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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 41

Multiple Choice

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Under its executive stock option plan, M Corporation granted options on January 1, 2018, 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, 2020 (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 2019 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2019?

A) $18.5 million.
B) $18 million.
C) $20 million.
D) $19 million.

E) All of the above
F) None of the above

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Question 42

Multiple Choice

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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.

E) None of the above
F) All of the above

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Question 43

Multiple Choice

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At December 31, 2018 and 2017, G 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 2018 or 2017. Net income for 2018 was $500,000. For 2018, basic earnings per common share amounted to:

What is the advantage of stock appreciation rights over stock options?

The most important accounting objective for executive stock options is:

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 2018, 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 2018 pretax earnings will be reduced by:

Why are preferred dividends deducted from net income when calculating EPS?

How is a complex capital structure different from a simple capital structure?

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

Listed below are five terms followed by a list of phrases that describe or characterize each of the terms. Match each phrase with the correct term. -Diluted EPS

What is the treasury stock method of accounting for stock options, warrants, and rights?

DJ Co. is a calendar-year firm with 120 million common shares outstanding throughout 2018. As part of its executive compensation plan, at January 1, 2017, 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, 2020. 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 2018. Its income tax rate is 40%. The average market price of the stock during 2018 was $12 per share. Required: Determine basic and diluted earnings per share (rounded to two decimal places) for DJ in 2018.

Which of the following is a correct statement concerning earnings per share?

When the income statement includes discontinued operations, which amounts require per share presentation?

Olde Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2018, 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, 2019 (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, 2018. (3.) Prepare the journal entry to record compensation expense on December 31, 2018. (4.) Prepare the journal entry to record compensation expense on December 31, 2019.

When calculating diluted earnings per share, stock options:

During 2018, 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 2018. On January 1, 2017, 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, 2018, was $6 million. The income tax rate is 20%. - What is Angel's basic earnings per share for 2018, rounded to the nearest cent?

Burns Company reported $752.4 million in net income in 2018. On January 1, 2018, the company had 400 million shares of common stock outstanding. On March 1, 2018, 24 million new shares of common stock were sold for cash. On June 1, 2018, the company's common stock split 2 for 1. On July 1, 2018, 8 million shares were reacquired as treasury stock. Required: Compute Burns' basic earnings per share for the year ended December 31, 2018.

Morrison Corporation had the following common stock record during the current calendar year: $\begin{array}{|l|l|}\hline \text { Outstanding-January } 1 & 2,000,000 \\\hline \text { Additional shares issued 3/31 } & 100,000 \\\hline \text { Distributed a } 10 \% \text { stock dividend on } 6 / 30 & \\\hline \text { Additional shares issued } 9 / 30 & 100,000 \\\hline\end{array}$ - What is the number of shares to be used in computing basic EPS?

Executive stock options should be reported as compensation expense: