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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 51

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

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Requirement 1
Other potential common sha...

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Question 52

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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.

E) C) and D)
F) B) and D)

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Question 53

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The tax code differentiates between qualified and nonqualified incentive plans. What are the major differences in tax treatment between the two?

The Peach Corporation provides restricted stock to certain executives. Under the plan, the company granted 30 million shares on January 1, 2009, 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, 2009. 3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2009.

The Burford Corporation provides an executive stock option plan. Under the plan, the company granted options on January 1, 2009, 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, 2012 (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, assuming Burford chooses to follow the FASB's accounting approach for fixed compensation plans. Show calculations. (2.) Prepare the appropriate journal entry (if any) to record the award of options on January 1, 2009. (3.) Prepare the appropriate journal entry (if any) to record compensation expense on December 31, 2009.

How many types of potential common shares must a corporation have in order to be said to have a complex capital structure?

A simple capital structure might include:

M, Inc. supplies consumer products used in the U.S. and other markets. In its 2009 Annual Report to Shareholders, M, Inc. disclosed the following footnote about its EPS: "The consolidated financial statements are presented in accordance with SFAS No. 128, "Earnings Per Share." 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 2009 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 2009." Explain why M mentioned the adjustment in the last sentence of the footnote.

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.

Stock options will be dilutive and included in the calculation of dilutive EPS if the exercise price is greater than the average market value of the stock.

In computing diluted earnings per share, the treasury stock method is used for:

On January 2, 2009, L Co. issued at par $20,000 of 4% bonds convertible in total into 1,000 shares of L's common stock. No bonds were converted during 2009. Throughout 2009, L had 1,000 shares of common stock outstanding. L's 2009 net income was $2,000. L's income tax rate is 50%. No potential common shares other than the convertible bonds were outstanding during 2009. L's diluted earnings per share for 2009 would be

Preferred dividends are subtracted from earnings when computing earnings per share whether or not the dividends are declared or paid if the preferred stock is:

Purple Cab Company had 50,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009, 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 $11 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2009. What is the basic earnings per share?

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

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:

On January 1, 2009, 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 2010, 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 2010?

When the income statement includes separately reported items such as discontinued operations or extraordinary items, which amounts require per share presentation?

What is Falwell's basic earnings per share for 2009, rounded to the nearest cent?

The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except: