In August 2016, all of the preference shares were converted. The fair value of the ordinary shares at the date of the conversion was $30 per share. What total amount should be credited to share premium—ordinary as a result of the conversion of the preference shares into ordinary shares? a. $1,020,000. b. $780,000. c. $1,500,000. d. $1,680,000.

60.

On December 1, 2016, Lester Company issued at 103, two hundred of its 9%, $1,000 bonds. Attached to each bond was one detachable share warrant entitling the holder to purchase 10 shares of Lester's ordinary shares. On December 1, 2016, the fair value of the bonds, without the share warrants, was 95, and the fair value of each share warrant was $50. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be a. $195,700. b. $190,000. c. $200,000. d. $206,000.

61.

On March 1, 2016, Ruiz Corporation issued $800,000 of 8% nonconvertible bonds at 104, which are due on February 28, 2036. In addition, each $1,000 bond was issued with 25 detachable share warrants, each of which entitled the bondholder to purchase for $50 one share of Ruiz ordinary shares, par value $25. The bonds without the warrants would normally sell at 95. On March 1, 2016, the fair value of Ruiz’s ordinary shares was $40 per share and the fair value of the warrants was $2. What amount should Ruiz record on March 1, 2016 as share premium—share warrants? a. $40,000 b. $41,600 c. $72,000 d. $83,200


During 2016, Gordon Company issued at 104 three hundred, $1,000 bonds due in ten years. One detachable share warrant entitling the holder to purchase 15 shares of Gordon’s ordinary shares was attached to each bond. At the date of issuance, the market value of the bonds, without the share warrants, was quoted at 96. The fair value of each detachable warrant was quoted at $40. What amount, if any, of the proceeds from the issuance should be accounted for as part of Gordon’s equity? a. $0 b. $12,000 c. $24,000 d. $12,480

63.

On April 7, 2016, Kegin Corporation sold a $2,000,000, twenty-year, 8 percent bond issue for $2,120,000. Each $1,000 bond has two detachable warrants, each of which permits the purchase of one share of the corporation's ordinary shares for $30. The shares have a par value of $25 per share. Immediately after the sale of the bonds, the corporation's securities had the following fair values: 8% bond without warrants Warrants Ordinary Shares

$1,008 21 28

What accounts should Kegin credit to record the sale of the bonds? a. Bonds Payable $2,077,600 Share Premium—Share Warrants 42,400 b. Bonds Payable $2,035,200 Share Premium—Share Warrants 84,800 c. Bonds Payable $2,016,000 Share Premium—Share Warrants 104,000 d. Bonds Payable $2,120,000 Use the following information for questions 64 and 65. On May 1, 2016, Payne Co. issued $300,000 of 7% bonds at 103, which are due on April 30, 2026. Twenty detachable share warrants entitling the holder to purchase for $40 one share of Payne’s ordinary shares, $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2016, the fair value of Payne’s shares was $35 per share and of the warrants was $2. 64.

On May 1, 2016, Payne should credit Share Premium –Share Warrants for a. $9,000. b. $12,000. c. $21,000. d. $12,360.

65.

On May 1, 2016, Payne should record bonds at payable a. discount of $296,640. b. discount of $288,000. c. discount of $300,000. d. premium of $309,000.

Dilutive Securities and Earnings per Share 66.

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Vernon Corporation offered detachable 5-year warrants to buy one ordinary share (par value $5) at $20 (at a time when the shares were selling for $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the Vernon bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants? a. $20,000 b. $25,000 c. $24,000 d. $20,500

Use the following information for questions 67 and 68. On May 1, 2016, Marly Co. issued $500,000 of 7% bonds at 103, which are due on April 30, 2026. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly’s ordinary shares $15 par value, were attached to each $1,000 bond. The bonds without the warrants would sell at 96. On May 1, 2016, the fair value of Marly’s shares was $35 per share and of the warrants was $2. 67.

On May 1, 2016, Marly should record bonds payable at a. $515,000. b. $500,000. c. $480,000. d. $494,400.

68.

On May 1, 2016, Marly should credit Share Premium–Share Warrants for a. $20,600 b. $35,000 c. $20,000 d. $15,000

69.

On July 1, 2016, Ellison Company granted Sam Wine, an employee, an option to buy 400 shares of Ellison Co. shares for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $1,800. Wine exercised his option on October 1, 2016 and sold his 400 shares on December 1, 2016. Quoted market prices of Ellison Co. shares in 2016 were: July 1 $30 per share October 1 $36 per share December 1 $40 per share The service period is for three years beginning January 1, 2016. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense on its books in the amount of a. $1,800. b. $600. c. $450. d. $0.


On January 1, 2016, Trent Company granted Dick Williams, an employee, an option to buy 100 shares of Trent Co. shares for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $900. Williams exercised his option on September 1, 2016, and sold his 100 shares on December 1, 2016. Quoted market prices of Trent Co. shares during 2016 were: January 1 $30 per share September 1 $36 per share December 1 $40 per share The service period is for two years beginning January 1,2016. As a result of the option granted to Williams, using the fair value method, Trent should recognize compensation expense for 2016 on its books in the amount of a. $1,000. b. $900. c. $450. d. $0.

71.

On December 31, 2015, Gonzalez Company granted some of its executives options to purchase 100,000 shares of the company’s $10 par ordinary shares at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $750,000. The options become exercisable on January 1, 2016, and represent compensation for executives’ services over a three-year period beginning January 1, 2016. At December 31, 2016 none of the executives had exercised their options. What is the impact on Gonzalez’s net income for the year ended December 31, 2016 as a result of this transaction under the fair value method? a. $250,000 increase. b. $750,000 decrease. c. $250,000 decrease. d. $0.

72.

On January 1, 2016 Reese Company granted Jack Buchanan, an employee, an option to buy 100 shares of Reese Co. shares for $40 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $1,200. Buchanan exercised his option on September 1, 2016, and sold his 100 shares on December 1, 2016. Quoted market prices of Reese Co. shares during 2016 were: January 1 $40 per share September 1 $48 per share December 1 $54 per share The service period is for two years beginning January 1, 2016. As a result of the option granted to Buchanan, using the fair value method, Reese should recognize compensation expense for 2016 on its books in the amount of a. $0. b. $600. c. $1,200 d. $1,400


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On June 30, 2015, Yang Corporation granted compensatory share options for 20,000 shares of its $24 par value ordinary shares to certain of its key employees. The market price of the ordinary shares on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $64,000. The options are exercisable beginning January 1, 2017, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2018. On January 4, 2017, when the market price of the shares was $36 per share, all options for the 20,000 shares were exercised. The service period is for two years beginning January 1, 2015. Using the fair value method, what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31, 2015? a. $64,000 b. $32,000 c. $15,000 d. $0

74.

In order to retain certain key executives, Smiley Corporation granted them incentive share options on December 31, 2014. 80,000 options were granted at an option price of $35 per share. Market prices of the shares were as follows: December 31, 2015 $46 per share December 31, 2016 51 per share The options were granted as compensation for executives’ services to be rendered over a two-year period beginning January 1, 2015. The Black-Scholes option pricing model determines total compensation expense to be $800,000. What amount of compensation expense should Smiley recognize as a result of this plan for the year ended December 31, 2015 under the fair value method? a. $1,400,000. b. $880,000. c. $800,000. d. $400,000.

75.

On January 1, 2015, Ritter Company granted share options to officers and key employees for the purchase of 10,000 ordinary shares of the company's $1 par at $20 per share as additional compensation for services to be rendered over the next three years. The options are exercisable during a five-year period beginning January 1, 2018 by grantees still employed by Ritter. The Black-Scholes option pricing model determines total compensation expense to be $90,000. The market price of ordinary shares was $26 per share at the date of grant. The journal entry to record the compensation expense related to these options for 2015 would include a credit to the Share Premium—Share Options account for a. $0. b. $18,000. c. $20,000. d. $30,000.


On January 1, 2016, Evans Company granted Tim Telfer, an employee, an option to buy 1,000 ordinary shares of Evans Co. for $25 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $7,500. Telfer exercised his option on September 1, 2016, and sold his 1,000 shares on December 1, 2016. Quoted market prices of Evans Co. shares during 2016 were January 1 $25 per share September 1 $30 per share December 1 $34 per share The service period is for three years beginning January 1, 2016. As a result of the option granted to Telfer, using the fair value method, Evans should recognize compensation expense for 2016 on its books in the amount of a. $9,000. b. $7,500. c. $2,500. d. $1,500.

77.

On December 31, 2015, Kessler Company granted some of its executives options to purchase 50,000 shares of the company's $10 par ordinary shares at an option price of $50 per share. The options become exercisable on January 1, 2016, and represent compensation for executives' services over a three-year period beginning January 1, 2016. The Black-Scholes option pricing model determines total compensation expense to be $300,000. At December 31, 2016, none of the executives had exercised their options. What is the impact on Kessler's net income for the year ended December 31, 2016 as a result of this transaction under the fair value method? a. $100,000 increase b. $0 c. $100,000 decrease d. $300,000 decrease

78.

Weiser Corp. on January 1, 2013, granted share options for 40,000 shares of its $10 par value ordinary shares to its key employees. The market price of the shares on that date was $23 per share and the option price was $20. The Black-Scholes option pricing model determines total compensation expense to be $240,000. The options are exercisable beginning January 1, 2016, provided those key employees are still in Weiser’s employ at the time the options are exercised. The options expire on January 1, 2017. On January 1, 2016, when the market price of the shares was $29 per share, all 40,000 options were exercised. The amount of compensation expense Weiser should record for 2015 under the fair value method is a. $0. b. $40,000. c. $80,000. d. $120,000.


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79.

On December 31, 2015, Houser Company granted some of its executives options to purchase 45,000 shares of the company's $50 par ordinary shares at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $900,000. The options become exercisable on January 1, 2016, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2015. What is the impact on Houser's total equity for the year ended December 31, 2015, as a result of this transaction under the fair value method? a. $900,000 decrease b. $300,000 decrease c. $0 d. $300,000 increase

80.

On June 30, 2012, Norman Corporation granted compensatory share options for 30,000 shares of its $20 par value ordinary shares to certain of its key employees. The market price of the shares on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $360,000. The options are exercisable beginning January 1, 2015, provided those key employees are still in Norman’s employ at the time the options are exercised. The options expire on June 30, 2016. On January 4, 2015, when the market price of the shares was $42 per share, all 30,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2014 using the fair value method? a. $0. b. $144,000. c. $180,000. d. $360,000.

81.

In order to retain certain key executives, Jensen Corporation granted them incentive share options on December 31, 2014. 50,000 options were granted at an option price of $35 per share. Market prices of the shares were as follows: December 31, 2015 December 31, 2016

$46 per share 51 per share

The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2015. The Black-Scholes option pricing model determines total compensation expense to be $500,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended December 31, 2015 under the fair value method? a. $250,000. b. $500,000. c. $550,000. d. $1,750,000.


Grant, Inc. had 40,000 treasury shares ($10 par value) at December 31, 2015, which it acquired at $11 per share. On June 4, 2016, Grant issued 20,000 treasury shares to employees who exercised options under Grant's employee share option plan. The fair value per share was $13 at December 31, 2015, $15 at June 4, 2016, and $18 at December 31, 2016. The share options had been granted for $12 per share. The cost method is used. What is the balance of the treasury shares on Grant's statement of financial position at December 31, 2016? a. $140,000. b. $180,000. c. $220,000. d. $240,000.

83.

On January 1, 2016 (the date of grant), Henrik Co. issues 2,000 shares of restricted shares to its executives. The fair value of these shares is $75,000, and their par value is $10,000. The shares are forfeited if the executives do not complete 3 years of employment with the company. Assuming the service period is three years, how much compensation expense will Henrik Co. record on January 1, 2016? a. $25,000. b. $-0c. $3,333. d. $21,667.

84.

Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary shares (par value $1 per share) at a 20 percent discount. The purchase price must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on average 80 shares at $22 share (market price $27.50). Under IFRS, Anazazi Co. will record a. No compensation since the plan is used to raise capital, not compensate employees. b. Compensation expense of $5,500,000. c. Compensation expense of $18,700,000. d. Compensation expense of $3,740,000.

Use the following information for questions 85 through 87. On January 1, 2014, Korsak, Inc. established a share appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its ordinary shares and a pre-established price of $20 on 60,000 SARs. Current fair values of the shares are as follows: January 1, 2014 December 31, 2014 December 31, 2015 December 31, 2016

$35 per share 38 per share 30 per share 33 per share

Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2014. *85.

What amount of compensation expense should Korsak recognize for the year ended December 31, 2014? a. $180,000 c. $225,000 b. $270,000 d. $1,080,000


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*86.

What amount of compensation expense should Korsak recognize for the year ended December 31, 2015? a. $0 b. $30,000 c. $300,000 d. $150,000

*87.

On December 31, 2016, 16,000 SARs are exercised by executives. What amount of compensation expense should Korsak recognize for the year ended December 31, 2016? a. $285,000 b. $195,000 c. $585,000 d. $78,000

Multiple Choice Answers—Dilutive Securities, Computational Item

48. 49. 50. 51. 52. 53.

Ans.

a b a b c b

Item

54. 55. 56. 57. 58. 59.

Ans.

c a b d c d

Item

60. 61. 62. 63. 64. 65.

Ans.

b c c c c b

Item

66. 67. 68. 69. 70. 71.

Ans.

b c b b c c

Item

72. 73. 74. 75. 76. 77.

Ans.

Item

Ans.

Item

Ans.

b b d d c c

78. 79. 80. 81. 82. *83.

c c b a c b

*84. *85. *86. *87.

d b b a

MULTIPLE CHOICE—Dilutive Securities, CPA Adapted 88.

On January 2, 2015, Farr Co. issued 10-year convertible bonds at 105. During 2017, these bonds were converted into ordinary shares having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr’s shares was 50 percent above its par value. On January 2, 2015, cash proceeds from the issuance of the convertible bonds should be reported as a. share capital for the entire proceeds. b. share premium for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. c. a liability for the entire proceeds. d. a liability for the present value of the bonds and share premium for the amount over the bonds present value.

89.

Lang Co. issued bonds with detachable ordinary share warrants. Only the bonds had a known fair value. The cash proceeds exceed the fair value of the bonds. This excess is reported as a. Share Premium—Share Warrants. b. Share Premium—Ordinary. c. Bonds Payable. d. Share Premium—Conversion Equity.

COMPOSITOR: DELETE THIS PAGE AND RENUMBER SUCCEEDING PAGES


On January 1, 2015, Sharp Corp. granted an employee an option to purchase 6,000 shares of Sharp's $5 par value ordinary shares at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $140,000. The option became exercisable on December 31, 2016, after the employee completed two years of service. The market prices of Sharp's shares were as follows: January 1, 2015 December 31, 2016

$30 50

For 2016, should recognize compensation expense under the fair value method of a. $90,000. b. $30,000. c. $70,000. d. $0. *91.

On January 2, 2015, for past services, Rosen Corp. granted Nenn Pine, its president, 16,000 share appreciation rights that are exercisable immediately and expire on January 2, 2016. On exercise, Nenn is entitled to receive cash for the excess of the market price of the shares on the exercise date over the market price on the grant date. Nenn did not exercise any of the rights during 2015. The market price of Rosen's shares was $30 on January 2, 2015, and $45 on December 31, 2015. As a result of the share appreciation rights, Rosen should recognize compensation expense for 2015 of a. $0. b. $80,000. c. $240,000. d. $480,000.

Multiple Choice Answers—Dilutive Securities, CPA Adapted Item

88.

Ans.

d

Item

89.

Ans.

a

Item

90.

Ans.

Item

Ans.

c

*91.

c

MULTIPLE CHOICE—Earnings Per Share—Conceptual 92.

With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure? a. Ordinary shares, preference shares, and convertible securities outstanding in lots of even thousands b. Earnings derived from one primary line of business c. Ownership interest consisting solely of ordinary shares d. None of these answers are correct

93.

In computing earnings per share for a simple capital structure, if the preference shares are cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the a. preference dividends in arrears. b. preference dividends in arrears times (one minus the income tax rate). c. annual preference dividend times (one minus the income tax rate). d. None of these answers are correct.


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94.

In computations of weighted average of shares outstanding, when a share dividend or stock split occurs, the additional shares are a. weighted by the number of days outstanding. b. weighted by the number of months outstanding. c. considered outstanding at the beginning of the year. d. considered outstanding at the beginning of the earliest year reported.

95.

What effect will the acquisition of treasury shares have on shareholders' equity and earnings per share, respectively? a. Decrease and no effect b. Increase and no effect c. Decrease and increase d. Increase and decrease

S

96.

Due to the importance of earnings per share information, it is required to be reported by all Public Companies Nonpublic Companies a. Yes Yes b. Yes No c. No No d. No Yes

P

97.

A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into ordinary shares, if the effect of its inclusion is a. b. c. d.

Dilutive Yes Yes No No

Antidilutive Yes No Yes No

98.

When computing diluted earnings per share, convertible bonds are a. ignored. b. assumed converted whether they are dilutive or antidilutive. c. assumed converted only if they are antidilutive. d. assumed converted only if they are dilutive.

99.

Dilutive convertible securities must be used in the computation of a. basic earnings per share only. b. diluted earnings per share only. c. diluted and basic earnings per share. d. None of these answers are correct.

100.

In computing earnings per share, the equivalent number of shares of convertible preference shares are added as an adjustment to the denominator (number of shares outstanding). If the preference shares are cumulative, which amount should then be added as an adjustment to the numerator (net earnings)? a. Annual preference dividend b. Annual preference dividend times (one minus the income tax rate) c. Annual preference dividend times the income tax rate d. Annual preference dividend divided by the income tax rate


In the diluted earnings per share computation, the treasury share method is used for options and warrants to reflect assumed reacquisition of ordinary shares at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would a. fairly present diluted earnings per share on a prospective basis. b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. c. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share. d. be antidilutive.

102.

In applying the treasury share method to determine the dilutive effect of share options and warrants, the proceeds assumed to be received upon exercise of the options and warrants a. are used to calculate the number of ordinary shares repurchased at the average market price, when computing diluted earnings per share. b. are added, net of tax, to the numerator of the calculation for diluted earnings per share. c. are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of ordinary shares. d. None of these answers are correct.

103.

When applying the treasury share method for diluted earnings per share, the market price of the ordinary shares used for the repurchase is the a. price at the end of the year. b. average market price. c. price at the beginning of the year. d. None of these answers are correct.

104.

Antidilutive securities a. should be included in the computation of diluted earnings per share but not basic earnings per share. b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share. c. include share options and warrants whose exercise price is less than the average market price of ordinary shares. d. should be ignored in all earnings per share calculations.

*105. Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the a. greater earnings adjustment. b. greater earnings effect per share. c. smaller earnings adjustment. d. smaller earnings effect per share.

Multiple Choice Answers—Earnings Per Share—Conceptual Item

92. 93.

Ans.

c d

Item

94. 95.

Ans.

d c

Item

96. 97.

Ans.

b b

Item

98. 99.

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

d b

100. 101.

a d

102. 103.

a b

104. *105.

d d

Solution to Multiple Choice question for which the answer is “None of these answers are correct.” 93.

annual preferred dividend.


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MULTIPLE CHOICE—Earnings Per Share—Computational 106.

Hill Corp. had 600,000 ordinary shares outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $1,050,000 for the year ending December 31, 2016. Earnings per share for 2016 would be a. $1.75. b. $.83. c. $1.00. d. $1.17.

107.

At December 31, 2016, Hancock Company had 500,000 ordinary shares issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2016. Net income for the year ended December 31, 2016, was $1,020,000. What should be Hancock's 2016 earnings per share, rounded to the nearest penny? a. $2.02 b. $2.55 c. $2.40 d. $2.27

108.

Milo Co. had 600,000 ordinary shares outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury shares on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is a. 651,000. b. 672,000. c. 693,000. d. 714,000.

109.

On January 1, 2016, Gridley Corporation had 125,000 shares of its $2 par value ordinary shares outstanding. On March 1, Gridley sold an additional 250,000 shares on the open market at $20 per share. Gridley issued a 20% share dividend on May 1. On August 1, Gridley purchased 140,000 shares and immediately retired the shares. On November 1, 200,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2016? a. 510,000 b. 375,000 c. 358,333 d. 258,333

110.

The following information is available for Barone Corporation: January 1, 2016 April 1, 2016 July 1, 2016 October 1, 2016

Shares outstanding Shares issued Treasury shares purchased Shares issued in a 100% stock dividend

1,250,000 200,000 75,000 1,375,000

The number of shares to be used in computing earnings per ordinary share for 2016 is a. 2,825,500. b. 2,737,500. c. 2,725,000. d. 1,706,250.


At December 31, 2015 Rice Company had 300,000 ordinary shares and 10,000 shares of 5%, $100 par value cumulative preference shares outstanding. No dividends were declared on either the preference or ordinary shares in 2015 or 2016. On January 30, 2017, prior to the issuance of its financial statements for the year ended December 31, 2016, Rice declared a 100% share dividend on its ordinary shares. Net income for 2016 was $950,000. In its 2016 financial statements, Rice's 2016 earnings per share should be a. $1.50. b. $1.58. c. $3.00. d. $3.17.

112.

Fultz Company had 300,000 ordinary shares issued and outstanding at December 31, 2015. During 2016, no additional ordinary shares were issued. On January 1, 2016, Fultz issued 400,000 shares of nonconvertible preference shares. During 2016, Fultz declared and paid $180,000 cash dividends on the ordinary shares and $150,000 on the nonconvertible preference shares. Net income for the year ended December 31, 2016, was $960,000. What should be Fultz's 2016 earnings per share, rounded to the nearest penny? a. $1.16 b. $2.10 c. $2.70 d. $3.20

113.

At December 31, 2015 Pine Company had 200,000 ordinary shares and 10,000 shares of 4%, $100 par value cumulative preference shares outstanding. No dividends were declared on either the preference or ordinary shares in 2015 or 2016. On February 10, 2017, prior to the issuance of its financial statements for the year ended December 31, 2016, Pine declared a 100% stock split on its ordinary shares. Net income for 2016 was $720,000. In its 2016 financial statements, Pine’s 2016 earnings per share should be a. $3.40. b. $3.20. c. $1.70. d. $1.00.

114.

Stine Inc. had 300,000 ordinary shares issued and outstanding at December 31, 2015. On July 1, 2016 an additional 300,000 shares were issued for cash. Stine also had share options outstanding at the beginning and end of 2016 which allow the holders to purchase 90,000 ordinary shares at $28 per share. The average market price of Stine’s ordinary shares was $35 during 2016. The number of shares to be used in computing diluted earnings per share for 2016 is a. 672,000 b. 618,000 c. 522,000 d. 468,000


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115.

Kasravi Co. had net income for 2016 of $300,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share is 12,000 shares. The average market price of the ordinary shares during the year was $36. What should Kasravi Co. report for diluted earnings per share for the year ended 2016? a. $1.50 b. $1.49 c. $1.43 d. $1.42

116.

On January 2, 2016, Worth Co. issued at par $2,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 20 ordinary shares. No bonds were converted during 2016. Worth had 200,000 ordinary shares outstanding during 2016. Worth’s 2016 net income was $600,000 and the income tax rate was 30%. Worth’s diluted earnings per share for 2016 would be (rounded to the nearest penny): a. $3.49. b. $2.91. c. $3.00. d. $3.08.

117.

Beaty Inc. purchased Dunbar Co. and agreed to give shareholders of Dunbar Co. 10,000 additional shares in 2017 if Dunbar Co.’s net income in 2016 is $500,000; in 2015 Dunbar Co.’s net income is $520,000. Beaty Inc. has net income for 2015 of $200,000 and has an average number of ordinary shares outstanding for 2015 of 100,000 shares. What should Beaty report as diluted earnings per share for 2015? a. $2.22 b. $2.00 c. $1.82 d. $1.67

Use the following information for questions 118 and 119. Hanson Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and $1,000,000 of 10% convertible bonds outstanding during 2016. The preference shares are convertible into 40,000 ordinary shares. During 2016, Hanson paid dividends of $1.20 per share on the ordinary shares and $4 per share on the preference shares. Each $1,000 bond is convertible into 45 ordinary shares. The net income for 2016 was $800,000 and the income tax rate was 30%. 118.

Basic earnings per share for 2016 is (rounded to the nearest penny) a. $2.94. b. $3.22. c. $3.35. d. $3.60.

119.

Diluted earnings per share for 2016 is (rounded to the nearest penny) a. $2.77. b. $2.81. c. $3.05. d. $3.33.


Fugate Company had 500,000 ordinary shares issued and outstanding at December 31, 2015. On July 1, 2016 an additional 500,000 shares were issued for cash. Fugate also had share options outstanding at the beginning and end of 2016 which allow the holders to purchase 150,000 ordinary shares at $20 per share. The average market price of Fugate's ordinary shares was $25 during 2016. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2016? a. 1,030,000 b. 870,000 c. 787,500 d. 780,000

121.

Shipley Corporation had net income for the year of $480,000 and a weighted average number of ordinary shares outstanding during the period of 200,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par ($2,000,000), carry a 7% interest rate, and are convertible into 40,000 shares. The company has a 40% tax rate. Diluted earnings per share are a. $1.65 b. $2.23. c. $2.35. d. $2.58.

122.

Colt Corporation purchased Massey Inc. and agreed to give shareholders of Massey Inc. 50,000 additional shares in 2017 if Massey Inc.’s net income in 2016 is $400,000 or more; in 2015 Massey Inc.’s net income is $410,000. Colt has net income for 2015 of $800,000 and has an average number of ordinary shares outstanding for 2015 of 500,000 shares. What should Colt report as earnings per share for 2015?

a. b. c. d. 123.

Basic Earnings Per Share $1.60 $1.45 $1.60 $1.45

Diluted Earnings Per Share $1.60 $1.60 $1.45 $1.45

On January 2, 2016, Perez Co. issued at par $10,000 of 6% bonds convertible in total into 1,000 ordinary shares of Perez's. No bonds were converted during 2016. Throughout 2016, Perez had 1,000 ordinary shares outstanding. Perez's 2016 net income was $3,000, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2016. Perez's diluted earnings per share for 2016 would be (rounded to the nearest penny) a. $1.50. b. $1.71. c. $1.80. d. $3.42.


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124.

At December 31, 2015, Kifer Company had 500,000 ordinary shares outstanding. On October 1, 2016, an additional 100,000 ordinary shares were issued. In addition, Kifer had $10,000,000 of 6% convertible bonds outstanding at December 31, 2015, which are convertible into 225,000 ordinary shares. No bonds were converted in 2016. The net income for the year ended December 31, 2016, was $3,000,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2016, should be (rounded to the nearest penny) a. $6.52. b. $4.80. c. $4.56. d. $4.00.

125.

On January 2, 2016, Mize Co. issued at par $300,000 of 9% convertible bonds. Each $1,000 bond is convertible into 30 ordinary shares. No bonds were converted during 2016. Mize had 50,000 ordinary shares outstanding during 2016. Mize 's 2016 net income was $160,000 and the income tax rate was 30%. Mize's diluted earnings per share for 2016 would be (rounded to the nearest penny) a. $2.71. b. $3.03. c. $3.20. d. $3.58.

126.

At December 31, 2015, Sager Co. had 1,200,000 ordinary shares outstanding. In addition, Sager had 450,000 shares of preference shares which were convertible into 750,000 ordinary shares. During 2016, Sager paid $600,000 ordinary cash dividends and $400,000 preference cash dividends. Net income for 2016 was $3,400,000 and the income tax rate was 40%. The diluted earnings per share for 2016 is (rounded to the nearest penny) a. $1.24. b. $1.74. c. $2.51. d. $2.84.

Use the following information for questions 127 and 128. Lerner Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and $1,000,000 of 10% convertible bonds outstanding during 2016. The preference shares are convertible into 40,000 ordinary shares. During 2016, Lerner paid dividends of $.90 per ordinary share and $3.00 per preference share. Each $1,000 bond is convertible into 45 ordinary shares. The net income for 2016 was $600,000 and the income tax rate was 30%. 127.

Basic earnings per share for 2016 is (rounded to the nearest penny) a. $2.21. b. $2.42. c. $2.51. d. $2.70.

128.

Diluted earnings per share for 2016 is (rounded to the nearest penny) a. $2.14. b. $2.25. c. $2.35. d. $2.46.


Yoder, Incorporated, has 3,200,000 ordinary shares outstanding on December 31, 2015. An additional 800,000 ordinary shares were issued on April 1, 2016, and 400,000 more on July 1, 2016. On October 1, 2016, Yoder issued 20,000, $1,000 face value, 8% convertible bonds. The bonds are dilutive. Each bond is convertible into 20 ordinary shares. No bonds were converted in 2016. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively? a. 4,000,000 and 4,000,000 b. 4,000,000 and 4,100,000 c. 4,000,000 and 4,400,000 d. 4,400,000 and 5,200,000

130.

Nolte Co. has 4,000,000 ordinary shares outstanding on December 31, 2015. An additional 200,000 shares are issued on April 1, 2016, and 480,000 more on September 1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. The bonds are dilutive. Each $1,000 bond is convertible into 40 ordinary shares. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2016 is a. 4,310,000 and 4,310,000. b. 4,310,000 and 4,370,000. c. 4,310,000 and 4,550,000. d. 5,080,000 and 5,320,000.

131.

At December 31, 2015, Tatum Company had 2,000,000 ordinary shares outstanding. On January 1, 2016, Tatum issued 500,000 shares of preference shares which were convertible into 1,000,000 ordinary shares. During 2016, Tatum declared and paid $1,500,000 ordinary cash dividends and $500,000 preference cash dividends. Net income for the year ended December 31, 2016, was $5,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2016? (Round to the nearest penny.) a. $1.50 b. $1.67 c. $2.50 d. $2.08

132.

At December 31, 2015, Emley Company had 1,200,000 ordinary shares outstanding. On September 1, 2016, an additional 400,000 ordinary shares were issued. In addition, Emley had $12,000,000 of 6% convertible bonds outstanding at December 31, 2015, which are convertible into 800,000 ordinary shares. No bonds were converted in 2016. The net income for the year ended December 31, 2016, was $4,500,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2016, rounded to the nearest penny? a. $2.11 b. $3.38 c. $2.35 d. $2.45


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Grimm Company has 1,800,000 ordinary shares outstanding on December 31, 2015. An additional 150,000 ordinary shares were issued on July 1, 2016, and 300,000 more on October 1, 2016. On April 1, 2016, Grimm issued 6,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 40 ordinary shares. The bonds are dilutive. No bonds were converted in 2016. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, 2016? a. 1,950,000 and 2,130,000 b. 1,950,000 and 1,950,000 c. 1,950,000 and 2,190,000 d. 2,250,000 and 2,430,000

Use the following information for questions 134 and 135. Information concerning the capital structure of Piper Corporation is as follows: December 31, 2016 2015 Ordinary Shares 150,000 shares 150,000 shares Convertible preference shares 15,000 shares 15,000 shares 9% convertible bonds $2,400,000 $2,400,000 During 2016, Piper paid dividends of $1.20 per ordinary share and $3.00 per preference share. The preference shares are convertible into 30,000 ordinary shares. The 9% convertible bonds are convertible into 75,000 ordinary shares. The net income for the year ended December 31, 2016, was $600,000. Assume that the income tax rate was 30%. 134.

What should be the basic earnings per share for the year ended December 31, 2016, rounded to the nearest penny? a. $2.66 b. $2.92 c. $3.70 d. $4.00

135.

What should be the diluted earnings per share for the year ended December 31, 2016, rounded to the nearest penny? a. $3.20 b. $2.95 c. $2.83 d. $2.35

136.

Warrants exercisable at $20 each to obtain 30,000 ordinary shares were outstanding during a period when the average market price of the ordinary shares was $25. Application of the treasury share method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by a. 30,000. b. 24,000. c. 6,000. d. 7,500.


Terry Corporation had 300,000 ordinary shares outstanding at December 31, 2016. In addition, it had 90,000 share options outstanding, which had been granted to certain executives, and which gave them the right to purchase Terry's shares at an option price of $37 per share. The average market price of Terry's ordinary shares for 2016 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2016? a. 300,000 b. 331,622 c. 366,600 d. 323,400

Multiple Choice Answers—Earnings Per Share—Computational Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

106. 107. 108. 109. 110.

c c b b c

111. 112. 113. 114. 115.

a c c d b

116. 117. 118. 119. 120.

c c d c d

121. 122. 123. 124. 125.

c c b c b

126. 127. 128. 129. 130.

b d c b b

131. 132. 133. 134. 135.

b c a c b

136. 137.

c d

MULTIPLE CHOICE—Earnings Per Share—CPA Adapted 138.

Didde Co. had 300,000 ordinary shares issued and outstanding at December 31, 2015. No ordinary shares were issued during 2016. On January 1, 2016, Didde issued 200,000 shares of nonconvertible preference shares. During 2016, Didde declared and paid $100,000 cash dividends on the ordinary shares and $80,000 on the preference shares. Net income for the year ended December 31, 2016 was $620,000. What should be Didde's 2016 earnings per share? a. $2.07 b. $1.80 c. $1.73 d. $1.47

139.

At December 31, 2016 and 2015, Miley Corp. had 180,000 ordinary shares and 10,000 shares of 5%, $100 par value cumulative preference shares outstanding. No dividends were declared on either the preference or ordinary shares in 2016 or 2015. Net income for 2016 was $400,000. For 2016, earnings per share amounted to a. $2.22. b. $1.94. c. $1.67. d. $1.11.


16 - 31

140.

Marsh Co. had 2,400,000 ordinary shares outstanding on January 1 and December 31, 2015. In connection with the acquisition of a subsidiary company in June 2014, Marsh is required to issue 100,000 additional ordinary shares on July 1, 2016, to the former owners of the subsidiary. Marsh paid $200,000 in preference share dividends in 2015, and reported net income of $3,400,000 for the year. Marsh's diluted earnings per share for 2015 should be a. $1.42. b. $1.36. c. $1.33. d. $1.28.

141.

Foyle, Inc., had 560,000 ordinary shares and outstanding at December 31, 2015. On July 1, 2016, an additional 40,000 shares were issued for cash. Foyle also had unexercised share options to purchase 32,000 ordinary shares at $15 per share outstanding at the beginning and end of 2016. The average market price of Foyle's ordinary shares was $20 during 2016. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2016? a. 580,000 b. 588,000 c. 608,000 d. 612,000

142.

When computing diluted earnings per share, convertible securities are a. ignored. b. recognized only if they are dilutive. c. recognized only if they are antidilutive. d. recognized whether they are dilutive or antidilutive.

143.

In determining diluted earnings per share, dividends on nonconvertible cumulative preference shares should be a. disregarded. b. added back to net income whether declared or not. c. deducted from net income only if declared. d. deducted from net income whether declared or not.

144.

The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the a. beginning of the earliest period reported (or at time of issuance, if later). b. beginning of the earliest period reported (regardless of time of issuance). c. middle of the earliest period reported (regardless of time of issuance). d. ending of the earliest period reported (regardless of time of issuance).

Multiple Choice Answers—Earnings Per Share—CPA Adapted Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

Item

Ans.

138.

b

139.

b

140.

d

141.

b

142.

b

143.

d

144.

a

16 - 32 Test Bank for Intermediate Accounting, IFRS Edition, 2e

DERIVATIONS — Dilutive Securities, Computational No. Answer

Derivation

48.

a

$800,000 + ($175,000 × .32) – (800 × 30 × $30) = $136,000.

49.

b

$60,000 – (1,200 × $45) – $2,400 = $3,600.

50.

a

($2,400,000 ÷ $1,000) × 40 × $20 = $1,920,000 (ordinary shares) ($2,400,000 ÷ $16,000,000) × $1,000,000 = $150,000 (unamortized discount) $2,400,000 – $1,920,000 – $150,000 = $330,000.

51.

b

$100,000 + $2,000 – (2,000 × $40) = $22,000.

52.

c

(€1,000,000 × .70843) + (€60,000 ×3.23972) = €902,813

53.

b

(€1,000,000 × .70843) + (€60,000 × 3.23972) = €902,813 €1,000,000 – €902,813 = €97,817.

54.

c

(€1,000,000 + €97,187) – (1,000 × 250 × €1) = €847,187.

55.

a

No gain or loss recorded.

56.

b

€40,000 payment is debited to Conversion Expense.

57.

d

(₤2,000,000 × .99) – ₤1,900,000 = ₤80,000.

58.

c

€820,000 – (2,000 × €400) = €20,000 dr. to R/E.

59.

d

$6,180,000 – (60,000 × 3 × $25) = $1,680,000.

60.

b

($200,000 × .95) = $190,000.

61.

c

($800,000 × .95) = $760,000; $800,000 × 1.04 = $832,000 $832,000 – $760,000 = $72,000.

62.

c

($300,000 × .96) = $288,000; $300,000 × 1.04 = $312,000 $312,000 – $288,000 = $24,000.

63.

c

(2,000 × $1,008) = $2,016,000 bonds payable $2,120,000 – $2,016,000 = $104,000 share premium – share warrants

64.

c

($300,000 × .96) = $288,000; $300,000 × 1.03 = $309,000 $309,000 – $288,000 = $21,000.

65.

b

$300,000 × .96 = $288,000.


DERIVATIONS — Dilutive Securities, Computational (cont.) No. Answer

Derivation

66.

b

$205,000 – $180,000) = $25,000.

67.

c

($500,000  .96) = $480,000

68.

b

($500,000  1.03) = $15,000 ($500,000  .96) = $480,000. $515,000 – $480,000 = $35,000.

69.

b

$1,800  3 = $600.

70.

c

$900  2 = $450.

71.

c

$750,000  3 = $250,000 decrease.

72.

b

$1,200  2 = $600.

73.

b

$64,000  2 = $32,000.

74.

d

$800,000  2 = $400,000.

75.

d

$90,000 ÷ 3 = $30,000.

76.

c

$7,500 ÷ 3 = $2,500.

77.

c

$300,000 ÷ 3 = $100,000.

78.

c

$240,000 ÷ 3 = $80,000/year.

79.

c

$900,000 × 1/3 = $300,000 increase (from the credit to Paid-in Capital—Stock Options). Offset by $300,000 decrease (from the debit to Compensation Expense).

80.

b

12    $360,000× 30 = $144,000.  

81.

a

$500,000 ÷ 2 = $250,000.

82.

c

20,000 × $11 = $220,000.

83.

b

No compensation expense recorded yet.

84.

d

[8,500  80  ($27.50 – $22)] = $3,740,000.

16 - 33


DERIVATIONS — Dilutive Securities, Computational (cont.) No. Answer

Derivation

*85.

b

($38 – $20) × 60,000 × .25 = $270,000.

*86.

b

($30 – $20) × 60,000 × .5 = $300,000 $300,000 – $270,000 = $30,000.

*87.

a

($33 – $20) × 60,000 × .75 = $585,000 $585,000 – $300,000 = $285,000.

DERIVATIONS — Dilutive Securities, CPA Adapted No. Answer

Derivation

88.

d

Conceptual.

89.

a

Conceptual.

90.

c

$140,000 ÷ 2 = $70,000.

*91.

c

($45 – $30) × 16,000 = $240,000.

DERIVATIONS — Earnings Per Share, Computational No. Answer

Derivation $1,050,000 ———————————— = $1.00. 6 600,000 + (900,000 × — ) 12

106.

c

107.

c

108.

b

109.

b

[(125,000 × 2 × 1.20) + (375,000 × 2 × 1.20) + (450,000 × 3) + (310,000 × 3) + (510,000 × 2)] ÷ 12 = 375,000.

110.

c

[(1,250,000 × 3 × 2) + (1,450,000 × 3 × 2) + (1,375,000 × 3 × 2) + (2,750,000 × 3)] ÷ 12 = 2,725,000.

111.

a

[$950,000 – (10,000 × $100 × .05)] ÷ (300,000 × 2) = $1.50.

112.

c

$960,000 – $150,000 —————————— = $2.70.

$1,020,000 ———————————— = $2.40. 3 400,000 + (100,000 × —- ) 12 600,000 + (126,000 × 8/12) – (63,000 × 4/12) + (54,000 × 2/12) = 672,000.

Dilutive Securities and Earnings per Share 300,000

16 - 35


DERIVATIONS — Earnings Per Share, Computational (cont.) No. Answer

Derivation

113.

c

[$720,000 – (10,000  $100  .04)]  (200,000  2) = $1.70.

114

d

(300,000  6/12) + (600,000  6/12) + [((35 – 28)  35)  90,000] = 468,000.

115.

b

[($36 – $30)  $36]  12,000 = 2,000 $300,000  (200,000 + 2,000) = $1.49.

116.

c

($2,000,000  $1,000)  20 = 40,000 $2,000,000  .07  (1 – .30) = $98,000 ($600,000 + $98,000)  (200,000 + 40,000) = $2.91.

117.

c

Since $520,000  $500,000 include 10,000 shares in DEPS $200,000  (100,000 + 10,000) = $1.82.

118.

d

[$800,000 – (20,000  $4]  200,000 = $3.60.

119.

c

[$800,000 + ($1,000,000  .10  .7)]  [200,000 + 40,000 + (1,000  45)] = $3.05.

120.

d

500,000 + (500,000 × 6/12) + [(25 – 20)/25 × 150,000] = 780,000.

121.

c

[$480,000 + ($2,000,000 × .07 × .60)] ÷ (200,000 + 40,000) = $2.35.

122.

c

Basis: Diluted:

123.

b

124.

c

125.

b

$160,000 + ($300,000 × .09 × .7) ————————————————— = $3.03. 50,000 + [($300,000 ÷ $1,000) × 30)]

126.

b

$3,400,000 —————————— = $1.74. 1,200,000 + 750,000

127.

d

$800,000 ÷ 500,000 = $1.60. $800,000 ÷ (500,000 + 50,000) = $1.45

$3,000 + ($10,000 × .06 × .70) —————————————— = $1.71. 1,000 + 1,000 $3,000,000 + ($10,000,000 × .06 × .7) ————————————————— = $4.56. 3 500,000 + (100,000 × —- ) + 225,000 12

$600,000 – (20,000 × $3) ——————————— = $2.70.

Dilutive Securities and Earnings per Share 200,000

16 - 37


DERIVATIONS — Earnings Per Share, Computational (cont.) No. Answer

Derivation

128.

c

$600,000 + ($1,000,000 × .10 × .7) ———————————————— = $2.35. 200,000 + 45,000 + 40,000

129.

b

3,200,000 + (800,000 × 9/12) + (400,000 × 6/12) = 4,000,000 (BEPS) 4,000,000 + (20,000 × 20 × 3/12) = 4,100,000 (DEPS).

130.

b

4,000,000 + (200,000 × 9/12) + (480,000 × 4/12) = 4,310,000. 4,310,000 + [($6,000,000 ÷ $1,000) × 40 × 3/12] = 4,370,000.

131.

b

$5,000,000 —————————— = $1.67. 2,000,000 + 1,000,000

132.

c

$4,500,000 + ($12,000,000 × .06 × .7) —————————————————— = $2.35. 1,200,000 + (400,000  4/12) + 800,000

133.

a

1,800,000 + (150,000 × 6/12) + (300,000 × 3/12) = 1,950,000 1,950,000 + (6,000 × 40 × 9/12) = 2,130,000.

134.

c

$600,000 – (15,000 × $3.00) ————————————— = $3.70. 150,000

135.

b

$600,000 + ($2,400,000 × .09 × .7) ———————————————— = $2.95. 150,000 + 75,000 + 30,000

136.

c

30,000 × $20 ÷ $25 = 24,000 30,000 – 24,000 = 6,000.

137.

d

90,000 – (90,000 × $37 ÷ $50) = 23,400 300,000 + 23,400 = 323,400.

DERIVATIONS — Earnings Per Share, CPA Adapted No.Answer 138. b

Derivation $620,000 – $80,000 ————————— = $1.80. 300,000

139.

$400,000 – (10,000 × $100 × .05) ——————————————— = $1.94. 180,000

b


d

$3,400,000 – $200,000 ——————————– = $1.28. 2,400,000 + 100,000

141.

b

560,000 + (40,000 × 6/12) + [32,000 – (32,000 × $15 ÷ $20)] = 588,000.

142.

b

Conceptual.

143.

d

Conceptual.

144.

a

Conceptual.

16 - 39


EXERCISES Ex. 16-145—Issuance and Conversion Repurchase of Convertible Bonds. Barone Corporation issues 3,000 convertible bonds at January 1, 2015. The bonds have a three year life, and are issued at par with a face value of €1,000 per bond, giving total proceeds of €3,000,000. Interest is payable annually at 6 percent. Each bond is convertible into 250 ordinary shares (par value of €1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 8%. Instructions (a) Compute the liability and equity component of the convertible bond on January 1, 2015. (b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2015. (c) Prepare the journal entry to record the conversion on January 1, 2016. (d) Assume that the bonds were repurchased on January 1, 2016, for €2,910,000 cash instead of being converted. The net present value of the liability component of the convertible bonds on January 1, 2016, is €2,850,000. Prepare the journal entry to record the repurchase on January 1, 2016. Solution 16-145 (a) Present Value of Principal: (€3,000,000  .79383) ................................................................. Present Value of Interest Payments: (€180,000  2.57710) ..................................................................... Present Value of the Liability Component........................................

€2,381,490 463,878 €2,845,368

Fair Value of Convertible Debt........................................................ Less: Fair Value of Liability Component.......................................... Fair Value of Equity Component......................................................

€3,000,000 2,845,368 € 154,362

(b) Cash............................................................................................... Bonds Payable................................................................................ Share Premium—Conversion Equity...............................................

3,000,000

(c) Share Premium—Conversion Equity .............................................. Bonds Payable (€2,845,368 + €47,629).......................................... Share Capital—Ordinary.......................................................... Share Premium—Ordinary....................................................... *€154,632 + €2,892,997 – €750,000

154,632 2,892,997

(d) Share Premium—Conversion Equity .............................................. Bonds Payable................................................................................ Cash........................................................................................ Gain on Repurchase (€2,892,997 – €2,850,000)..................... *€2,910,000 – €2,850,000

60,000* 2,892,997

2,845,368 154,632

750,000 2,297,629*

2,910,000 42,997


16 - 41

Ex. 16-146—Convertible Bonds. Koch Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value ordinary shares that had a market price of $40 per share. How should Koch Co. account for the conversion of the bonds into ordinary shares under the book value method? Discuss the rationale for this method. Solution 16-146 To account for the conversion of bonds under the book value method, Bonds Payable should be debited for the carrying value, and Share Capital–Ordinary should be credited at par for the shares issued. Using the book value method, no gain (loss) on conversion is recorded. The amount to be recorded for the shares is equal to the book (carrying) value (face value plus unamortized premium) of the bonds. Share Premium–Ordinary would be credited for the difference between the book value of the bonds and the par value of the shares issued. The rationale for the book value method is that the conversion is the completion of the transaction initiated when the bonds were issued. Since this is viewed as a transaction with shareholders, no gain (loss) should be recognized. Ex. 16-147 (Issuance, Conversion, Repurchase of Convertible Bonds) On January 1, 2014, Lin Company issued a convertible bond with a par value of $100,000 in the market for $120,000. The bonds are convertible into 12,000 ordinary shares of $1 per share par value. The bond has a 5-year life and has a stated interest rate of 10% payable annually. The market interest rate for a similar non-convertible bond at January 1, 2014, is 8%. The liability component of the bond is computed to be 107,986. The following bond amortization schedule is provided for this bond. EFFECTIVE-INTEREST METHOD 10% BOND DISCOUNTED AT 8% Date 1/1/14 12/31/14 12/31/15 12/31/16 12/31/17 12/31/18

Cash Paid

Interest Expense

Premium Amortized

$10,000 10,000 10,000 10,000 10,000

$8,639 8,530 8,412 8,285 8,148

$1,361 1,470 1,588 1,715 1,852

Carrying Amount of Bonds $107,986 106,625 105,155 103,567 101,852 100,000

Instructions (a) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2014. (b) Assume that the bonds were converted on December 31, 2016. The fair value of the liability component of the bond is determined to be $108,000 on December 31, 2016. Prepare the journal entry to record the conversion on December 31, 2016. Assume that the accrual of interest related to 2016 has been recorded. (c) Assume that the convertible bonds were repurchased on December 31, 2016, for $111,000 instead of being converted. As indicated, the liability component of the bond is determined to be $108,000 on December 31, 2016. Assume that the accrual of interest related to 2016 has been recorded.

16 - 42 Test Bank for Intermediate Accounting, IFRS Edition, 2e Solution 16-147 (a) Cash............................................................................................... Bonds Payable................................................................................ Share Premium—Conversion Equity.......................................

120,000

(b) Share Premium—Conversion Equity............................................... Bonds Payable................................................................................ Share Capital—Ordinary (12,000  $1).................................... Share Premium—Ordinary......................................................

12,014 103,567

107,986 12,014

12,000 103,581

(c) Computation of gain or loss: Present value of liability component At 12/31/16................................................................................... Less: Carrying value (from above).................................................. Loss................................................................................................

108,000 103,567 4,433

Adjustment to equity: Fair value of convertible bonds (with both liability and equity)................................................ Less: Liability component........................................................ Adjustment to Share Premium––Conversion

111,000 108,000 3,000

Share Premium––Conversion Equity.............................................. Bonds Payable................................................................................ Loss on Repurchase....................................................................... Cash........................................................................................

3,000 103,567 4,433 111,000

Ex. 16-148 (Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction: 1. 2. 3.

Baden Corp. issued €5,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company’s investment banker determines that they would have been sold at 95. Fleming Company issued €5,000,000 par value 10% bonds at 98. One share warrant was issued with each €100 par value bond. At the time of issuance, the warrants were selling for €4. The net present value of the bonds without the warrants was €4,800,000. Jackson, Inc. called its convertible debt in 2015. Assume the following related to the transaction: The 11% €5,000,000 par value bonds were converted into 500,000 shares of €1 par value ordinary shares on July 1, 2015. The carrying amount of the debt on July 1 was €4,800,000. The Share Premium––Conversion Equity account had a balance of €100,000 and the company paid an additional €35,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.


16 - 43

Solution 16-148 1. Cash (€5,000,000  .99)................................................................. Bonds Payable (€5,000,000  .95)............................................ Share Premium—Conversion Equity.........................................

4,950,000

2. Cash (€5,000,000  .98)................................................................. Bonds Payable.......................................................................... Share Premium––Share Warrants.............................................

4,900,000

3.

100,000 35,000 4,800,000

Share Premium––Conversion Equity.............................................. Conversion Expense...................................................................... Bonds Payable............................................................................... Share Capital––Ordinary........................................................... Share Premium––Ordinary........................................................ Cash..........................................................................................

4,750,000 200,000 4,800,000 1,000,000

500,000 4,400,000 35,000

*[(€4,800,000 + €100,000) – €500,000] Ex. 16-149—Share options. Prepare the necessary entries from 1/1/14-2/1/16 for the following events using the fair value method. If no entry is needed, write “No Entry Necessary.” 1. On 1/1/14, the shareholders adopted a share option plan for top executives whereby each might receive rights to purchase up to 12,000 ordinary shares at $40 per share. The par value is $10 per share. 2. On 2/1/14, options were granted to each of five executives to purchase 12,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/16. It is assumed that the options were for services performed equally in 2014 and 2015. The Black-Scholes option pricing model determines total compensation expense to be $1,300,000. 3. At 2/1/16, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited. Solution 16-149 1.

1/1/14 No entry necessary.

2.

2/1/14 No entry necessary. 12/31/14 Compensation Expense............................................................... Share Premium—Share Options....................................... 12/31/15 Compensation Expense............................................................... Share Premium—Share Options.......................................

650,000 650,000 650,000 650,000

16 - 44 Test Bank for Intermediate Accounting, IFRS Edition, 2e Solution 16-149 (Cont.) 3.

2/1/16 Cash (4 × 12,000 × $40) .............................................................. 1,920,000 Share Premium—Share Options ($1,300,000 × 4/5) ................... 1,040,000 Share Capital—Ordinary................................................... Share Premium—Ordinary................................................ Share Premium—Share Options.................................................. Share Premiun—Expired Share Options...........................

480,000 2,480,000

260,000 260,000

Ex. 16-150—Weighted average shares outstanding. On January 1, 2015, Warren Corporation had 1,000,000 ordinary shares outstanding. On March 1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 share split. On October 1, the corporation purchased on the market 600,000 of its own outstanding shares and retired them. Instructions Compute the weighted average number of shares to be used in computing earnings per share for 2015. Solution 16-150

Jan. 1 March 1 July 1 Oct. 1

Increase (Decrease) — 150,000 1,150,000 (600,000)

Months Outstanding 2 4 3 3 12

Outstanding 1,000,000 1,150,000 2,300,000 1,700,000

(25,200,000 ÷ 12)

2/1 2/1

Share Months 4,000,000 9,200,000 6,900,000 5,100,000 25,200,000 2,100,000

Ex. 16-151—Earnings per share. Santana Corporation has 400,000 ordinary shares outstanding throughout 2016. In addition, the corporation has 5,000, 20-year, 7% bonds issued at par in 2014. Each $1,000 bond is convertible into 20 ordinary shares after 9/23/17. During the year 2016, the corporation earned $600,000 after deducting all expenses. The tax rate was 30%. Instructions Compute the proper earnings per share for 2016.


16 - 45

Solution 16-151 Net income $600,000 Earnings per share: ————————— = ———— = $1.50 Outstanding shares 400,000 Net income + Interest after taxes Earnings per share assuming bond conversion: ——————————————— Assumed outstanding shares $600,000 + $245,000 ($350,000 × .7 = $245,000); —————————— = $1.69 400,000 + 100,000 Therefore the bonds are antidilutive, and earnings per share outstanding of $1.50 should be reported. Note that the convertible security is antidilutive: Bond interest after taxes $245,000 ————————————— = ———— = $2.45 Assumed incremental shares 100,000 Ex. 16-152—Diluted earnings per share. Dunbar Company had 400,000 ordinary shares outstanding during the year 2016. In addition, at December 31, 2016, 90,000 shares were issuable upon exercise of executive share options which require a $40 cash payment upon exercise (options granted in 2014). The average market price during 2016 was $50. Instructions Compute the number of shares to be used in determining diluted earnings per share for 2016. Solution 16-152 Shares outstanding Add: Assumed issuance Deduct: Proceeds/Average market price ($3,600,000 ÷ $50) Number of shares

400,000 90,000 490,000 72,000 418,000

16 - 46 Test Bank for Intermediate Accounting, IFRS Edition, 2e *Ex. 16-153—Share appreciation rights. On January 1, 2013, Orr Co. established a share appreciation rights plan for its executives. They could receive cash at any time during the next four years equal to the difference between the market price of the ordinary shares and a preestablished price of $16 on 300,000 SARs. The fair value of the SARs is estimate as follows: 12/31/13—$5; 12/31/14—$2; 12/31/15—$3; 12/31/16— $4. On December 31, 2015, 50,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2016. Instructions (a) Prepare a schedule that shows the amount of compensation expense for each of the four years starting with 2013. (b) Prepare the journal entry at 12/31/14 to record compensation expense. (c) Prepare the journal entry at 12/31/16 to record the exercise of the remaining SARs. *Solution 16-153 (a)

Schedule of Compensation Expense 300,000 SARs Fair Value

Cumulative Compensation Recognizable

Percentage Accrued

12/31/13

$5

$1,500,000

25%

12/31/14

2

600,000

50%

12/31/15

3

900,000

75%

12/31/16

4

1,000,000

100%

Date

Cumulative Compensation Accrued to Date $ 375,000 (75,000) 300,000 375,000 675,000 325,000 1,000,000

2013 Expense

2015 2016 Expense Expense

$375,000

(b) Liability Under Share Appreciation Plan........................................ Compensation Expense.................................................... (c)

2014 Expense

$(75,000) $375,000 $325,000

75,000

Liability Under Share Appreciation Plan........................................ 1,000,000 Cash.................................................................................

75,000 1,000,000


16 - 47

PROBLEMS Pr. 16-154—Convertible bonds and share warrants. For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions. 1. On August 1, 2016, Lane Corporation called its 10% convertible bonds for conversion. The $8,000,000 par bonds were converted into 320,000 shares of $20 par ordinary shares. On August 1, there was $700,000 of unamortized premium applicable to the bonds. The Share Premium—Conversion Equity account had a balance of $300,000. The fair value of the ordinary shares was $20 per share. Ignore all interest payments. 2. Packard, Inc. decides to issue convertible bonds instead of ordinary shares. The company issues 10% convertible bonds, par $3,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94. 3. Gomez Company issues $5,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable share warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the fair value of the bonds without the warrants is $4,935,000. The bonds with the warrants sold at 101. Solution 16-154 1. Share Premium—Conversion Equity............................................... 300,000 Bonds Payable................................................................................ 8,700,000 Share Capital—Ordinary...................................................... Share Premium—Ordinary...................................................

6,400,000 2,600,000

2. Cash................................................................................................ 2,910,000 Bonds Payable ($3,000,000  .94)....................................... Share Premium—Conversion Equity...................................

2,820,000 90,000

3. Cash................................................................................................ 5,050,000 Bonds Payable..................................................................... Share Premium—Share Warrants.......................................

4,935,000 115,000

Pr. 16-155—Earnings per share. Colson Corp. had $500,000 net income in 2016. On January 1, 2016 there were 200,000 ordinary shares outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought 30,000 treasury shares. There are 30,000 options to buy ordinary shares at $40 a share outstanding. The market price of the ordinary shares averaged $50 during 2016. The tax rate is 40%. During 2016, there were 40,000 shares of cumulative convertible preference shares outstanding. The preference is $100 par, pays $3.50 a year dividend, and is convertible into three ordinary shares.

16 - 48 Test Bank for Intermediate Accounting, IFRS Edition, 2e Colson issued $2,000,000 of 8% convertible bonds at face value during 2015. Each $1,000 bond is convertible into 30 ordinary shares. COMPOSITOR: FILL THIS PAGE BY MOVING MATERIAL BELOW UP.


16 - 49

Instructions Compute diluted earnings per share for 2016. Complete the schedule and show all computations. Security

Net Income

Adjustment

Adjusted Net Income

Shares

Adjustment

Adjusted Shares

EPS

Adjusted Net Income

Shares

Adjustment

Adjusted Shares

EPS

205,000 211,000 271,000 391,000

$1.76 1.71 1.68 1.52

Solution 16-155 Security Ord. Shares Options Bonds Preference a

Net Income

Adjustment

$500,000

$(140,000)

360,000 456,000

96,000c 140,000

20,000 × 3/4 = 30,000 × 1/3 =

$360,000 360,000 456,000 596,000

a

200,000 205,000 211,000 271,000

5,000 6,000b 60,000 120,000

15,000 (10,000) 5,000 SA

b

30,000 $1,200,000 ÷ $50 = (24,000) 6,000 SA

(or) [(50 – 40) ÷ 50] × 30,000 = 6,000 SA

c

$96,000 ———— = $1.60 60,000

$2,000,000 × .08 × .6 = $96,000

$140,000 ———— = $1.17 120,000

Pr. 16-156—Basic and diluted EPS. Assume that the following data relative to Kane Company for 2016 is available: Net Income Transactions in Ordinary Shares Jan. 1, 2016, Beginning number Mar. 1, 2016, Purchase of treasury shares June 1, 2016, Share split 2-1 Nov. 1, 2016, Issuance of shares 8% Cumulative Convertible Preference Shares Sold at par, convertible into 200,000 ordinary shares (adjusted for split). Share Options Exercisable at the option price of $25 per share. Average market price in 2016, $30 (market price and option price adjusted for split). Instructions

$2,100,000 Change (60,000) 640,000 120,000

Cumulative 700,000 640,000 1,280,000 1,400,000

$1,000,000

60,000 shares

16 - 50 Test Bank for Intermediate Accounting, IFRS Edition, 2e (a) Compute the basic earnings per share for 2016. (Round to the nearest penny.) (b) Compute the diluted earnings per share for 2016. (Round to the nearest penny.) COMPOSITOR: FILL THIS PAGE BY MOVING MATERIAL BELOW UP.


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Solution 16-156 Computation of weighted average shares outstanding during the year: January 1 March 1

Outstanding Repurchase (5/6 × 60,000)

June 1 November 1

2-for-1 split Issued (1/6 × 120,000)

700,000 (50,000) 650,000 1,300,000 20,000 1,320,000

Additional shares for purposes of diluted earnings per share: Potentially dilutive securities 8% convertible preference shares Share options Proceeds from exercise of 60,000 options (60,000 × $25) Shares issued upon exercise of options Less: treasury shares purchasable with proceeds ($1,500,000 ÷ $30) Dilutive securities—additional shares

200,000 $1,500,000 60,000 50,000

10,000 210,000

$2,100,000 – $80,000 (a) Basic earnings per share: —————————— = $1.53 1,320,000 (b) Diluted earnings per share:

$2,100,000 ———–—————— = $1.37 1,320,000 + 210,000

Pr. 16-157—Basic and diluted EPS. Presented below is information related to Starr Company. 1. Net Income [including a discontinued operations gain (net of tax) of $70,000]

$230,000

2. Capital Structure a. Cumulative 8% preference shares, $100 par, 6,000 shares issued and outstanding

$600,000

b. $10 par, 74,000 ordinary shares outstanding on January 1. On April 1, 40,000 shares were issued for cash. On October 1, 16,000 shares were purchased and retired.

$980,000

c. On January 2 of the current year, Starr purchased Oslo Corporation. One of the terms of the purchase was that if Starr's net income for the following year is $200,000 or more, 50,000 additional shares would be issued to Oslo stockholders next year. 3. Other Information a. Average market price per ordinary share during entire year b. Income tax rate

$30 30%

16 - 52 Test Bank for Intermediate Accounting, IFRS Edition, 2e Instructions Compute earnings per share for the current year. COMPOSITOR: FILL THIS PAGE BY MOVING MATERIAL BELOW UP.


16 - 53

Solution 16-157 Income from continuing operations Less preference dividends Available to ordinary before discontinued operations Add discontinued operations gain (net of tax) Income available to ordinary

$160,000 (48,000) 112,000 70,000 $182,000

Weighted average shares outstanding: January 1 3/4 × 40,000 1/4 × 16,000

74,000 30,000 (4,000) 100,000

Basic earnings per share: Income from continuing operations Discontinued operations (net of tax) Net income

$1.12 .70 $1.82

(a) (b) (c)

Calculations: $112,000 ———— 100,000

(a)

$70,000 ———— 100,000

(b)

Diluted earnings per share: Income from continuing operations Discontinued operations (net of tax) Net Income

(c)

$ .75 .46 $1.21

$182,000 ———— 100,000

(a) (b) (c)

Calculations: (a)

$112,000 ———————— 100,000 + 50,000

(b)

$70,000 ———— 150,000

(c)

$182,000 ———————— 100,000 + 50,000

16 - 54 Test Bank for Intermediate Accounting, IFRS Edition, 2e Pr. 16-158—Basic and diluted EPS. The following information was taken from the books and records of Ludwick, Inc.: 1. Net income

$ 280,000

2. Capital structure: a. Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible into 50 ordinary shares at the present date and for the next 10 years. b. $10 par, 200,000 ordinary shares issued and outstanding during the entire year.

300,000 2,000,000

c. Share warrants outstanding to buy 16,000 ordinary shares at $20 per share. 3. Other information: a. Bonds converted during the year b. Income tax rate c. Convertible debt was outstanding the entire year d. Average market price per share of common stock during the year e. Warrants were outstanding the entire year f. Warrants exercised during the year

None 30% $32 None

Instructions Compute basic and diluted earnings per share. Solution 16-158 Basic EPS = $280,000 ÷ 200,000 sh. = $1.40 Net Security Income Ord. Shares $280,000 Warrants 280,000 Conv. Bonds 280,000

Adjustment — — $12,6002

Adjusted Net Income $280,000 280,000 292,600

16,000 1

2

320,000 ———— = (10,000) 32 6,000

SA

$300,000  .06  .7 = $12,600

$12,600 ———— = $.84 15,000

Shares 200,000 200,000 206,000

Adjustment — 6,0001 15,000

Adjusted Shares 200,000 206,000 221,000

Diluted EPS $1.40 1.36 1.32

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