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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 51

Multiple Choice

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Wilson's compensation expense in 2013 for these stock options was:

A) $0.
B) $200 million.
C) $400 million.
D) $800 million.

E) B) and D)
F) None of the above

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Question 52

Multiple Choice

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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.

E) B) and D)
F) A) and B)

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Question 53

Multiple Choice

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The single accounting number in the annual report that receives the most attention by investors is:

If restricted stock is forfeited because an employee leaves the company, the appropriate accounting procedure is to:

Dilutive convertible bonds affect both the numerator and the denominator in computing diluted EPS.

On December 31, 2012, 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, 2013, 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, 2011, was $600,000. The company paid cash dividends of $110,000 to preferred shareholders on December 20, 2013. The income tax rate is 40%. Required: Compute Witherspoon's earnings per share for the year ended December 31, 2013.

The Peach Corporation provides restricted stock to certain executives. Under the plan, the company granted 30 million shares on January 1, 2013, 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, 2013. 3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2013.

If a company reports an extraordinary gain, EPS must be disclosed for both income from continuing operations and net income.

When we take into account the dilutive effect of convertible securities in the calculation of EPS, the method used is called the:

The Peach Corporation provides restricted stock to certain executives. Under the plan, the company granted 30 million shares on January 1, 2013, 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, 2013. 3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2013.

GAAP requires using intrinsic value accounting for employee stock options.

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.

The compensation associated with a share of restricted stock under a stock award plan is:

On January 2, 2013, 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 2013. Throughout 2013, L had 1,000 shares of common stock outstanding. L's 2013 net income was $2,000. L's income tax rate is 50%. No potential common shares other than the convertible bonds were outstanding during 2013. L's diluted earnings per share for 2013 would be:

XYZ Company had 200,000 shares of common stock outstanding on December 31, 2012. On July 1, 2013, XYZ issued an additional 50,000 shares for cash. On January 1, 2013, 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 2013, 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 2013.

Zeba Company granted 27 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. Zeba's common shares have a market price of $10 per share on January 1, 2012, the grant date. Required: When calculating diluted EPS at December 31, 2013, what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averaged $10 during 2013?

Nagy Industries reported a net income of $619,369 on December 31, 2013. 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, 2013, 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 2013.

M, Inc., supplies consumer products used in the United States and other markets. In its 2013 Annual Report to Shareholders, M, Inc., disclosed the following note about its EPS: Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per common share incorporate the incremental shares issuable upon the assumed exercise of stock options and upon the assumed conversion of the Company's Convertible Notes in fiscal 2013 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 2013. Explain why M mentioned the adjustment in the last sentence of the disclosure note.

A primary goal of earnings per share determination is:

What is Falwell's diluted earnings per share for 2013, rounded to the nearest cent?