Share-Based Compensation And Earnings Ch19 Test Bank Docx - Answer Key + Test Bank | Intermediate Accounting 10e by J. David Spiceland, Mark W. Nelson, Wayne Thomas. DOCX document preview.
Intermediate Accounting, 10e (Spiceland)
Chapter 19 Share-Based Compensation and Earnings Per Share
1) GAAP requires using intrinsic value accounting for employee stock options.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
2) Compensation expense must be adjusted during the service period to reflect changes in the fair value of options caused by changes in the market price of the underlying shares.
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
3) If previous experience indicates that a material number of stock options will be forfeited before they vest, the fair value estimate of the options on the grant date should be adjusted to reflect that expectation.
Difficulty: 1 Easy
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
4) Current year stock dividends and splits require retroactive restatement of EPS for all prior years presented in comparative financial statements.
Difficulty: 1 Easy
Topic: Financial statement presentation; Basic EPS–Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
5) Dilutive convertible bonds affect both the numerator and the denominator in computing diluted EPS.
Difficulty: 1 Easy
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
6) Except for tax considerations the potentially dilutive effect of convertible preferred stock is handled in EPS calculations in much the same way as convertible debt.
Difficulty: 1 Easy
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
7) If a company's capital structure includes convertible bonds, diluted EPS might be reduced even if the bonds are not actually converted during the year.
Difficulty: 2 Medium
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
8) Stock options will be dilutive and included in the calculation of diluted EPS if the exercise price is greater than the average market value of the stock.
Difficulty: 2 Medium
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
9) No time-weighting of contingently issuable shares is required when computing basic EPS.
Difficulty: 1 Easy
Topic: EPS issues-Contingently issuable shares
Learning Objective: 19-12 Explain the way contingently issuable shares are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
10) If a company reports discontinued operations, EPS must be disclosed for both income from continuing operations and net income.
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
11) Lance Chips granted restricted stock units (RSUs) representing 40 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $5 per share on the grant date. The total compensation cost pertaining to the restricted stock units is:
A) $5 million.
B) $40 million.
C) $50 million.
D) $200 million.
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
12) Taxon Corp. granted restricted stock units (RSUs) representing 30 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?
A) $0.
B) $30 million.
C) $80 million.
D) $240 million.
| $ | 8 |
| fair value per share |
| × | 30 | million | shares represented by RSUs shares granted |
| $ | 240 | million | fair value of shares represented by RSUs |
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
13) The compensation associated with restricted stock units (RSUs) under a stock award plan is:
A) The book value of an unrestricted share of the same stock times the number of shares represented by the RSUs.
B) Allocated to expense over the service period which usually is the vesting period.
C) The estimated fair value of a share of similar stock times the number of shares represented by the RSUs.
D) The book value of a share of similar stock times the number of shares represented by the RSUs.
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
14) The compensation associated with restricted stock units (RSUs) under a stock award plan is the number of shares represented by the RSUs multiplied by:
A) The market price of a share of similar fixed income securities.
B) The market price of an unrestricted share of the same stock.
C) The book value of an unrestricted share of the same stock.
D) The book value of a share of similar stock.
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
15) Restricted stock units (RSUs):
A) are a grant valued in terms of a set number of shares of company stock.
B) are reported as a liability if payable in shares rather than cash.
C) are recorded based on a value estimated by a restricted stock valuation model.
D) represent shares issued at the date of grant that must be returned if the recipient fails to satisfy the vesting requirement.
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
16) Restricted stock units (RSUs):
A) are reported as a liability if payable in shares rather than cash.
B) are reported as part of shareholders' equity if payable in shares rather than cash.
C) are reported as part of shareholders' equity if payable in cash rather than shares.
D) are reported as part of shareholders' equity if the recipient will receive cash or can elect to receive cash.
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
17) FX Services granted 15 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?
A) $0.
B) $15 million.
C) $40 million.
D) $120 million.
| $ | 8 |
| fair value per share |
|
| × 15 | million | shares granted |
$ | 120 | million | fair value of award |
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
18) The compensation associated with restricted stock under a stock award plan is:
A) The book value of an unrestricted share of the same stock times the number of shares.
B) The estimated fair value of a share of similar stock times the number of shares.
C) Allocated to expense over the service period which usually is the vesting period.
D) The book value of a share of similar stock times the number of shares.
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
19) Under its restricted stock unit (RSU) plan, Peach Company granted restricted stock units (RSUs) representing 5 million of its $1 par common shares to certain key executives. At vesting, recipients are given the option to receive the cash equivalent of the number of shares used to value the RSUs. Peach plans to account for these new RSUs in the same manner as described in the company's disclosure notes to its financial statements:
Share-Based Compensation (in part)
Share-based compensation cost for RSUs is measured based on the closing fair market value of the Company's common stock on the date of grant … The Company reports paid-in capital and recognizes share-based compensation cost over the award's requisite service period on a straight-line basis.
Which of the following is an accurate statement regarding the company's policy?
A) The policy is inappropriate because we consider a stock award that can be settled in cash to be a liability rather than equity.
B) The policy is appropriate as long as Peach periodically adjusts the compensation based on the change in the stock's fair value until the award vests.
C) The policy is appropriate because the recipients have only the option to receive cash; cash settlement is not specified.
D) This approach is conceptually correct and consistent with accounting for stock options.
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
20) Common forms of share-based compensation include each of the following except:
A) stock splits.
B) restricted stock.
C) restricted stock units.
D) stock options.
Difficulty: 1 Easy
Topic: Stock options; Restricted stock
Learning Objective: 19-02 Explain and implement the accounting for stock options.; 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
21) Regardless of the form of share-based compensation, the accounting objective is to record compensation expense:
A) as the book value of the compensation expensed over the vesting period.
B) as the fair value of the compensation expensed over the vesting period.
C) as the book value of the compensation expensed at the date of grant.
D) as the fair value of the compensation expensed at the date of grant.
Difficulty: 1 Easy
Topic: Stock options; Restricted stock
Learning Objective: 19-02 Explain and implement the accounting for stock options.; 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
22) On January 1, 2021, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2023, and expire on January 1, 2027. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant.
What amount should M recognize as compensation expense for 2021?
A) $30,000.
B) $60,000.
C) $120,000.
D) $150,000.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
23) Under its executive stock option plan, N Corporation granted options on January 1, 2021, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?
A) $0.
B) $20 million.
C) $60 million.
D) $90 million.
| $ | 4 |
| fair value per option | |
× |
| 15 | million | options granted | |
$ | 60 | million | fair value of award |
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
24) The compensation associated with executive stock option plans is:
A) The book value of a share of the company's shares times the number of options.
B) The estimated fair value of the options.
C) Allocated to expense over the number of years until expiration.
D) Recorded as compensation expense on the date of grant.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
25) The most important accounting objective for executive stock options is:
A) Measuring and reporting the amount of compensation expense during the service period.
B) Measuring their fair value for balance sheet purposes.
C) To disclose increases or decreases in the stock options held at the end of each accounting period.
D) None of these answer choices are correct.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
26) Executive stock options should be reported as compensation expense:
A) Using the intrinsic value method.
B) Using the fair value method.
C) Using either the fair value method or the intrinsic value method.
D) Only on rare occasions.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
27) Executive stock options:
A) allow the holder the option to buy shares at a specified exercise price during a specified period of time.
B) allow the holder the option to buy shares at a specified exercise price any time prior to the executive ceasing to be employed by the firm.
C) are expensed at their intrinsic value.
D) permit executives to purchase restricted stock.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
28) Under its executive stock option plan, W Corporation granted options on January 1, 2021, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. The options are exercised on April 2, 2024, when the market price is $21 per share. By what amount will W's shareholders' equity be increased when the options are exercised?
A) $60 million.
B) $270 million.
C) $315 million.
D) $330 million.
| $ | 4 |
| fair value per option |
× |
| 15 | million | options granted |
$ | 60 | million | fair value of award |
| ($ in millions) | ||||
Cash ($18 exercise price × 15 million shares) |
| 270 |
|
| |
Paid-in capital—stock options (account balance) |
| 60 |
|
| |
Common stock (15 million shares at $1 par per share) |
|
| 15 |
| |
Paid-in capital—excess of par (remainder) |
|
| 315 |
| |
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
29) On January 1, 2021, D Corp. granted an employee an option to purchase 6,000 shares of D's $5 par common stock at $20 per share. The options became exercisable on December 31, 2022, after the employee completed two years of service. The option was exercised on January 10, 2023. The market prices of D's stock were as follows: January 1, 2021, $30; December 31, 2022, $50; and January 10, 2023, $45. An option pricing model estimated the value of the options at $8 each on the grant date. For 2021, D should recognize compensation expense of:
A) $0.
B) $24,000.
C) $30,000.
D) $60,000.
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
30) Under its executive stock option plan, Z Corporation granted options on January 1, 2021, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. The options expired in 2027 without being exercised. By what amount will Z's shareholders' equity be increased as a result of having granted the options?
A) $60 million.
B) $270 million.
C) $315 million.
D) $330 million.
| $ | 4 |
| fair value per option |
× |
| 15 | million | options granted |
$ | 60 | million | fair value of award |
| ($ in millions) | ||||
Paid-in capital—stock options (account balance) |
| 60 |
|
| |
Paid-in capital—expiration of stock options |
|
| 60 |
| |
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
31) Wilson Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2021, 20 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2025. They cannot be exercised before that date and will expire on December 31, 2027. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $40 per option. Ignore income tax.
Wilson's compensation expense in 2021 for these stock options was:
A) $0.
B) $200 million.
C) $400 million.
D) $800 million.
| $ | 40 |
| estimated fair value/option |
× |
| 20 | million | options granted |
$ | 800 | million | fair value of options |
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
32) Wilson Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2021, 20 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2025. They cannot be exercised before that date and will expire on December 31, 2027. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $40 per option. Ignore income tax.
On March 1, 2025, when the market price of Wilson's stock was $14 per share, 3 million of the options were exercised. The journal entry to record this would include:
A) A debit to paid-in capital—stock options for $42 million.
B) A credit to paid–in capital—excess of par for $255 million.
C) A credit to common stock for $75 million.
D) All of these answer choices are correct.
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
33) Wilson Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2021, 20 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2025. They cannot be exercised before that date and will expire on December 31, 2027. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $40 per option. Ignore income tax.
Assume that all compensation expense from the stock options granted by Wilson already has been recorded. Further assume that 200,000 options expire in 2026 without being exercised. The journal entry to record this would include:
A) Debit to paid-in capital—stock options for $8 million.
B) A debit to common stock for $5 million.
C) A debit to paid-in capital—expiration of stock options for $8 million.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
34) Pastore Inc. granted options for 1 million shares of its $1 par common stock at the beginning of the current year. The exercise price is $35 per share, which was also the market value of the stock on the grant date. The fair value of the options was estimated at $8 per option.
What would be the total compensation indicated by these options?
A) $3 million.
B) $27 million.
C) $8 million.
D) $35 million.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
35) Pastore Inc. granted options for 1 million shares of its $1 par common stock at the beginning of the current year. The exercise price is $35 per share, which was also the market value of the stock on the grant date. The fair value of the options was estimated at $8 per option.
If the options have a vesting period of five years, what would be the balance in "Paid-in Capital—Stock Options" three years after the grant date?
A) A credit of $4.8 million.
B) A credit of $16.2 million.
C) A debit of $4.8 million.
D) A debit of $16.2 million.
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
36) Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2021, options were granted for 60,000 $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2024, and expire December 31, 2025. Each option has a fair value of $1 based on an option pricing model.
What is the total compensation cost for this plan?
A) $0.
B) $60,000.
C) $240,000.
D) $300,000.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
37) Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2021, options were granted for 60,000 $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2024, and expire December 31, 2025. Each option has a fair value of $1 based on an option pricing model.
Which is the correct entry to record compensation expense for the year 2021?
A)
Compensation expense | 12,000 |
|
Paid-in capital—stock options |
| 12,000 |
B)
Compensation expense | 20,000 |
|
Common stock |
| 20,000 |
C)
Compensation expense | 20,000 |
|
Paid-in capital—stock options |
| 20,000 |
D)
Compensation expense | 80,000 |
|
Paid-in capital—stock options |
| 80,000 |
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
38) Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2021, options were granted for 60,000 $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2024, and expire December 31, 2025. Each option has a fair value of $1 based on an option pricing model.
Which is the correct entry to record the exercise of 90% the options on April 15, 2024, when the market price of the stock was $8?
A)
Cash | 270,000 |
|
Paid-in capital—stock options | 54,000 |
|
Common stock |
| 60,000 |
Paid-in capital—excess of par |
| 264,000 |
B)
Cash | 378,000 |
|
Paid-in capital—stock options | 54,000 |
|
Common stock |
| 54,000 |
Paid-in capital—excess of par |
| 378,000 |
C)
Cash | 270,000 |
|
Paid-in capital—stock options | 54,000 |
|
Compensation expense | 108,000 |
|
Common stock |
| 54,000 |
Paid-in capital—excess of par |
| 378,000 |
D)
Cash | 270,000 |
|
Paid-in capital—stock options | 54,000 |
|
Common stock |
| 54,000 |
Paid-in capital—excess of par |
| 270,000 |
Cash (60,000 × 90% × $5) | 270,000 |
|
Paid-in capital—stock options ($60,000 × 90%) | 54,000 |
|
Common stock (60,000 × 90% × $1) |
| 54,000 |
Paid-in capital—excess of par |
| 270,000 |
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
39) Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2021, options were granted for 60,000 $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2024, and expire December 31, 2025. Each option has a fair value of $1 based on an option pricing model.
What is the entry to record the expiration of 10% of the options on December 31, 2025?
A)
Paid-in capital—stock options | 6,000 |
|
Paid-in capital—expired stock options |
| 6,000 |
B)
Paid-in capital—stock options | 6,000 |
|
Retained earnings |
| 6,000 |
C)
Paid-in capital—stock options | 6,000 |
|
Compensation expense |
| 6,000 |
D)
Stock options receivable | 30,000 |
|
Common stock |
| 6,000 |
Paid-in capital—excess of par |
| 27,000 |
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
40) A deferred tax asset for stock options:
A) is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense.
B) is the portion of the options' intrinsic value earned to date times the tax rate.
C) is the tax rate times the fair value of all the options.
D) isn't created if the award is "in the money;" that is, it has intrinsic value.
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
41) Halo Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2021, the company had issued 40,000 executive stock options permitting executives to buy 40,000 shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Date | Amount Vesting | Fair Value per Option | |||||
Dec. 31, 2021 |
| 20 | % | $ | 7 |
| |
Dec. 31, 2022 |
| 30 | % | $ | 8 |
| |
Dec. 31, 2023 |
| 50 | % | $ | 12 |
| |
What is the compensation expense related to the options to be recorded in 2022?
A) $48,000.
B) $96,000.
C) $128,000.
D) $140,000.
Vesting Date | Amount Vesting | Fair Value per Option | Compensation Cost | ||||||||||
Dec. 31, 2021 |
| 8,000 |
| $ | 7 |
|
| $ | 56,000 |
| |||
Dec. 31, 2022 |
| 12,000 |
| $ | 8 |
|
|
| 96,000 |
| |||
Dec. 31, 2023 |
| 20,000 |
| $ | 12 |
|
|
| 240,000 |
| |||
|
|
|
|
|
|
|
| $ | 392,000 |
| |||
Shares Vesting at: | Compensation Cost Recognized in: ($ in 000s) | ||||||||||||||||||
|
| 2021 |
| 2022 |
| 2023 |
| ||||||||||||
Dec. 31, 2021 |
| $ | 56 |
|
|
|
|
|
|
|
|
|
| ||||||
Dec. 31, 2022 |
|
| 48 |
|
| $ | 48 |
|
|
|
|
|
| ||||||
Dec. 31, 2023 |
|
| 80 |
|
|
| 80 |
|
| $ | 80 |
|
| ||||||
|
| $ | 184 |
|
| $ | 128 |
|
| $ | 80 |
| = $392 | ||||||
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
42) Green Company is a calendar-year U.S. firm with operations in several countries. At January 1, 2021, the company had issued 40,000 executive stock options permitting executives to buy 40,000 shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Date | Amount Vesting | Fair Value per Option | ||||||
Dec. 31, 2021 |
| 20 | % |
|
| $ | 7 |
|
Dec. 31, 2022 |
| 30 | % |
|
| $ | 8 |
|
Dec. 31, 2023 |
| 50 | % |
|
| $ | 12 |
|
Assuming Green uses the straight-line method, what is the compensation expense related to the options to be recorded in 2022?
A) $130,667.
B) $200,000.
C) $333,333.
D) $400,000.
Vesting Date | Amount Vesting | Fair Value per Option | Compensation Cost | ||||||||||
Dec. 31, 2021 |
| 8,000 |
|
| $ | 7 |
|
| $ | 56,000 |
| ||
Dec. 31, 2022 |
| 12,000 |
|
| $ | 8 |
|
|
| 96,000 |
| ||
Dec. 31, 2023 |
| 20,000 |
|
| $ | 12 |
|
|
| 240,000 |
| ||
|
|
|
|
|
|
|
|
| $ | 392,000 |
| ||
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
43) On January 1, 2021, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2023, and expire on January 1, 2027. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant.
If unexpected turnover in 2022 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2022?
A) $30,000.
B) $60,000.
C) $120,000.
D) $150,000.
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
44) On January 1, 2021, G Corp. granted stock options to key employees for the purchase of 80,000 shares of the company's common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2023, by the grantees still in the employ of the company. No options were terminated during 2021, but the company does have an experience of 4% forfeitures over the life of the stock options. The market price of the common stock was $31 per share at the date of the grant. G Corp. used the Binomial pricing model and estimated the fair value of each of the options at $10. What amount should G charge to compensation expense for the year ended December 31, 2021?
A) $307,200.
B) $320,000.
C) $384,000.
D) $400,000.
Difficulty: 3 Hard
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
45) Under its executive stock option plan, B Corporation granted options on January 1, 2021, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures were anticipated; however, unexpected turnover during 2022 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2022?
A) $18.5 million.
B) $18 million.
C) $20 million.
D) $19 million.
| $ | 4 |
| fair value per option |
× |
| 15 | million | options granted |
$ | 60 | million | fair value of award |
2022 |
| ||
Compensation expense ([$60 × 95% × 2/3] − $20) | 18 |
| |
Paid-in capital—stock options |
| 18 | |
Difficulty: 3 Hard
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
46) If restricted stock is forfeited because an employee leaves the company, the appropriate accounting procedure is to:
A) Reverse related entries previously made.
B) Do nothing.
C) Prepare correcting entries.
D) Record an income item.
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
47) When recognizing compensation under a stock option plan, unanticipated forfeitures are treated as:
A) A change in accounting principle.
B) A loss.
C) An income item.
D) A change in estimate.
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
48) Under its executive stock option plan, Q Corporation granted options on January 1, 2021, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2023 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures were anticipated; however, unexpected turnover during 2022 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2023?
A) $18.5 million.
B) $18 million.
C) $19 million.
D) $20 million.
| $ | 4 | fair value per option |
× |
| 15 | options granted |
$ | 60 | fair value of award |
2022 | |||
Compensation expense ([$60 × 95% × 2/3] − $20) | 18 |
| |
Paid-in capital—stock options |
| 18 | |
2023 | |||
Compensation expense ([$60 × 95% × 3/3] − $20 − $18) | 19 |
| |
Paid-in capital—stock options |
| 19 | |
Difficulty: 3 Hard
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
49) On January 1, 2021, Felix Austead Athletic Club (FAAC) granted stock options to key executives exercisable for 500,000 shares of the company's common stock at $18 per share. The stock options are intended as compensation for the next four years. The options are exercisable within a four-year period beginning January 1, 2025, by the executives still in the employ of the company. No options were terminated during 2021, but the company anticipates 5% forfeitures over the life of the stock options. The market price of the common stock was $18 per share at the date of the grant. FAAC estimated the fair value of the options at $4 each. 1% of the options are forfeited during 2022 due to executive turnover. What amount should FAAC record as compensation expense for the year ended December 31, 2022, assuming FAAC chooses the option not to estimate forfeitures?
A) $490,000.
B) $500,000.
C) $1,980,000.
D) $2,020,000.
Compensation expense: ([$4 × 500 − (1% × $4 × 500)] × 2/4 − [$4 × 500,000 ÷ 4]) | 490 |
|
Paid-in capital—stock options |
| 490 |
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
50) On January 1, 2021, Marguerite DeVille Co. granted restricted stock units (RSUs) representing 300,000 of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $12 per share on the grant date. At the date of grant, DeVille anticipated that 6% of the recipients would leave the firm prior to vesting. In 2022, 2% of the options are forfeited due to executive turnover. DeVille chooses the option not to estimate forfeitures. What amount should DeVille record as compensation expense for the year ended December 31, 2022?
A) $72,000.
B) $1,128,000.
C) $1,152,000.
D) $1,200,000.
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
51) On January 1, 2021, Wendy Day Co. granted stock options to key executives exercisable for 500,000 shares of the company's common stock at $18 per share. The stock options are intended as compensation for the next four years. The options are exercisable within a four-year period beginning January 1, 2025, by the executives still in the employ of the company. No options were terminated during 2021, but the company anticipates 5% forfeitures over the life of the stock options. The market price of the common stock was $18 per share at the date of the grant. Wendy Day estimated the fair value of the options at $4 each. 1% of the options are forfeited during 2022 due to executive turnover. What amount should Wendy Day record as compensation expense for the year ended December 31, 2022, assuming the company chooses to estimate forfeitures?
A) $475,000.
B) $495,000.
C) $500,000.
D) $520,000.
| $ | 1,900,000 |
| total compensation (500,000 options × $4 × 95%) |
| ÷ | 4 |
| years |
| $ | 475,000 |
| per year |
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
52) On January 1, 2021, Cori Ander Herbs granted restricted stock units (RSUs) representing 300,000 of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $12 per share on the grant date. At the date of grant, the company anticipated that 6% of the recipients would leave the firm prior to vesting. In 2022, 2% of the options are forfeited due to executive turnover. The company chooses the option not to estimate forfeitures. What amount should the company record as compensation expense for the year ended December 31, 2022?
A) $94,000.
B) $1,128,000.
C) $1,152,000.
D) $1,200,000.
| $ | 3,600,000 |
| total compensation (300,000 shares × $12) |
| ÷ | 3 |
| years |
| $ | 1,200,000 |
| per year |
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
53) On January 1, 2021, Red Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is compensation expense for 2021?
A) $0.
B) $200,000.
C) $400,000.
D) $1,200,000.
Difficulty: 2 Medium
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
54) On January 1, 2021, Oliver Foods issued stock options for 40,000 shares to a division manager. The options have an estimated fair value of $5 each. To provide additional incentive for managerial achievement, the options are not exercisable unless Oliver Foods' stock price increases by 5% in four years. Oliver Foods initially estimates that it is not probable the goal will be achieved. How much compensation will be recorded in each of the next four years?
A) $10,000.
B) $45,000.
C) $50,000.
D) No effect.
Difficulty: 2 Medium
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
55) On January 1, 2021, Black Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Black initially estimates that it is probable the goal will be achieved. In 2022, after one year, Black estimates that it is not probable that divisional revenue will increase by 6% in three years. Ignoring taxes, what is the effect on earnings in 2022?
A) $200,000 decrease.
B) $200,000 increase.
C) $400,000 increase.
D) No effect.
Difficulty: 3 Hard
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
56) On January 1, 2021, Blue Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Blue initially estimates that it is not probable the goal will be achieved, but in 2022, after one year, Blue estimates that it is probable that divisional revenue will increase by 6% by the end of 2023. Ignoring taxes, what is the decrease in earnings in 2022?
A) $200,000.
B) $400,000.
C) $600,000.
D) $800,000.
2022 |
| |
Compensation expense ([$1,200,000 × 2/3] − $0) | 800,000 |
|
Paid-in capital—stock options |
| 800,000 |
2023 |
|
|
Compensation expense ([$1,200,000 × 3/3] − $800,000) | 400,000 |
|
Paid-in capital—stock options |
| 400,000 |
Difficulty: 3 Hard
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
57) On October 1, 2021, Iona Frisbee Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Frisbee initially estimates that it is probable the goal will be achieved. How much compensation will be recorded in each of the next three years?
A) $0
B) $100,000
C) $300,000
D) $900,000
300,000 | × | $3 | = | $900,000 |
options |
| fair |
| estimated |
expected to vest |
| value |
| total compensation |
Difficulty: 2 Medium
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
58) On October 1, 2021, Iona Ford Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Ford initially estimates that it is probable the goal will be achieved. After one year, Ford estimates that it is not probable that divisional revenue will increase by 5% in three years. In 2022, Ford will:
A) reverse the amount expensed in 2021.
B) record one-half of the new estimated total compensation.
C) take no action.
D) continue to record the original estimated compensation.
300,000 | × | $3 | = | $900,000 |
options |
| fair |
| estimated |
expected to vest |
| value |
| total compensation |
0 | × | $6 | = | $0 |
options |
| fair |
| estimated |
expected to vest |
| value |
| total compensation |
Difficulty: 2 Medium
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
59) On October 1, 2021, Iona Bell Co. issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Bell initially estimates that it is not probable the goal will be achieved, but then after one year, Bell estimates that it is probable that divisional revenue will increase by 6% by the end of 2023. Bell will:
A) record compensation expense of $600,000 in 2022 and $300,000 in 2023.
B) record compensation expense of $300,000 in 2022 and $300,000 in 2023.
C) record compensation expense of $450,000 in 2022 and $450,000 in 2023.
D) record compensation expense of zero in 2022 and in 2023.
300,000 | × | $3 | = | $900,000 |
options |
| fair |
| estimated |
expected to vest |
| value |
| total compensation |
Compensation expense ([$900,000 × 2/3] – $0) | 600,000 |
|
Paid-in capital—stock options |
| 600,000 |
Compensation expense ([$900,000 × 3/3] – $600,000) | 300,000 |
|
Paid-in capital—stock options |
| 300,000 |
Difficulty: 2 Medium
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
60) On October 1, 2021, Iona Barr issued stock options for 300,000 shares to a division manager. The options have an estimated fair value of $3 each. To provide additional incentive for managerial achievement, the options are not exercisable unless Barr's stock price increases by 6% in three years. Barr initially estimates that it is not probable the goal will be achieved. How much compensation will be recorded in each of the next three years?
A) $100,000
B) $300,000
C) $0
D) $900,000
300,000 | × | $3 | = | $900,000 |
options |
| fair |
| estimated |
expected to vest |
| value |
| total compensation |
Difficulty: 2 Medium
Topic: Stock plans with conditions
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
61) To encourage employee ownership of the company's common shares, KL Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During May, employees purchased 10,000 shares at a time when the market price of the shares on the New York Stock Exchange was $15 per share. KL will record compensation expense associated with the May purchases of:
A) $0.
B) $15,000.
C) $22,500.
D) $150,000.
Cash ($15 × 10,000 × 85%) | 127,500 |
|
Compensation expense ($15 × 10,000 × 15%) | 22,500 |
|
Common stock ($15 × 10,000) |
| 150,000 |
Difficulty: 1 Easy
Topic: Stock plans‒Employee share purchase plans
Learning Objective: 19-03 Explain and implement the accounting for employee share purchase plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
62) Martin Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During 2021, employees purchased 8 million shares; during this same period, the shares had a market price of $15 per share at the end of the year. Martin's 2021 pretax earnings will be reduced by:
A) $12 million.
B) $108 million.
C) $120 million.
D) $0.
Cash ($15 × 8 million × 90%) | 108 |
|
Compensation expense ($15 × 8 million × 10%) | 12 |
|
Common stock ($15 × 8 million) |
| 120 |
Difficulty: 1 Easy
Topic: Stock plans‒Employee share purchase plans
Learning Objective: 19-03 Explain and implement the accounting for employee share purchase plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
63) Under its employee stock purchase plan, Watson Company encourages employee ownership by permitting all employees to buy shares directly from their company at a 15% discount and without brokerage fees. Watson simply records the sale of new shares as employees buy them. Which of the following is an accurate statement regarding the company's policy?
A) This approach is conceptually correct and consistent with the sale of shares to non-employees.
B) The policy is appropriate as long substantially all employees can participate and employees have no longer than one month after the price is fixed to decide whether to participate.
C) The company should record compensation expense when the shares are sold.
D) The policy is inappropriate because the plan is noncompensatory.
Difficulty: 2 Medium
Topic: Stock plans‒Employee share purchase plans
Learning Objective: 19-03 Explain and implement the accounting for employee share purchase plans.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
64) A primary goal of earnings per share determination is:
A) Conservatism.
B) Comparability.
C) Materiality.
D) Objectivity.
Difficulty: 1 Easy
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
65) A company is said to have a complex capital structure if:
A) the company has preferred stock outstanding at the end of the period.
B) the company has potential common shares outstanding at the end of the period.
C) the company's capital structure includes more debt than shareholders' equity.
D) the company's capital structure includes more shareholders' equity than debt.
Difficulty: 1 Easy
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
66) How many types of potential common shares must a corporation have in order to be said to have a complex capital structure?
A) Three.
B) Two.
C) One.
D) Zero.
Difficulty: 1 Easy
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement; BB Resource Management / Keyboard Navigation
67) Which of the following does not represent potential shares for an EPS calculation?
A) Convertible preferred stock.
B) Convertible bonds.
C) Stock rights.
D) Participating preferred stock.
Difficulty: 2 Medium
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement; BB Resource Management / Keyboard Navigation
68) Basic earnings per share ignores:
A) All potential common shares.
B) Some potential common shares, but not others.
C) Dividends declared on noncumulative preferred stock.
D) Stock splits.
Difficulty: 1 Easy
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
69) A simple capital structure might include:
A) Stock rights.
B) Convertible bonds.
C) Nonconvertible preferred stock.
D) Stock purchase warrants.
Difficulty: 1 Easy
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement; BB Resource Management / Keyboard Navigation
70) Which of the following results in increasing basic earnings per share?
A) Paying more than book (carrying) value to retire outstanding bonds.
B) Issuing cumulative preferred stock.
C) Purchasing treasury stock.
D) All of these answer choices increase basic earnings per share.
Difficulty: 2 Medium
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
71) ABC declared and paid cash dividends to its common shareholders in January of the current year. The dividend:
A) Will be added to the numerator of the earnings per share fraction for the current year.
B) Will be added to the denominator of the earnings per share fraction for the current year.
C) Will be subtracted from the numerator of the earnings per share fraction for the current year.
D) Has no effect on the earnings per share for the coming year.
Difficulty: 2 Medium
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
72) Nonconvertible bonds affect the calculation of:
A) Basic earnings per share.
B) Diluted earnings per share.
C) Basic earnings per share and Diluted earnings per share.
D) None of these answer choices are correct
Difficulty: 2 Medium
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
73) Basic earnings per share is computed using:
A) The actual number of common shares outstanding at the end of the year.
B) A weighted-average of preferred and common shares.
C) The number of common shares outstanding plus potential common shares.
D) Weighted-average common shares outstanding for the year.
Difficulty: 1 Easy
Topic: Basic EPS-Weighted average concept
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
74) Purple Cab Company had 50,000 shares of common stock outstanding on January 1, 2021. On April 1, 2021, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock was $12. The company reported net income in the amount of $269,915 for 2021. What is the basic earnings per share (rounded)?
A) $4.10.
B) $3.86.
C) $3.60.
D) $4.15.
Difficulty: 2 Medium
Topic: Basic EPS-Weighted average concept
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
75) The following information pertains to Torque Corp.'s outstanding stock for 2021:
Common stock, $1 par value |
|
Shares outstanding, 1/1/2021 | 60,000 |
2-for-1 stock split, 4/1/2021 |
|
Shares issued, 7/1/2021 | 30,000 |
|
|
Preferred stock, $10 par value, 6% cumulative |
|
Shares outstanding, 1/1/2021 | 12,000 |
How many shares should Torque use to calculate 2021 basic earnings per share?
A) 120,000
B) 135,000
C) 150,000
D) 162,000
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-05 Describe what is meant by the weighted-average number of common shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
76) The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except:
A) The shares are deducted rather than added.
B) The shares are added rather than deducted.
C) The shares are treated as being acquired at the end of the year.
D) The shares are treated as being acquired at the beginning of the year.
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
77) The result of a stock split is:
A) A larger number of more valuable shares.
B) An increase in corporate assets.
C) An increase in shareholders' equity.
D) A larger number of less valuable shares.
Difficulty: 1 Easy
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
78) If a stock split occurred, when calculating the current year's EPS, the shares are treated as issued:
A) At the end of the year.
B) On the first day of the next fiscal year.
C) At the beginning of the year.
D) On the date of distribution.
Difficulty: 1 Easy
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
79) Which of the following will require a recalculation of weighted-average shares outstanding for all years presented?
A) Stock dividends and stock splits.
B) Stock dividends but not stock splits.
C) Stock splits but not stock dividends.
D) Stock rights.
Difficulty: 1 Easy
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
80) All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?
A) Decrease.
B) No effect if the shares are held as treasury shares.
C) Increase only if the shares are considered to be retired.
D) Increase.
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
81) If a stock dividend were distributed, when calculating the current year's EPS, the shares distributed are treated as having been issued:
A) At the end of the year.
B) At the beginning of the year.
C) On the declaration date.
D) On the date of distribution.
Difficulty: 1 Easy
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
82) Stock options do not affect the calculation of:
A) Diluted EPS.
B) Weighted-average common shares.
C) The denominator in the diluted EPS fraction.
D) Basic EPS.
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
83) The following information pertains to J Company's outstanding stock for 2021:
Common stock, $1 par |
|
Shares outstanding, 1/1/2021 | 10,000 |
2 for 1 stock split, 4/1/2021 | 10,000 |
Shares issued, 7/1/2021 | 5,000 |
Preferred stock, $100 par, 7% cumulative |
|
Shares outstanding, 1/1/2021 | 4,000 |
What is the number of shares J should use to calculate 2021 basic earnings per share?
A) 20,000.
B) 22,500.
C) 25,000.
D) 27,000.
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
84) On December 31, 2020, Beta Company had 300,000 shares of common stock issued and outstanding. Beta issued a 5% stock dividend on June 30, 2021. On September 30, 2021, 40,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2021?
A) 315,000.
B) 307,500.
C) 305,000.
D) 267,500.
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
85) Cookie Company had 2 million shares of common stock outstanding all through 2020. On April 1, 2021, an additional 100,000 shares were sold and issued. On September 30, 2021, Cookie declared a 2-for-1 stock split. Net income in 2021 and 2020 was $10 million and $8 million, respectively. In the 2021 comparative financial statements, EPS (rounded) would be reported as follows:
| 2021 EPS |
| 2020 EPS | ||||
a. | $ | 2.41 |
|
| $ | 2.00 |
|
b. | $ | 2.41 |
|
| $ | 4.00 |
|
c. | $ | 4.82 |
|
| $ | 4.00 |
|
d. | $ | 4.82 |
|
| $ | 4.00 |
|
A) Option A
B) Option B
C) Option C
D) Option D
Difficulty: 3 Hard
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
86) Dublin Inc. had the following common stock record during the current calendar year:
Outstanding, beginning of year | 2,000,000 |
Additional shares issued 6/30 | 100,000 |
Additional shares issued 9/30 | 100,000 |
A 10% stock dividend was paid on December 1. What is the number of shares to be used in computing basic EPS?
A) 2,075,000.
B) 2,282,500.
C) 2,475,000.
D) 2,620,000.
Difficulty: 2 Medium
Topic: Basic EPS-Stock-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
87) Morrison Corporation had the following common stock record during the current calendar year:
Outstanding-January 1 | 2,000,000 |
Additional shares issued 3/31 | 100,000 |
Distributed a 10% stock dividend on 6/30 |
|
Additional shares issued 9/30 | 100,000 |
What is the number of shares to be used in computing basic EPS?
A) 2,000,000.
B) 2,205,000.
C) 2,307,500.
D) 2,335,000.
Difficulty: 3 Hard
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
88) Gear Corporation had the following common stock record during the current calendar year:
Outstanding-January 1 | 100,000 |
Additional shares issued 3/31 | 5,000,000 |
Distributed a 10% stock dividend on 6/30 |
|
Shares reacquired 9/30 | 100,000 |
What is the number of shares to be used in computing basic EPS?
A) 5,500,000.
B) 4,210,000.
C) 5,303,750.
D) 5,050,000.
Difficulty: 3 Hard
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
89) On January 1, 2021, Albacore Company had 300,000 shares of its common stock issued and outstanding. Albacore issued a 10% stock dividend on July 1, 2021. On October 1, 2021, Albacore retired 12,000 of its common shares. When calculating basic earnings per share for 2021, what is the appropriate number of shares for Albacore to use in the denominator of the EPS fraction?
A) 303,000.
B) 342,000.
C) 312,000.
D) 327,000.
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
90) When computing earnings per share, noncumulative preferred dividends not declared should be:
A) Ignored.
B) Deducted from earnings for the year.
C) Added to earnings for the year.
D) Deducted, net of tax effect, from earnings for the year.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
91) A company has cumulative preferred stock. When computing earnings per share, the current year's dividends not declared on the preferred stock should be:
A) Deducted from earnings for the year.
B) Deducted, net of tax effect, from earnings for the year.
C) Added to earnings for the year.
D) Ignored.
Difficulty: 1 Easy
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
92) Preferred dividends are subtracted from earnings when computing basic earnings per share whether or not the dividends are declared or paid if the preferred stock is:
A) Callable.
B) Convertible.
C) Participating.
D) Cumulative.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
93) Preferred dividends would not be subtracted from earnings when computing basic earnings per share in a year when the dividends are not declared if the preferred stock is:
A) Noncumulative.
B) Convertible.
C) Participating.
D) Cumulative.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
94) XYZ paid $10,000 in dividends in January of the current year to its preferred shareholders. The preferred stock is nonconvertible and noncumulative. The dividend:
A) Will be added to the denominator of the earnings per share fraction for the current year.
B) Will be added to the numerator of the earnings per share fraction for the current year.
C) Will be subtracted from the numerator of the earnings per share fraction for the current year.
D) might not affect earnings per share, depending on the declaration date.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
95) At December 31, 2021 and 2020, P Co. had 50,000 shares of common stock and 5,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2021 or 2020. Net income for 2021 was $500,000. For 2021, basic earnings per common share amounted to:
A) $5.00.
B) $9.50.
C) $9.00.
D) $10.00.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
96) At December 31, 2021, Hansen Corporation had 50,000 shares of common stock and 5,000 shares of 6%, $100 par cumulative preferred stock outstanding. No dividends were declared or paid in 2021. Net income was reported as $200,000. What is basic EPS?
A) $4.00.
B) $3.40.
C) $3.64.
D) $4.02.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
97) During 2021, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2021.
Falwell's net income for the year ended December 31, 2021, was $2.5 million. The income tax rate is 25%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2021.
What is Falwell's basic earnings per share for 2021, rounded to the nearest cent?
A) $3.14.
B) $4.40.
C) $5.00.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
98) At December 31, 2021 and 2020, Cow Co. had 100,000 shares of common stock and 5,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2021 or 2020. Net income for 2021 was $500,000. For 2021, basic earnings per share was:
A) $2.50
B) $4.50
C) $4.75
D) $5.00
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
99) On December 31, 2020, the Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2021, the company sold 50,000 additional shares for cash. Frisbee's net income for the year ended December 31, 2021, was $700,000. During 2021, Frisbee declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2021 basic earnings per share? (Round final answers to 2 decimal places.)
A) $2.16.
B) $3.50.
C) $3.10.
D) $2.80.
Difficulty: 2 Medium
Topic: Basic EPS with multiple adjustments
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
100) Flyaway Travel Company reported net income for 2021 in the amount of $90,000. During 2021, Flyaway declared and paid $2,125 in cash dividends on its nonconvertible preferred stock. Flyaway also paid $10,000 cash dividends on its common stock. Flyaway had 40,000 common shares outstanding from January 1 until 10,000 new shares were sold for cash on April 1, 2021. What is 2021 basic earnings per share?
A) $1.85.
B) $1.64.
C) $1.76.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Basic EPS with multiple adjustments
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
101) On December 31, 2020, the Bennett Company had 100,000 shares of common stock issued and outstanding. On July 1, 2021, the company sold 20,000 additional shares for cash. Bennett's net income for the year ended December 31, 2021, was $650,000. During 2021, Bennett declared and paid $89,000 in cash dividends on its nonconvertible preferred stock. What is the 2021 basic earnings per share?
A) $5.91.
B) $5.61.
C) $5.10.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Basic EPS with multiple adjustments
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
102) Getaway Travel Company reported net income for 2021 in the amount of $50,000. During 2021, Getaway declared and paid $2,000 in cash dividends on its nonconvertible preferred stock. Getaway also paid $10,000 cash dividends on its common stock. Getaway had 40,000 common shares outstanding from January 1 until 10,000 new shares were sold for cash on July 1, 2021. A 2-for-1 stock split was granted on July 5, 2021. What is the 2021 basic earnings per share? (Round final answers to 2 decimal places.)
A) $0.42.
B) $0.47.
C) $0.53.
D) $0.56.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
103) When computing diluted earnings per share, which of the following will not be considered in the calculation?
A) Dividends paid on common stock.
B) The weighted average common shares.
C) The effect of stock splits.
D) The number of common shares represented by stock purchase warrants.
Difficulty: 1 Easy
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
104) The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to buy treasury stock at:
A) The average market price for the reporting period.
B) The market price at the end of the period.
C) The purchase price stated on the options.
D) The stock's par value.
Difficulty: 1 Easy
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
105) When we take into account the dilutive effect of stock options, rights, and warrants in the calculation of EPS, the method used is called the:
A) Optional method.
B) If converted method.
C) Dilution method.
D) Treasury stock method.
Difficulty: 1 Easy
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
106) In computing diluted earnings per share, the treasury stock method is used for:
A) Stock warrants.
B) Stock splits.
C) Reverse stock splits.
D) Convertible preferred stock.
Difficulty: 1 Easy
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
107) When calculating diluted earnings per share, stock options:
A) Are included if they are antidilutive.
B) Should be ignored.
C) Are included if they are dilutive.
D) Increase the numerator while not affecting the denominator.
Difficulty: 2 Medium
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
108) The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to:
A) Buy common stock as an investment.
B) Retire preferred stock.
C) Buy treasury stock.
D) Increase net income.
Difficulty: 1 Easy
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
109) During 2021, Farewell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Farewell did not declare or pay any dividends during 2021.
Farewell's net income for the year ended December 31, 2021, was $2.5 million. The income tax rate is 25%. Farewell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2021.
What is Farewell's diluted earnings per share for 2021, rounded to the nearest cent?
A) $3.14.
B) $4.90.
C) $4.34.
D) Cannot determine from the given information.
Difficulty: 3 Hard
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
110) Blue Cab Company had 50,000 shares of common stock outstanding on January 1, 2021. On April 1, 2021, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $13 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2021. What is the diluted earnings per share (rounded)?
A) $3.60.
B) $4.10.
C) $4.50.
D) $3.81.
Difficulty: 3 Hard
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
111) Dulce Corporation had 200,000 shares of common stock outstanding during the current year. There were also fully vested options for 10,000 shares of common stock were granted with an exercise price of $20. The market price of the common stock averaged $25 for the year. Net income was $4 million. What is diluted EPS (rounded)?
A) $20.00.
B) $19.80.
C) $19.23.
D) $18.18.
Difficulty: 2 Medium
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
112) On January 1, 2021, Hage Corporation granted incentive stock options to purchase 18,000 of its common shares at $7 each. The options are exercisable after one year. The market price of common averaged $9 per share during the quarter ending on March 31, 2021. There was no change in the 100,000 shares of outstanding common stock during the quarter ended March 31, 2021. Net income for the quarter was $8,268. The number of shares to be used in computing diluted earnings per share for the quarter is:
A) 100,000.
B) 104,000.
C) 106,000.
D) 118,000.
Number of shares if options exercised | 18,000 |
|
|
Less: Shares assumed repurchased | (14,000 | ) |
|
Dilution (potential common shares) | 4,000 |
|
|
Difficulty: 2 Medium
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
113) January 1, 2021, Woody Forrest Corporation granted executive stock options to purchase 27,000 of its common shares at $7 each. The market price of common stock was $10 per share on December 31, 2021, and averaged $9 per share during the year then ended. There was no change in the 150,000 shares of outstanding common stock during the year. Net income for the year was $25,000. The number of shares to be used in computing diluted earnings per share for the quarter is:
A) 150,000
B) 156,000
C) 171,000
D) 177,000
Proceeds from exercise of options = 27,000 shs. × $7 | = | $ | 189,000 |
|
| ÷ | $ | 9 |
|
| = |
| 21,000 | shs. |
Number of shares from exercise | 27,000 |
|
Less: Shares assumed repurchased | (21,000 | ) |
Potential common shares | 6,000 |
|
Difficulty: 2 Medium
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
114) When a company's only potential common shares are convertible bonds:
A) Diluted EPS will be greater if the bonds are actually converted than if they are not converted.
B) Diluted EPS will be smaller if the bonds are actually converted than if the bonds are not converted.
C) Diluted EPS will be the same whether or not the bonds are converted.
D) The effect of conversion on diluted EPS cannot be determined without additional information.
Difficulty: 2 Medium
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
115) Stock options, rights, and warrants are different from convertible securities in that they:
A) Typically increase cash upon exercise.
B) Usually reduce total assets upon exercise.
C) Often reduce liabilities upon exercise.
D) Normally increase retained earnings upon exercise.
Difficulty: 1 Easy
Topic: Diluted EPS-Convertible securities; Diluted EPS–Options-warrants-rights
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
116) Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100 par convertible preferred stock outstanding during the year. Net income for the year was $400,000 and dividends were paid to both common and preferred shareholders. Rudyard's effective tax rate is 25%.
What is Rudyard's basic EPS?
A) $2.13.
B) $4.80.
C) $4.00.
D) $3.20.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
117) When we assume conversion of convertible bonds, the numerator is increased by:
A) The amount of after-tax interest.
B) The gross amount of interest.
C) The weighted-average interest.
D) The amount of cash paid during the current year for interest.
Difficulty: 1 Easy
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
118) When we take into account the dilutive effect of convertible securities in the calculation of EPS, the method used is called the:
A) Treasury stock method.
B) If converted method.
C) Optional method.
D) Dilution method.
Difficulty: 1 Easy
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
119) If convertible bonds were issued at a discount, when computing diluted EPS, the amortization of the bond discount:
A) Will have no effect.
B) Will decrease the numerator.
C) Will increase the numerator.
D) May increase or decrease the numerator, depending on the amortization method used.
Difficulty: 3 Hard
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
120) Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100 par convertible preferred stock outstanding during the year. Net income for the year was $400,000 and dividends were paid to both common and preferred shareholders. Rudyard's effective tax rate is 25%.
Each share of preferred stock is convertible into five shares of common stock. What is Rudyard's diluted EPS (rounded)?
A) $2.13.
B) $2.67.
C) $3.20.
D) $4.80.
Difficulty: 3 Hard
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
121) On January 2, 2021, L Co. issued at face value $20,000 of 4% bonds convertible in total into 1,000 shares of L's common stock. No bonds were converted during 2021.
Throughout 2021, L had 1,000 shares of common stock outstanding. L's 2021 net income was $2,000. L's income tax rate is 25%.
No potential common shares other than the convertible bonds were outstanding during 2021.
L's diluted earnings per share for 2021 would be:
A) $1.00.
B) $1.30.
C) $1.40.
D) $2.00.
Difficulty: 2 Medium
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
122) During 2021, R Co. had the following two classes of stock issued and outstanding for the entire year:
• 400,000 shares of common stock, $1 par.
• 2,000 shares of 4% preferred stock, $100 par, convertible share-for-share into
common stock.
R's 2021 net income was $1,800,000, and its income tax rate for the year was 25%. In the computation of diluted earnings per share for 2021, the amount to be used in the numerator is:
A) $1,792,000.
B) $1,796,000.
C) $1,800,000.
D) $1,802,400.
Difficulty: 2 Medium
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
123) Jet Corporation had 8 million shares of common stock outstanding during the current calendar year. On July 1, Jet issued ten thousand $1,000 face value, convertible bonds. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannually for 20 years. They have a stated rate of 12%. Jet had income before tax of $24 million and a net income of $18 million. Jet would report the following EPS data (rounded):
| Basic EPS | Diluted EPS | |||||
a. | $ | 2.25 |
| $ | 2.24 |
| |
b. | $ | 2.25 |
| n/a antidilutive | |||
c. | $ | 2.25 |
| $ | 2.16 |
| |
d. | $ | 2.25 |
| $ | 2.12 |
| |
A) Option A
B) Option B
C) Option C
D) Option D
Difficulty: 3 Hard
Topic: Diluted EPS-Convertible securities; Basic EPS-Weighted average concept
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.; 19-05 Describe what is meant by the weighted-average number of common shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
124) Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2021. On April 1, 2021, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock for the year was $12. What number of shares of stock (rounded) should be used in computing diluted earnings per share?
A) 65,000.
B) 56,667.
C) 55,000.
D) 46,667.
Difficulty: 3 Hard
Topic: Diluted EPS-Convertible securities; Diluted EPS with multiple adjustments
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
125) When several types of potential common shares exist, the one that enters the computation of diluted EPS first is the one with the:
A) Highest incremental effect.
B) Higher numerator.
C) Median incremental effect.
D) Lowest incremental effect.
Difficulty: 1 Easy
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
126) During 2021, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2021.
On January 1, 2020, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.
Angel's net income for the year ended December 31, 2021, was $6 million. The income tax rate is 20%.
What is Angel's basic earnings per share for 2021, rounded to the nearest cent?
A) $5.29.
B) $5.57.
C) $6.50.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
127) During 2021, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2021.
On January 1, 2020, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.
Angel's net income for the year ended December 31, 2021, was $6 million. The income tax rate is 20%.
What will Angel report as diluted earnings per share for 2021, rounded to the nearest cent?
A) $6.43.
B) $6.25.
C) $6.22.
D) None of these answer choices are correct.
Difficulty: 3 Hard
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
128) Burnet Company had 30,000 shares of common stock outstanding on January 1, 2021. On April 1, 2021, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The average market price of common stock was $9. The company reported net income in the amount of $189,374 for 2021. What is the effect of the options?
A) The options are antidilutive.
B) The options will dilute EPS by $0.09 per share.
C) The options will dilute EPS by $0.33 per share.
D) The options will dilute EPS by $0.17 per share.
Difficulty: 3 Hard
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
129) During the current year, East Corporation had 2 million shares of common stock outstanding. Two thousand 10% convertible bonds, each with $1,000 face value, were issued at face amount at the beginning of the year. East reported net income of $2 million for the year. Each bond is convertible into 10 shares of common stock. The tax rate is 25%. What is diluted EPS (rounded)?
A) $0.90.
B) $0.95.
C) $1.00.
D) $1.10.
Difficulty: 3 Hard
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
130) During the current year, High Corporation had 3 million shares of common stock outstanding. $5,000,000 of 6% convertible bonds were issued at face amount at the beginning of the year. High reported income before tax of $4 million and net income of $3 million for the year. The bonds are convertible into 625,000 shares of common. What is diluted EPS (rounded)?
A) $0.89.
B) $0.91.
C) $1.00.
D) $1.08
Difficulty: 3 Hard
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
131) Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest semiannually at an annual rate of 10%. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid quarterly. Ignatius has an effective tax rate of 25%. Ignatius would report the following EPS data (rounded) on its net income of $20 million:
| Basic EPS | Diluted EPS | |||||
a. | $ | 2.77 |
| $ | 2.67 |
| |
b. | $ | 2.81 |
| $ | 2.73 |
| |
c. | $ | 2.85 |
| $ | 2.67 |
| |
d. | $ | 2.81 |
| $ | 2.68 |
| |
A) Option A
B) Option B
C) Option C
D) Option D
Difficulty: 3 Hard
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
132) Horrocks Company granted 180,000 restricted stock awards of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. Horrocks' common shares have a market price of $10 per share on January 1, 2020, the grant date, and at December 31, 2021, averaging $10 throughout the year. When calculating diluted EPS at December 31, 2021, the net increase in the denominator of the EPS fraction will be:
A) 0 shares.
B) 60,000 shares.
C) 120,000 shares.
D) 180,000 shares.
No adjustment to the numerator |
180,000 - 60,000 = 120,000 |
Difficulty: 3 Hard
Topic: EPS issues-Unexpected compensation
Learning Objective: 19-11 Describe the two components of the proceeds used in the treasury stock method and how restricted stock is incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
133) Isadore Bell Company granted 8 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $3 per share on January 1, 2021, the grant date. When calculating diluted EPS at December 31, 2022, what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averaged $4 per share during 2022?
A) 2 million
B) 2.67 million
C) 6 million
D) 8 million
No adjustment to the numerator |
8 million – 2* million = 6 million |
Difficulty: 3 Hard
Topic: EPS issues-Unexpected compensation
Learning Objective: 19-11 Describe the two components of the proceeds used in the treasury stock method and how restricted stock is incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement / Keyboard Navigation
134) Contingently issuable shares might be included in:
A) Basic EPS.
B) Diluted EPS.
C) Basic EPS and Diluted EPS.
D) None of these answer choices are correct.
Difficulty: 1 Easy
Topic: EPS issues-Contingently issuable shares
Learning Objective: 19-12 Explain the way contingently issuable shares are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
135) The single accounting number in the annual report that receives the most attention by investors is:
A) Total revenue.
B) Book value per share.
C) Equity per share.
D) Earnings per share.
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
136) The reporting of earnings per share is required only for:
A) Private companies.
B) Companies with complex capital structures.
C) Publicly traded corporations.
D) Medium-sized and large corporations.
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
137) Earnings per share data is required to be reported:
A) In disclosure notes to the financial statements.
B) Only if it adds to the relevance of the income statement.
C) In the summary section of the annual report.
D) On the face of the income statement.
Difficulty: 2 Medium
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
138) For a firm with a simple capital structure, EPS is:
A) earnings available to common and preferred shareholders divided by the weighted-average number of common and preferred shares outstanding.
B) earnings available to common and preferred shareholders divided by the number of common and preferred shares outstanding at the end of the reporting period.
C) reported for both basic and diluted EPS.
D) reported for both earnings before discontinued operations and net income.
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
139) Which of the following is a correct statement concerning earnings per share?
A) Earnings per share can never be a negative number.
B) Earnings per share must be reported for all corporations.
C) If a company has discontinued operations, at least two EPS amounts must be reported.
D) Reported earnings per share is the result of dividing weighted-average shares by net income.
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
140) When a company's income statement includes discontinued operations, the company should report per share information on:
| Net Income | Income from Continuing Operations |
a. | Yes | No |
b. | Yes | Yes |
c. | No | No |
d. | No | Yes |
A) Option A
B) Option B
C) Option C
D) Option D
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
141) When a company's income statement includes discontinued operations and a gain on the sale of machinery, the company should report per share information on:
| Net Income | Income from Continuing Operations | Gain on sale of machinery |
a. | Yes | No | No |
b. | Yes | Yes | No |
c. | Yes | No | Yes |
d. | Yes | Yes | Yes |
A) Option A
B) Option B
C) Option C
D) Option D
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
142) Under IFRS, a deferred tax asset for stock options:
A) Is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense.
B) Is the portion of the options' intrinsic value earned to date times the tax rate.
C) Is the tax rate times the amount of compensation.
D) Isn't created if the award is "in the money;" that is, it has intrinsic value.
Difficulty: 2 Medium
Topic: IFRS‒EPS
Learning Objective: 19-14 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for share-based compensation and earnings per share.
Bloom's: Evaluate
AACSB: Reflective Thinking; Diversity
AICPA/Accessibility: FN Measurement; BB Global / Keyboard Navigation
143) Yellow Company is a calendar-year firm with operations in several countries. At January 1, 2021, the company had issued 40,000 executive stock options permitting executives to buy 40,000 shares of stock for $30. The vesting schedule is 25% the first year, 25% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Date | Amount Vesting | Fair Value per Option | |||||||
Dec. 31, 2021 |
| 25 | % |
|
| $ | 6 |
| |
Dec. 31, 2022 |
| 25 | % |
|
| $ | 7 |
| |
Dec. 31, 2023 |
| 50 | % |
|
| $ | 9 |
| |
Assuming Yellow prepares its financial statements in accordance with International Financial Reporting Standards (IFRS), what is the compensation expense related to the options to be recorded in 2022?
A) $40,000.
B) $60,000.
C) $95,000.
D) $130,000.
Vesting Date | Amount Vesting | Fair Value per Option | Compensation Cost | |||||||||
Dec. 31, 2021 |
| 10,000 |
|
| $ | 6 |
|
| $ | 60,000 |
| |
Dec. 31, 2022 |
| 10,000 |
|
| $ | 7 |
|
|
| 70,000 |
| |
Dec. 31, 2023 |
| 20,000 |
|
| $ | 9 |
|
|
| 180,000 |
| |
|
|
|
|
|
|
|
|
| $ | 310,000 |
| |
Shares Vesting at: | Compensation Cost Recognized in: ($ in 000s) | |||||||||||||||||||||
|
| 2021 |
|
| 2022 |
|
| 2023 |
| |||||||||||||
Dec. 31, 2021 |
| $ | 60 |
|
|
|
|
|
|
|
|
|
| |||||||||
Dec. 31, 2022 |
|
| 35 |
|
| $ | 35 |
|
|
|
|
|
| |||||||||
Dec. 31, 2023 |
|
| 60 |
|
|
| 60 |
|
| $ | 60 |
|
| |||||||||
|
| $ | 155 |
|
| $ | 95 |
|
| $ | 60 |
| = $310 | |||||||||
Difficulty: 3 Hard
Topic: IFRS‒EPS
Learning Objective: 19-14 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for share-based compensation and earnings per share.
Bloom's: Apply
AACSB: Knowledge Application; Diversity
AICPA/Accessibility: FN Measurement; BB Global / Keyboard Navigation
144) Which of the following statements is true regarding share appreciation rights (SAR) payable in cash?
A) Any change in estimated total compensation is recorded as a prior adjustment.
B) The total amount of compensation is not known for certain until the date the SAR is exercised.
C) The liability is adjusted to reflect each additional year of service.
D) None of these answer choices are correct.
Difficulty: 2 Medium
Topic: Stock appreciation rights‒Appendix B
Learning Objective: Appendix 19B Stock Appreciation Rights.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement / Keyboard Navigation
145) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Convertible bonds | Add after-tax interest to EPS numerator. | ____ |
2. Diluted EPS | Dual presentation of EPS does not apply. | ____ |
3. Simple capital structure | Assumption used for options, rights, and warrants. | ____ |
4. Treasury stock method | Applies to both convertible debt and convertible equity securities. | ____ |
5. If-converted method | Approximation of EPS assuming potential common shares became common stock. | ____ |
TERM | PHRASE | NUMBER |
1. Convertible bonds | Add after-tax interest to EPS numerator. | 1 |
2. Diluted EPS | Dual presentation of EPS does not apply. | 3 |
3. Simple capital structure | Assumption used for options, rights, and warrants. | 4 |
4. Treasury stock method | Applies to both convertible debt and convertible equity securities. | 5 |
5. If-converted method | Approximation of EPS assuming potential common shares became common stock. | 2 |
Difficulty: 2 Medium
Topic: Basic EPS-Calculation concepts; Diluted EPS-Convertible securities; Diluted EPS-Options-warrants-rights
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
146) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Stock dividends and splits | Expresses the market value of a stock as a multiple of EPS. | ____ |
2. Contingently issuable shares | Factored into EPS if the stock is cumulative. | ____ |
3. Undeclared preferred dividends | Omitted from the EPS numerator under the "if converted" method. | ____ |
4. Convertible preferred stock dividends | Included in diluted EPS when performance criterion is met. | ____ |
5. Price-earnings ratio | Handled retroactively in computing current and prior years' EPS. | ____ |
TERM | PHRASE | NUMBER |
1. Stock dividends and splits | Expresses the market value of a stock as a multiple of EPS. | 5 |
2. Contingently issuable shares | Factored into EPS if the stock is cumulative. | 3 |
3. Undeclared preferred dividends | Omitted from the EPS numerator under the "if converted" method. | 4 |
4. Convertible preferred stock dividends | Included in diluted EPS when performance criterion is met. | 2 |
5. Price-earnings ratio | Handled retroactively in computing current and prior years' EPS. | 1 |
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends; Basic EPS-Denominator items; Diluted EPS-Convertible securities; EPS issues-Contingently issuable shares; Financial statement presentation
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.; 19-12 Explain the way contingently issuable shares are incorporated in the calculation of EPS.; 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
147) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Antidilutive security | Does not affect and is not affected by EPS calculations. | ____ |
2. Issuance of new shares | Time-weighted decrease in the basic EPS denominator. | ____ |
3. Reacquired shares | Decrease in the EPS numerator. | ____ |
4. Preferred dividends | Time-weighted increase in the basic EPS denominator. | ____ |
5. Convertible bonds | Potentially dilutive debt. | ____ |
TERM | PHRASE | NUMBER |
1. Antidilutive security | Does not affect and is not affected by EPS calculations. | 1 |
2. Issuance of new shares | Time-weighted decrease in the basic EPS denominator. | 3 |
3. Reacquired shares | Decrease in the EPS numerator. | 4 |
4. Preferred dividends | Time-weighted increase in the basic EPS denominator. | 2 |
5. Convertible bonds | Potentially dilutive debt. | 5 |
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends; Basic EPS-Denominator items; Basic EPS-Weighted average concept; Diluted EPS-Antidilutive securities; Diluted EPS-Convertible securities
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.; 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
148) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term.
TERM | PHRASE | NUMBER |
1. Stock option | Paid-in capital effectively renamed under the fair value approach. | ____ |
2. Performance condition plans | A right to buy shares of stock in the future. | ____ |
3. Vesting period | Expensed as compensation in the period earned. | ____ |
4. Bonuses | Shares given for achieving financial goals. | ____ |
5. Expired options | Benefit period over which stock option compensation expense is spread. | ____ |
TERM | PHRASE | NUMBER |
1. Stock option | Paid-in capital effectively renamed under the fair value approach. | 5 |
2. Performance condition plans | A right to buy shares of stock in the future. | 1 |
3. Vesting period | Expensed as compensation in the period earned. | 4 |
4. Bonuses | Shares given for achieving financial goals. | 2 |
5. Expired options | Benefit period over which stock option compensation expense is spread. | 3 |
Difficulty: 2 Medium
Topic: Stock plans with conditions; Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
149) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the most correct term
TERM | PHRASE | NUMBER |
1. Option exercise price | An important factor in option pricing models. | ____ |
2. Option exercise date | The amount paid to convert the option into stock. | ____ |
3. Grant date | Date on or after which employees can buy stock with options. | ____ |
4. Stock volatility | Require(s) compensation expense regardless of condition satisfaction. | ____ |
5. Market condition plans | Date on which options are awarded. | ____ |
TERM | PHRASE | NUMBER |
1. Option exercise price | An important factor in option pricing models. | 4 |
2. Option exercise date | The amount paid to convert the option into stock. | 1 |
3. Grant date | Date on or after which employees can buy stock with options. | 2 |
4. Stock volatility | Require(s) compensation expense regardless of condition satisfaction. | 5 |
5. Market condition plans | Date on which options are awarded. | 3 |
Difficulty: 2 Medium
Topic: Stock plans with conditions; Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
150) Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the number for the correct term.
TERM | PHRASE | NUMBER |
1. Options, rights, and warrants | Need to be ranked high to low in terms of dilutive effect. | ____ |
2. Multiple convertible securities | No dilution considered. | ____ |
3. Basic EPS | Tends to be low for growth companies. | ____ |
4. Earnings available to common shareholders | The numerator in the EPS formula. | ____ |
5. Dividend payout ratio | The treasury stock method is used. | ____ |
TERM | PHRASE | NUMBER |
1. Options, rights, and warrants | Need to be ranked high to low in terms of dilutive effect. | 2 |
2. Multiple convertible securities | No dilution considered. | 3 |
3. Basic EPS | Tends to be low for growth companies. | 5 |
4. Earnings available to common shareholders | The numerator in the EPS formula. | 4 |
5. Dividend payout ratio | The treasury stock method is used. | 1 |
Difficulty: 2 Medium
Topic: Basic EPS-Calculation concepts; Diluted EPS-Convertible securities; Diluted EPS-Options-warrants-rights; Financial statement presentation
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.; 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
151) EG Corporation granted restricted stock units (RSUs) representing 32 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $6 per share on the grant date.
Required:
(1.) Ignoring taxes, determine the total compensation cost pertaining to the restricted stock units.
(2.) What is the effect on earnings in the year after the shares are granted to executives?
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
152) On January 1, 2021, Cobbler Corporation awarded restricted stock units (RSUs) representing 30 million of its $1 par common shares to key officers, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. On the grant date, the shares had a market price of $3 per share.
Required:
(1.) Determine the total compensation cost pertaining to the RSUs.
(2.) Prepare the appropriate journal entry to record the award of RSUs on January 1, 2021.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2021.
(4.) Prepare the appropriate journal entry to record compensation expense on December 31, 2022.
(5.) Prepare the appropriate journal entry to record compensation expense on December 31, 2023.
(6.) Prepare the appropriate journal entry to record the lifting of restrictions on the RSUs and issuing shares at December 31, 2023.
($ in millions) | ||
Compensation expense ($90 million ÷ 3 years) | 30 | |
Paid-in capital–restricted stock | 30 |
Compensation expense ($90 million ÷ 3 years) | 30 | |
Paid-in capital–restricted stock | 30 |
Compensation expense ($90 million ÷ 3 years) | 30 | |
Paid-in capital–restricted stock | 30 |
Paid-in capital—restricted stock | 90 | |
Common stock (30 million shares × $1 par) | 30 | |
Paid-in capital–excess of par (remainder) | 60 |
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
153) Tweet Inc. included the following disclosure note in an annual report:
Share-Based Compensation (in part)
…compensation expense related to these grants is based on the grant date fair value of the RSUs and is recognized on a straight-line basis over the applicable three-year vesting period.
The following table summarizes the activities for our unvested RSUs for the year ended December 31, 2021:
Number of Shares | Weighted Average Grant Date Fair Value | |
Unvested at December 31, 2020 | 110,000 | $21.40 |
Granted | 54,000 | 29.50 |
Vested | (48,300) | 17.00 |
Forfeited | (14,800) | 25.30 |
Unvested at December 31, 2021 | 100,900 | $27.30 |
Required:
(1.) Ignoring taxes, determine compensation expense Tweet reported in the year ended December 31, 2022, for the restricted stock units granted during the year ended December 31, 2021.
(2.) Based on the information provided in the disclosure note, prepare the journal entry that summarizes the vesting of RSUs during the year ended December 31, 2021. (Tweet's common shares have a par amount per share of $0.01.)
Paid-in capital–restricted stock (account balance of $17 × 48,300 shs) | 821,100 | |
Common stock (48,300 shares at $0.01 par per share) | 483 | |
Paid-in capital–excess of par (remainder) | 820,617 |
Difficulty: 3 Hard
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Create
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
154) As part of its stock-based compensation package, on January 1, 2021, Weldon Well Supplies granted restricted stock units (RSUs) representing 100,000 $1 par common shares. At exercise, holders of the RSUs are entitled to receive cash or stock equal in value to the market price of those shares at exercise. The RSUs cannot be exercised until the end of 2024 (vesting date) and expire at the end of 2026. The $1 par common shares have a market price of $6 per share on the grant date. The fair value at December 31, 2021, 2022, 2023, 2024, and 2025, is $16, $12, $16, $10, and $12, respectively. All recipients are expected to remain employed through the vesting date.
Required:
(1.) Prepare the appropriate journal entry to record the award of RSUs on January 1, 2021.
(2.) Prepare the appropriate journal entries pertaining to the RSUs on December 31, 2021-December 31, 2024.
(3.) The RSUs remain unexercised on December 31, 2025. Prepare the appropriate journal entry on that date.
(4.) The RSUs are exercised on June 6, 2026, when the share price is $13, and executives choose to receive cash. Prepare the appropriate journal entry(s) on that date.
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans..
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
155) The Peach Corporation provides restricted stock to certain executives. Under the plan, the company granted 30 million shares on January 1, 2021, which vest in four years. The fair value of the shares is $14. No forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the restricted stock.
2. Prepare the appropriate journal entry (if any) to record the award of restricted stock on January 1, 2021.
3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2021.
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
156) Jmart Corporation included the following disclosure note in a recent annual report:
RESTRICTED STOCK (in part)
We issued 100,000 shares of restricted stock at market prices ranging from $46.00 to $60.
The restricted stock generally vests over three years, during which time we will recognize total compensation expense of approximately $6 million.
Required:
1. Based on the information provided in the disclosure note, determine the weighted average market price of the restricted stock issued.
2. How much compensation expense did Jmart report for the year following the year in which the restricted stock was issued?
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
157) Mann Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2021, the corporation granted 10 million of its $5 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market value of $10 per share on the date the award is granted.
Required:
1. Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares.
2. Prepare the appropriate journal entries related to the restricted stock through December 31, 2022.
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
158) On January 1, 2021, Jeans-R-Us Company awarded 15 million of its $1 par common shares to key executives, subject to forfeiture if employment is terminated within three years. On the date of the grant, the stock had a market price of $3 per share.
Required:
(1.) Determine the total compensation cost pertaining to the restricted shares.
(2.) Prepare the appropriate journal entry to record the award on January 1, 2021.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2021.
Difficulty: 1 Easy
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
159) On January 1, 2021, La-Dee-Da Company awarded 15 million of its $1 par common shares to key officers, subject to forfeiture if employment is terminated within three years. On the date of the grant, the stock had a market price of $3 per share.
Required:
(1.) Determine the total compensation cost pertaining to the restricted shares.
(2.) Prepare the appropriate journal entry to record the award on January 1, 2021.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2021.
(4.) Prepare the appropriate journal entry to record compensation expense on December 31, 2022.
(5.) Prepare the appropriate journal entry to record compensation expense on December 31, 2023.
(6.) Prepare the appropriate journal entry to record the lifting of restrictions on December 31, 2023.
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
160) Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2021, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market value of $6 per share on the date the award is granted.
Required:
(1.) Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares.
(2.) Prepare the appropriate journal entries related to the restricted stock through December 31, 2022.
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
161) The Santiago Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2021, that permit executives to acquire 70 million of the company's $1 par value common shares within the next eight years, but not before December 31, 2024 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $27 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry (if any) to record the award of options on January 1, 2021.
3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2021.
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
162) Olde Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2021, that permit executives to acquire 2 million of the company's $1 par value common shares within the next five years, but not before December 31, 2022 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $14 per share. The fair value of the options, estimated by an appropriate option pricing model, is $2 per option. No forfeitures are anticipated. Ignore taxes.
Required:
(1.) Determine the total compensation cost pertaining to the options, assuming the fair value approach has been selected.
(2.) Prepare the appropriate journal entry to record the award of the options on January 1, 2021.
(3.) Prepare the journal entry to record compensation expense on December 31, 2021.
(4.) Prepare the journal entry to record compensation expense on December 31, 2022.
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
163) The Burford Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2021, that permit executives to acquire 12 million of the company's $1 par value common shares within the next five years, but not before December 31, 2024 (the vesting date). The exercise price is the market price of the shares on the date of the grant, $14 per share. The fair value of the options, estimated by an appropriate model, is $3 per option. No forfeitures are anticipated. Ignore taxes.
Required:
(1.) Determine the total compensation cost pertaining to the options. Show calculations.
(2.) Prepare the appropriate journal entry (if any) to record the award of options on January 1, 2021.
(3.) Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2021.
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
164) Hammerstein Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock award plan, the company, on January 1, 2021, granted 2 million of its $1 par common shares to various division managers. The shares are subject to forfeiture if employment is terminated within four years. The common shares have a market price of $20 per share on the award date.
Required:
(1.) Determine the total compensation cost from these restricted shares.
(2.) Prepare the appropriate journal entry to record the award on January 1, 2021.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2021.
(4.) Suppose a 15% forfeiture rate was expected prior to vesting. Determine the total compensation cost, assuming the company follows the fair value approach and chooses to anticipate forfeitures at the grant date.
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
165) On January 1, 2021, Lawson Brothers Enterprises (LBE) granted restricted stock units (RSUs) representing 40 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $10 per share on the grant date. At the date of grant, LBE anticipated that 5% of the recipients would leave the firm prior to vesting. Ignore taxes.
Required:
1. Prepare the appropriate journal entry to record compensation expense on December 31, 2021.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2022.
3. During 2023 third year, LBE revised its estimate of forfeitures from 5% to 10%. Prepare the appropriate journal entry to record compensation expense on December 31, 2023.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2024.
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
166) On January 1, 2021, M.T. Toombe Mausoleum granted restricted stock units (RSUs) representing 60 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $15 per share on the grant date. At the date of grant, Toombe anticipated that 5% of the recipients would leave the firm prior to vesting. In 2022, 3% of the options are forfeited due to executive turnover. Toombe chooses the option not to estimate forfeitures.
Required:
1. Prepare the appropriate journal entry to record compensation expense on December 31, 2021. Ignore taxes.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2022. Ignore taxes.
Difficulty: 2 Medium
Topic: Stock plans and forfeiture
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
167) In order to encourage employee ownership of the company's $1 par common shares, T Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During June, employees purchased 150,000 shares at a time when the market price of the shares on the New York Stock Exchange was $10 per share.
Required:
Prepare the appropriate journal entry to record the June purchases of shares under the employee share purchase plan.
Cash ($10 × 150,000 × 85%) | 1,275,000 | |
Compensation expense ($10 × 150,000 × 15%) | 225,000 | |
Common stock ($1 × 150,000) | 150,000 | |
Paid-in capital–excess of par ($9 × 150,000) | 1,350,000 |
Difficulty: 1 Easy
Topic: Stock plans‒Employee share purchase plans
Learning Objective: 19-03 Explain and implement the accounting for employee share purchase plans.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
168) Sugarland Industries reported a net income of $750,750 on December 31, 2021. At the beginning of the year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000 shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger.
Required:
Compute Sugarland's net income that would produce a basic EPS of $2.00 per share for 2021.
Difficulty: 3 Hard
Topic: Basic EPS-Weighted average concept
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.; 19-05 Describe what is meant by the weighted-average number of common shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
169) Nagy Industries reported a net income of $619,369 on December 31, 2021. At the beginning of the year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000 shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger. On December 1, 2021, the company declared and issued a 10% stock dividend.
Required:
Compute Nagy's net income that would produce a basic EPS of $2.00 per share for 2021.
Difficulty: 3 Hard
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
170) Burns Company reported $752.4 million in net income in 2021. On January 1, 2021, the company had 400 million shares of common stock outstanding. On March 1, 2021, 24 million new shares of common stock were sold for cash. On June 1, 2021, the company's common stock split 2 for 1. On July 1, 2021, 8 million shares were reacquired as treasury stock.
Required:
Compute Burns' basic earnings per share for the year ended December 31, 2021.
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
171) On January 1, 2021, Algerian Delivery had 100,000 shares of common stock outstanding. The following transactions occurred during 2021:
March 1: | Reacquired 3,000 shares, accounted for as treasury stock. |
September 30: | Sold all the treasury shares. |
December 1: | Sold 12,000 new shares for cash. |
December 31: | Reported a net income of $297,750. |
Required:
Calculate Algerian Delivery's basic earnings per share for the year ended December 31, 2021.
Difficulty: 3 Hard
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
172) On January 1, 2021, Shamu Corporation had 100,000 shares of common stock outstanding. The following transactions occurred during 2021:
March 1: | Reacquired 3,000 shares, accounted for as treasury stock. |
September 30: | Sold all the treasury shares. |
December 1: | Sold 12,000 new shares for cash. |
December 31: | Reported a net income of $198,500. |
The following transactions occurred during 2022:
January 10: | Declared and issued a 25% stock dividend. |
December 31: | Reported a net income of $268,800. |
Required:
Calculate Shamu's basic earnings per share (rounded to 2 decimal places) for both years for presentation in comparative financial statements that will be prepared at the end of 2022.
Difficulty: 3 Hard
Topic: Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
173) Kramer Inc. had 95 million shares of common stock, 1 million shares of 6%, $100 par, cumulative preferred stock, and 1 million shares of 8%, $100 par, noncumulative preferred stock outstanding at the end of 2020 and 2021. No dividends were declared or paid on common stock in either year. In 2021, a $3 million dividend was paid on the 6% preferred stock and a $4 million dividend was paid on the 8% preferred stock. Net income for 2021 was $300 million. The company's tax rate is 25%.
Required:
Compute basic earnings per share (rounded to 2 decimal places) for the year ended December 31, 2021
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
174) Rice Inc. had 420 million shares of common stock and 1 million shares of 6%, $200 par, cumulative preferred stock outstanding at the end of 2020 and 2021. No dividends were declared or paid on either class of stock in either year. Net income for 2021 was $398.4 million. The company's tax rate is 25%.
Required:
Compute basic earnings per share for the year ended December 31, 2021.
Difficulty: 1 Easy
Topic: Basic EPS and preferred dividends
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
175) Capital Consulting Company had 400,000 shares of common stock outstanding on December 31, 2021. On that date, there were also 5,000 shares of $100 par, 6% noncumulative preferred stock outstanding. On March 1, 2021, the company's common stock split 3-for-1. On December 15, 2021, a preferred dividend was declared and paid in the amount of $25,000. Net income for 2021 was $3,000,000.
Required:
Compute basic earnings per share (rounded to 2 decimal places) for the year ended December 31, 2021.
Difficulty: 2 Medium
Topic: Basic EPS with multiple adjustments
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
176) Parsley Corporation had 250,000 shares of common stock and 5,000 shares of 8%, $100 par, preferred stock outstanding on December 31, 2020. The preferred stock is cumulative, nonconvertible preferred stock. On June 1, 2021, Parsley sold 36,000 shares of common stock for cash. No cash dividends were declared for 2021. Parsley reported a net loss of $320,000 for the year ended December 31, 2021.
Required:
Calculate Parsley's loss per share (rounded to 2 decimal places) for the year ended December 31, 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
177) On December 31, 2020, Belair Corporation had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Belair purchased 24,000 shares of common stock on the open market as treasury stock paying $20 per share. On June 30, 2021, Belair declared and issued a 2-for-1 stock split on outstanding common stock. Belair sold 6,000 treasury shares on September 30, 2021, for $15 per share. Net income for 2021 was $180,905.
Required:
Compute Belair's basic earnings per share for 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments; Basic EPS-Denominator items
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
178) On December 31, 2020, Witherspoon Services had 800,000 shares of common stock and 200,000 shares of 5.5%, noncumulative, nonconvertible $10 par preferred stock issued and outstanding. On March 2, 2021, Witherspoon sold 120,000 common shares. In keeping with its long-term share repurchase plan, 30,000 shares were retired on August 31. Witherspoon distributed a 10% common stock dividend on June 3. Witherspoon's net income for the year ended December 31, 2019, was $600,000. The company paid cash dividends of $110,000 to preferred shareholders on December 20, 2021. The income tax rate is 25%.
Required:
Compute Witherspoon's earnings per share for the year ended December 31, 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
179) On December 31, 2020, Clarkson Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Clarkson purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Clarkson sold 6,000 of the treasury shares on September 30, 2021, for $47 per share. Net income for 2021 was $180,905. Also outstanding at December 31, 2020, were fully vested incentive stock options giving key executives the option to buy 50,000 common shares at $40. These stock options were exercised on November 1, 2021. The market price of the common shares averaged $50 during 2021.
Required:
Compute Clarkson's basic and diluted earnings per share (rounded to 2 decimal places) for 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments; Diluted EPS-Options-warrants-rights
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
180) Fully vested incentive stock options for 100,000 shares of common stock at an exercise price of $50 were outstanding for the entire year. The market price of the stock during the year averaged $56.
Required:
By how many shares will the assumed exercise of these options increase the weighted-average number of shares outstanding when calculating diluted earnings per share?
Difficulty: 1 Easy
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
181) Fully vested incentive stock options for 60,000 shares of common stock at an exercise price of $50 were outstanding at the beginning of 2021. The market price of the stock averaged $56 during the year.
Required:
If these options are exercised on March 1 of the current year, by how many shares will the options increase the weighted-average number of shares outstanding when calculating diluted earnings per share?
Difficulty: 3 Hard
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
182) XYZ Company had 200,000 shares of common stock outstanding on December 31, 2020. On July 1, 2021, XYZ issued an additional 50,000 shares for cash. On January 1, 2021, XYZ issued 20,000 shares of convertible preferred stock. The preferred stock had a par value of $100 per share and paid a 5% dividend. Each share of preferred stock is convertible into 8 shares of common. During 2021, XYZ paid the regular annual dividend on the preferred and common stock. Net income for the year was $300,000.
Required:
Calculate XYZ's basic and diluted earnings per share (rounded to 2 decimal places) for 2021.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends; Diluted EPS-Convertible securities
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
183) Paul Company had 100,000 shares of common stock outstanding on January 1, 2021. On September 30, 2021, Paul sold 48,000 shares of common stock for cash. Paul also had 10,000 shares of convertible preferred stock outstanding throughout 2021. The preferred stock is $100 par, 6%, and is convertible into 3 shares of common for each share of preferred. Paul also had 500, 8%, convertible bonds outstanding throughout 2021. Each $1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2021 was $300,000 with a 25% tax rate. Common shareholders received $2 per share dividends after preferred dividends were paid in 2021.
Required:
Compute basic and diluted earnings per share (rounded to 2 decimal places) for 2021.
Difficulty: 3 Hard
Topic: Basic EPS and preferred dividends; Basic EPS-Weighted average concept; Diluted EPS-Convertible securities
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
184) Woolery, Inc. had 50,000 shares of common stock outstanding at January 1, 2021. On March 31, 2021, an additional 12,000 shares were sold for cash. Woolery also had $4,000,000 of 6% convertible bonds outstanding throughout the year. The bonds are convertible into 40,000 shares of common stock. Net income for the year was $350,000. The tax rate is 25%.
Required:
Compute basic and diluted earnings per share (rounded to 2 decimal places) for the year ended December 31, 2021.
Difficulty: 2 Medium
Topic: Basic EPS-Weighted average concept; Diluted EPS-Convertible securities
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
185) On December 31, 2020, Brisbane Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Brisbane purchased 24,000 shares of common stock on the open market as treasury stock paying $40 per share. Brisbane sold 6,000 treasury shares on September 30, 2021, for $45 per share. Net income for 2021 was $180,905. Also outstanding during the year were fully vested incentive stock options giving key officers the option to buy 50,000 common shares at $40. The market price of the common shares averaged $50 during 2021.
Required:
Compute Brisbane's basic and diluted earnings per share (rounded to 2 decimal places) for 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments; Diluted EPS-Options-warrants-rights
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
186) On December 31, 2020, Heffner Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $100 par, cumulative preferred stock outstanding. On February 28, 2021, Heffner purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Heffner sold 6,000 of the treasury shares on September 30, 2021, for $47 per share. Net income for 2021 was $540,000. The income tax rate is 25%. Also outstanding at December 31, 2020, were fully vested incentive stock options giving key employees the option to buy 50,000 common shares at $40. The market price of the common shares averaged $50 during 2021. Five thousand 6% bonds were issued at par on January 1, 2021. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds had been converted by December 31, 2021, and no stock options were exercised during the year.
Required:
Compute basic and diluted earnings per share (rounded to 2 decimal places) for Heffner Company for 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments; Diluted EPS with multiple adjustments
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
187) On December 31, 2020, Vitners Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10).
February 28, 2021, issued an additional 36,000 shares of common stock
September 1, 2021, 9,000 shares were retired.
A 10% stock dividend was declared and distributed on July 1, 2021.
At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2018 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 25%.
Required:
Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments; Diluted EPS with multiple adjustments
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
188) On December 31, 2020, Merlin Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). On February 28, 2021, the preferred stock was convertible into 30,000 shares of common stock. Merlin issued an additional 36,000 shares of common stock. A 10% stock dividend was declared and distributed on July 1, 2021. On September 1, 2021, 9,000 shares were retired. At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2018 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 25%.
Required:
Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments; Diluted EPS with multiple adjustments
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
189) On December 31, 2020, Jackson Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Jackson purchased 24,000 shares of common stock on the open market as treasury stock for $35 per share. Jackson sold 6,000 treasury shares on September 30, 2021, for $37 per share. Net income for 2021 was $180,905. Also outstanding during the year were fully vested incentive stock options giving key executives the option to buy 50,000 common shares at $40. The market price of the common shares averaged $39 during 2021.
Required:
Compute Jackson's basic and diluted earnings per share (rounded to 2 decimal places) for 2021.
Difficulty: 3 Hard
Topic: Basic EPS with multiple adjustments; Diluted EPS-Antidilutive securities
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
190) At December 31, 2021, MedX Corporation had outstanding 200,000 shares of common stock. Also outstanding were 120,000 shares of preferred stock convertible into 64,000 common shares and $1,800,000 of 10% bonds convertible into 27,000 common shares. MedX's net income for the year ended December 31, 2021, is $1,040,000. The income tax rate is 25%. MedX paid dividends of $2 per share on its preferred stock during 2021.
Required:
Compute basic and diluted earnings per share for the year ended December 31, 2021, considering possible antidilutive effects.
Difficulty: 3 Hard
Topic: Basic EPS and preferred dividends; Diluted EPS-Antidilutive securities; Diluted EPS-Convertible securities.
Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.; 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
191) DJ Co. is a calendar-year firm with 120 million common shares outstanding throughout 2021. As part of its executive compensation plan, at January 1, 2020, the company had issued 12 million executive stock options permitting executives to buy 12 million shares of stock for $10 each within the next eight years, but not prior to January 1, 2023. The fair value of the options was estimated on the grant date to be $3 per option. The stock options qualify for tax purposes as an incentive plan. The company's net income was $480 million in 2021. Its income tax rate is 25%. The average market price of the stock during 2021 was $12 per share.
Required:
Determine basic and diluted earnings per share (rounded to two decimal places) for DJ in 2021.
Difficulty: 3 Hard
Topic: EPS issues-Unexpensed compensation
Learning Objective: 19-11 Describe the two components of the proceeds used in the treasury stock method and how restricted stock is incorporated into the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
192) JD Co. is a calendar-year firm with 600 million common shares outstanding throughout 2021 and 2022. As part of its executive compensation plan, at January 1, 2020, the company had issued 60 million executive stock options permitting executives to buy 60 million shares of stock for $10 per share within the next eight years, but not prior to January 1, 2023. The fair value of the options was estimated on the grant date to be $3 per option.
In 2021, JD began granting employees stock awards rather than stock options as part of its equity compensation plans and granted 30 million restricted common shares to senior executives at January 1, 2021. The shares vest four years later. The fair value of the stock was $12 per share on the grant date. The average market price of the common shares was $12 and $15 during 2021 and 2022, respectively.
The stock options qualify for tax purposes as an incentive plan. The restricted stock does not. The company's income before tax was $400 million and $500 million, and the net income was $240 million and $300 million, in 2021 and 2022, respectively.
Required:
1. Determine basic and diluted earnings per share (rounded to 2 decimal places) for JD in 2021.
2. Determine basic and diluted earnings per share for JD (rounded to 2 decimal places) in 2022.
Difficulty: 3 Hard
Topic: EPS issues-Unexpensed compensation
Learning Objective: 19-11 Describe the two components of the proceeds used in the treasury stock method and how restricted stock is incorporated into the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
193) During 2021, Quattro entered into the following transactions relating to shareholders' equity. The corporation was authorized to issue 20 million common shares, $1 par per share.
Net income for 2021 was $110 million.
Jan. 2: | Issued 10 million common shares for cash. |
Jan. 3: | Entered an agreement with the company president to issue up to 2 million additional shares of common stock in 2021 based on the earnings of Quattro in 2021. If net income exceeds $100 million, the president will receive 1 million shares; if net income exceeds $120 million, the president will receive 2 million shares. |
Required:
Compute basic and diluted EPS for 2021.
Difficulty: 1 Easy
Topic: Basic EPS-Calculation concepts; EPS issues-Contingently issuable shares
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.; 19-05 Describe what is meant by the weighted-average number of common shares.; 19-12 Explain the way contingently issuable shares are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
194) Pastner Brands is a calendar-year firm with operations in several countries. As part of its executive compensation plan, at January 1, 2021, the company had issued 20 million executive stock options permitting executives to buy 20 million shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Date | Amount Vesting | Fair Value per Option |
Dec. 31, 2021 | 20% | $3.50 |
Dec. 31, 2022 | 30% | $4.00 |
Dec. 31, 2023 | 50% | $6.00 |
Required:
Determine the compensation expense related to the options to be recorded each year for 2021-2023, assuming Pastner prepares its financial statements in accordance with International Financial Reporting Standards (IFRS).
Vesting Date | Amount Vesting (shares in millions) | Fair Value per Option | Compensation Cost ($ in millions) |
Dec. 31, 2021 | 4 | $3.50 | $14 |
Dec. 31, 2022 | 6 | $4.00 | 24 |
Dec. 31, 2023 | 10 | $6.00 | 60 |
$98 |
2021 | 2022 | 2023 | ||
Dec. 31, 2021 | $14 | |||
Dec. 31, 2022 | 12 | $12 | ||
Dec. 31, 2023 | 20 | 20 | $20 | |
$46 | $32 | $20 | = $98 |
Difficulty: 3 Hard
Topic: IFRS‒EPS
Learning Objective: 19-14 Discuss the primary differences between U.S. GAAP and IFRS with respect to accounting for share-based compensation and earnings per share.
Bloom's: Apply
AACSB: Diversity; Knowledge Application
AICPA/Accessibility: BB Global; FN Measurement
195) What is restricted stock? Describe how compensation expense is determined and recorded for a restricted stock plan.
Difficulty: 2 Medium
Topic: Restricted stock
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal; FN Measurement
196) The tax code differentiates between qualified and nonqualified incentive plans. What are the major differences in tax treatment between the two?
Difficulty: 1 Easy
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: BB Legal
197) Blair Systems offers its employees a variety of share-based compensation plans including stock options, stock appreciation rights, and restricted stock. The following is an excerpt from a disclosure note from Blair's 2021 financial statements:
Note 11 Employee Benefit Plans (in part)
The Company adopted accounting guidelines under ASC Topic 718 which require the measurement and recognition of compensation expense for all share-based payment awards made to the Company's employees and directors including employee stock options and employee stock purchase rights, based on estimated fair values. Employee share-based compensation expense under ASC Topic 718 was as follows (in millions):
Years Ended | 2021 | 2020 | 2019 |
Total employee share-based compensation expense | $455 | $870 | $760 |
Required:
1. Blair's share-based compensation includes stock options, stock appreciation rights, and restricted stock awards. What is the general financial reporting objective when recording compensation expense for these forms of compensation?
2. Blair reported share-based expense of $455 million in 2021. Without referring to specific numbers and ignoring other forms of share-based compensation, describe how this amount reflects the value of stock options.
Difficulty: 2 Medium
Topic: Restricted stock; Stock appreciation rights―Appendix B; Stock options
Learning Objective: 19-01 Explain and implement the accounting for restricted stock plans.; 19-02 Explain and implement the accounting for stock options.; Appendix 19B Stock Appreciation Rights.
Bloom's: Evaluate
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: FN Measurement
198) Reacting to opposition to the FASB's "Share-Based Payment" Exposure Draft, Senator Carl Levin stated, "Stock options are the 800-pound gorilla that has yet to be caged by corporate reform." In reference to a bill that would thwart the FASB's position, Senator John McCain said, "This legislation blocking stock option expensing not only undermines FASB's independence, but undermines the effort to restore confidence in our financial markets as well." Discuss what these two senators meant by their statements.
Difficulty: 2 Medium
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Evaluate
AACSB: Analytical Thinking; Communication
AICPA/Accessibility: BB Critical Thinking
199) Stock option plans give employees the option to purchase (a) a specified number of shares of the firm's stock, (b) at a specified price, (c) during a specified period of time. One of the most heated controversies in standard-setting history has been the debate over the amount of compensation to be recognized as expense for stock options. At issue is how the value of stock options is measured, which for most options determines whether any expense at all is recognized. The opposition included corporate executives, auditors, members of Congress, and the SEC.
Required:
Describe the primary objections of critics of the FASB's eventually successful attempt to require expensing of the fair value of the options.
Difficulty: 3 Hard
Topic: Stock options
Learning Objective: 19-02 Explain and implement the accounting for stock options.
Bloom's: Evaluate
AACSB: Communication; Reflective Thinking
AICPA/Accessibility: BB Critical Thinking
200) A disclosure note from E Corp.'s 2021 annual report is shown below:
Employee Stock Purchase Plan. We have an employee stock purchase plan for all eligible employees. Compensation expense for the employee stock purchase plan is recognized in accordance with GAAP. Shares of our common stock may be purchased by employees at three-month intervals at 85% of the fair value on the last day of each three-month period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. Employees purchased the following shares:
2021 | 2020 | 2019 | |
Shares purchased (in millions) | 15 | 14 | 12 |
Average price paid per share | $25.25 | $23.92 | $23.83 |
At June 30, 2021, 150 million shares were reserved for future issuance.
Required:
Describe the way "Compensation expense for the employee stock purchase plan" is recognized in accordance with GAAP by E Corp. Include in your explanation the journal entry that summarizes employee share purchases during 2021.
Difficulty: 2 Medium
Topic: Stock plans‒Employee share purchase plans
Learning Objective: 19-03 Explain and implement the accounting for employee share purchase plans.
Bloom's: Evaluate
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
201) How is a complex capital structure different from a simple capital structure?
Difficulty: 1 Easy
Topic: Basic EPS-Calculation concepts
Learning Objective: 19-04 Distinguish between a simple and a complex capital structure.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: BB Legal
202) What is the treasury stock method of accounting for stock options, warrants, and rights?
Difficulty: 2 Medium
Topic: Diluted EPS-Options-warrants-rights
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement
203) In its 2021 Annual Report to shareholders, V Co. had the following disclosure note about its EPS:
NOTE 9 - EARNINGS PER SHARE:
The following represents the reconciliation from basic earnings per share to diluted earnings per share. Options to purchase 8.3 million and 9.7 million shares of common stock were outstanding at May 31, 2021 and May 31, 2020, respectively, but were not included in the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. No such antidilutive options were outstanding at May 31, 2019.
Determination of shares: IN MILLIONS
EXCEPT PER SHARE DATA
Year ended May 31,
2021 | 2020 | 2019 | |
Average common shares outstanding | 270.0 | 275.7 | 283.3 |
Assumed conversion of dilutive stock options and awards | 3.3 | 3.7 | 5.0 |
Diluted average common shares outstanding | 273.3 | 279.4 | 288.3 |
Basic earnings per common share | $2.18 | $2.10 | $1.59 |
Diluted earnings per common share | $2.16 | $2.07 | $1.57 |
At the end of 2021, what is the maximum number of shares that could possibly be issued if all stock options and awards are exercised? Explain why V Co. used only 3.3 million in its computation for 2021.
Difficulty: 2 Medium
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Analyze
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement
204) Why are earnings per share figures for prior years adjusted for stock splits and stock dividends when data from prior years is presented in comparative financial statements?
Difficulty: 2 Medium
Topic: Basic EPS-Denominator items; Financial statement presentation
Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares, a stock dividend or stock split, and the reacquisition of shares.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: FN Measurement
205) Why are preferred dividends deducted from net income when calculating EPS?
Difficulty: 1 Easy
Topic: Diluted EPS-Antidilutive securities; Diluted EPS-Convertible securities; Diluted EPS-Options-warrants-rights; EPS issues-Unexpensed compensation
Learning Objective: 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Communication; Reflective Thinking
AICPA/Accessibility: FN Measurement
206) What is the "if converted method"?
Difficulty: 1 Easy
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Remember
AACSB: Communication; Reflective Thinking
AICPA/Accessibility: FN Measurement
207) What is an antidilutive security?
Difficulty: 2 Medium
Topic: Diluted EPS-Antidilutive securities
Learning Objective: 19-10 Determine whether potential common shares are antidilutive.
Bloom's: Remember
AACSB: Communication; Reflective Thinking
AICPA/Accessibility: FN Measurement
208) X, Inc. supplies consumer products used in the United States and other markets. In its 2021 Annual Report to Shareholders, M, Inc. disclosed the following note about its EPS:
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporates the incremental shares issuable upon the assumed exercise of stock options and upon the assumed conversion of the Company's Convertible Notes in fiscal 2021 as if conversion to common shares had occurred at the beginning of the fiscal year. Earnings have also been adjusted for interest expense on the Convertible Notes in fiscal 2021.
Explain why X mentioned the adjustment in the last sentence of the disclosure note.
Difficulty: 3 Hard
Topic: EPS issues-Unexpensed compensation
Learning Objective: 19-11 Describe the two components of the proceeds used in the treasury stock method and how restricted stock is incorporated into the calculation of EPS.
Bloom's: Apply
AACSB: Knowledge Application
AICPA/Accessibility: FN Measurement
209) Salle Services issued $300 million of 6% bonds in 2019. The bonds are convertible into 60 million shares of its no par common stock. Salle elected the option to report the bonds at fair value, with changes in fair value reported in earnings. As a result, the bonds are reported at $312 million in the December 31, 2021, balance sheet.
Required:
When calculating diluted EPS at December 31, 2021, what will be the net increase in the denominator of the EPS fraction? Explain.
Difficulty: 2 Medium
Topic: Diluted EPS-Convertible securities
Learning Objective: 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Apply
AACSB: Analytical Thinking
AICPA/Accessibility: FN Measurement
210) If executive stock options or restricted stock are outstanding when calculating diluted EPS, what are the components of the "proceeds" assumed available for the repurchase of shares under the treasury stock method?
Difficulty: 2 Medium
Topic: EPS issues-Unexpensed compensation
Learning Objective: 19-11 Describe the two components of the proceeds used in the treasury stock method and how restricted stock is incorporated into the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
211) When the income statement includes discontinued operations, which amounts require per share presentation?
Difficulty: 1 Easy
Topic: Financial statement presentation
Learning Objective: 19-13 Describe the way EPS information should be reported in an income statement.
Bloom's: Remember
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
212) Compare the concepts of basic and diluted earnings per share with respect to their calculation.
Difficulty: 2 Medium
Topic: Basic EPS and preferred dividends; Basic EPS-Weighted average concept; Diluted EPS-Convertible securities; Diluted EPS-Options-warrants-rights
Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.; 19-07 Describe how preferred dividends affect the calculation of EPS.; 19-08 Describe how options, rights, and warrants are incorporated in the calculation of EPS.; 19-09 Describe how convertible securities are incorporated in the calculation of EPS.
Bloom's: Understand
AACSB: Reflective Thinking; Communication
AICPA/Accessibility: FN Measurement
213) What is the advantage of stock appreciation rights over stock options?
Difficulty: 1 Easy
Topic: Stock appreciation rights‒Appendix B
Learning Objective: Appendix 19B Stock Appreciation Rights.
Bloom's: Evaluate
AACSB: Reflective Thinking
AICPA/Accessibility: FN Measurement
Document Information
Connected Book
Answer Key + Test Bank | Intermediate Accounting 10e
By J. David Spiceland, Mark W. Nelson, Wayne Thomas
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Chapter 19 Share-Based Compensation And Earnings Per Share
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Chapter 20 Accounting Changes And Error Corrections
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Chapter 21 The Statement Of Cash Flows Revisited
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