INT II Final MC
Fully vested incentive stock options exercisable at $50 per share to obtain 24,000 shares of common stock were outstanding during a period when the average market price of the common stock was $60 and the ending market price was $60. What will be the net increase in the weighted-average number of shares outstanding due to the assumed exercise of these options when calculating diluted earnings per share?
# of shares = 4,000 24,000 - 20,000 = 4,000 (24,000 * 50) / 60 = 20,000
Sales revenue for Marshall Matches was $240,000. The following data are from the accounting records of Marshall: A/R, Jan 1 52,000 A/R, Dec 31 47,000 Cash received from customers was:
$245,000. Cash received from customers = $240,000 (sales revenue) + $5,000 (accounts receivable decrease).
At December 31, 2021, the balance sheet of Goode Corporation included 80 million common shares. On October 1, 2022, Goode retired 4 million shares as part of a share repurchase program. Net income for the year ended December 31, 2022, was $400 million. Goode's 2022 EPS should be:
$5.06 400/[80-(4*3/12)]
Selected information from Jacklyn Hyde Corporation's accounting records and financial statements for 2021 is as follows ($ in millions): Cash paid to retire bonds 30 Treasury stock purchased for cash 50 Proceeds from issuance of C/S 70 Proceeds from issuance of m bonds 90 Cash Div paid on C/S 25 Cash Int paid on bondholders 35 On its statement of cash flows, Jacklyn Hyde should report net cash inflows from financing activities of:
$55 million. $70 (proceeds from issuance of common stock) + $90 (proceeds from issuance of mortgage bonds) − $30 (cash paid to retire bonds) − $50 (treasury stock purchased for cash) − $25 (cash dividends paid on common stock).
White Company is a calendar-year firm with operations in several countries. At January 1, 2021, the company had issued 10,000 executive stock options permitting executives to buy 10,000 shares of stock for $25. The vesting schedule is 30% the first year, 30% the second year, and 40% the third year (graded-vesting). The fair value of the options is estimated as follows: Vesting Date Amt Vesting FV/ Option 12/31/2021 30% $2.80 12/31/2022 30% $3.00 12/31/2023 40% $3.75 What is the compensation expense related to the options to be recorded in 2022?
$9,500 1/2 of $9 (30% × 10 × $3) + 1/3 of $15 (40% × 10 × $3.75).
Executive stock options are outstanding all year that permit executives to buy 12 million common shares at $50. The average market price of the common stock was $60. When calculating diluted earnings per share, the assumed exercise of these options will increase the weighted average number of shares outstanding by:
2 million shares 12-[($12 * $50) / $60] = 2
In 2021, it was discovered that Brandon Irons Metal works had debited expense for the full cost of an asset purchased on January 1, 2018. The cost was $12 million with no expected residual value. Its useful life was 5 years and straight-line depreciation is used by the company. The correcting entry assuming the error was discovered in 2021 before the adjusting and closing entries includes:
A credit to accumulated depreciation of $7.2 million. Accumulated depreciation would be credited for three year's depreciation (2012 to 2014) at $2.4 million per year. Depreciation for 2018 will be accounted for normally. In addition, an asset account would be debited for $12 million and retained earnings would be credited for $4.8 million.
Early in 2021, Brandon Transport discovered that a five-year insurance premium payment of $250,000 at the beginning of 2018 was debited to insurance expense. The correcting entry would include:
A credit to retained earnings of $100,000. The correcting entry would debit prepaid insurance for $100,000 and a credit to retained earnings for $100,000 since there are two years remaining on the insurance policy.
Property dividends are reported in connection with a statement of cash flows as:
A noncash activity. A property dividend does not involve a cash outflow and therefore is reported as a noncash activity.
Lamont Communications has amortized a patent on a straight-line basis since it was acquired in 2018 at a cost of $50 million. During 2021 management decided that the benefits from the patent would be received over a total period of 8 years rather than the 20-year legal life being used to amortize the cost. Lamont's 2021 financial statements should include:
A patent balance of $34 million. Accumulated amortization at the end of 2018 is $16 million, comprised of 3 year's amortization at $2.5 million per year ($50 / 20 years) plus one year's amortization at $8.5 million [($50 − $7.5) / (8 − 3) years].
The compensation associated with restricted stock units (RSUs) under a stock award plan is:
Allocated to expense over the service period which usually is the vesting period.
Van Frank Telecommunications has a patent on a cellular transmission process. The company has amortized the $18 million cost of the patent on a straight-line basis since it was acquired at the beginning of 2017. Due to rapid technological advances in the industry, management decided that the patent would benefit the company over a total of six years rather than the nine-year life being used to amortize its cost. The decision was made at the end of 2021 (before adjusting and closing entries). What is the appropriate adjusting entry for patent amortization in 2021 to reflect the revised estimate?
Amortization exp 5 Patent 5 When an estimate is revised as new information comes to light, accounting for the change in estimate is quite straightforward. We do not recast prior years' financial statements to reflect the new estimate. Instead, we merely incorporate the new estimate in any related accounting determinations from the beginning of the year of change and years forward. If the effect of the change in estimate is material, the effect on continuing operations, net income, and earnings per share must be disclosed in a note, along with the justification for the change. Cost 18 Prev amort (18/9) 2 Amort to date (8) x 4 years 10 remaining life /2 new annual amort 5
In determining cash flows from operating activities (indirect method), adjustments to net income should not include:
An addition for a gain on sale of equipment. The gain would be deducted from net income.
In a statement of cash flows (indirect method), an increase in available-for-sale securities should be reported as:
An investing activity. An increase in available-for-sale securities due to the purchasing of additional shares is reported as an investing activity in the statement of cash flows.
Sean-McDonald Company sold a printer with a cost of $34,000 and accumulated depreciation of $21,000 for $10,000 cash. This transaction would be reported as:
An investing activity. Selling (as well as buying) fixed assets are considered investing activities.
Investment revenue is reported in connection with a statement of cash flows as:
An operating activity. Since interest revenue is reported in the income statement under GAAP, it is reported in the operating activities section of the statement of cash flows.
Which of the following statements is untrue regarding earnings per share?
Any new shares issued during the period in a stock dividend or stock split are time-weighted by the fraction of the period they were outstanding and then added to the number of shares outstanding for the period.
Restricted stock units (RSUs):
Are reported as part of shareholder's equity if payable in shares rather than cash.
Ahnberg Corporation had 800,000 shares of common stock issued and outstanding at January 1. No common shares were issued during the year, but on January 1, Ahnberg issued 100,000 shares of convertible preferred stock. The preferred shares are convertible into 200,000 shares of common stock. During the year Ahnberg paid $60,000 cash dividends on the preferred stock. Net income was $1,500,000. What were Ahnberg's basic and diluted earnings per share for the year?
Basic EPS= (1,500 (NI) - 60 (Preferred Dividends) ) / 800 Shares at Jan 1. = $1.80 Dilutive EPS= 1,500 (NI) / ( 800 (shares at Jan 1) + 200 (conversion of preferred shares) ) = $1.50
Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021, that permit executives to purchase 12 million of the company's $1 par common shares within the next six 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, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. Suppose that the options are exercised on April 3, 2024, when the market price is $19 per share. Ignoring taxes, what journal entry will National record?
Cash 204 PIC - Stock Options 60 Common Stock 12 PIC - Excess of Par 252 Cash ($17 exercise price × 12 million shares) = $204 million Paid-in capital—stock options (account balance) $5 (FV/Option) * 12 million (options granted) = $60 million -The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million each year. -Common stock (12 million shares at $1 par per share) = $12 million -Note: The market price at exercise is irrelevant.
Sherriane Baby Products' salaries expense was $17 million. What is the amount of cash Sherriane paid to employees during the reporting period if its salaries payable increased by $3 million? Prepare a summary entry that represents the net effect of salaries expense incurred and paid during the reporting period.
Cash = 14 General Journal Entry Sal Exp 17 Sal Pay 3 Cash 14
LaRoe Lawns' inventory increased during the year by $6 million. Its accounts payable increased by $5 million during the same period. What is the amount of cash LaRoe paid to suppliers of merchandise during the reporting period if its cost of goods sold was $25 million? Prepare a summary entry that represents the net effect of merchandise purchases during the reporting period.
Cash = 26 General Journal Entry COGS 25 Inventory 6 A/P 5 Cash 26
April Wood Products' accounts receivable increased during the year by $4 million. What is the amount of cash April Wood Products received from customers during the reporting period if its sales were $44 million? Prepare a summary entry that represents the net effect of the selling and collection activities during the reporting period.
Cash = 40 mil General Journal entry Cash 40 A/R 4 Sales Rev 44
Carter Containers sold marketable equity securities, land, and common stock for $30 million, $15 million, and $40 million, respectively. Carter also purchased treasury stock, equipment, and a patent for $21 million, $25 million, and $12 million, respectively. What amount should Carter report as net cash from financing activities?
Cash flows from financing activities Proceeds from sale of C/S = 40 Purchase of T/S = (21) Net cash inflows from financing activities = 19
Carter Containers sold marketable equity securities, land, and common stock for $30 million, $15 million, and $40 million, respectively. Carter also purchased treasury stock, equipment, and a patent for $21 million, $25 million, and $12 million, respectively. What amount should Carter report as net cash from investing activities?
Cash flows from investing activities Proceeds from sale of marketable securities = 30 Proceeds from sale of land = 15 Purchase of equipment for cash = (25) Purchase of patent for cash = (12) Net cash inflows from investing activities = 8
Sanders Awnings reported net income of $90 million. Included in that number were depreciation expense of $3 million and a loss on the sale of equipment of $2 million. Records reveal increases in accounts receivable, accounts payable, and inventory of $1 million, $4 million, and $3 million, respectively. What were Sanders' cash flows from operating activities?
Cash flows from operating activities NI = 90 Adjustments for noncash effects: Depr Exp = 3 Loss on Sale of Equip = 2 Changes in assets and liabilities: Increase in A/R = (1) Increase in A/P = 4 Increase in Inventory = (3) Net cash flows from operating activities = 95
Sunset Acres reported net income of $60 million. Included in that number were trademark amortization expense of $2 million and a gain on the sale of land of $1 million. Records reveal decreases in accounts receivable, accounts payable, and inventory of $2 million, $5 million, and $4 million, respectively. What were Sunset's cash flows from operating activities?
Cash flows from operating activities: NI = 60 Adjustments for noncash effects: Amortization expense = 2 Gain on Sale of Land = (1) Changes in operating assets and liabilities Decrease in A/R = 2 Decrease in A/P = (5) Decrease in Inv = 4 Net cash flows from operating activities = 62
Agee Technology, Inc., issued 9% bonds, dated January 1, with a face amount of $400 million on July 1, 2021, at a price of $380 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semi-annually on June 30 and December 31. What would be the amount(s) related to the bonds that Agee would report in its statement of cash flows for the year ended December 31, 2021, if it uses the indirect method?
Cash inflow from financing activities = 380 Operating Activities: Positive adj to NI = 1 Int exp (10%x1/2x$380) 19 Disc on B/P 1 Cash (9%x1/2x$400) 18 Agee would report the cash inflow of $380 million from the sale of the bonds as a cash inflow from financing activities in its statement of cash flows. The $1 million amortization of the discount would be added back to net income as a noncash adjustment because the interest expense ($19 million) was subtracted in calculating net income and yet the cash interest paid was only $18 million.
On January 1, 2021, the Merit Group issued to its bank a $41 million, five-year installment note to be paid in five equal payments at the end of each year. Installment payments of $10 million annually include interest at the rate of 7%. What would be the amount(s) related to the note that Merit would report in its statement of cash flows for the year ended December 31, 2021?
Cash inflow from financing activities = 41.00 Cash outflow from operating activities = (2.87) Cash outflow from financing activities = (7.13) Merit would report the cash inflow of $41 million from the borrowing as a cash inflow from financing activities in its statement of cash flows. Each installment payment includes both an amount that represents interest and an amount that represents a reduction of principal. In its statement of cash flows, then, Merit reports the interest portion ($2,870,000*) as a cash outflow from operating activities and the principal portion ($7,130,000*) as a cash outflow from financing activities. Int Exp (7%xbal) 2,870,000 N/P (plug) 7,130,000 Cash (given) 10,000,000
Which of the following is not usually accounted for retrospectively?
Change form FIFO to LIFO With a change to LIFO, companies may not have the necessary information related to the cost of inventory to retrospectively adjust retained earnings.
Which of the accounting changes listed below is more associated with financial statements prepared in accordance with U.S. GAAP than with International Financial Reporting Standards?
Change from the FIFO method of costing inventories to the LIFO method. LIFO is not a permissible method for accounting for inventory under IFRS.
Retrospective restatement usually is not applied for a:
Change in accounting estimate. Change in accounting estimate is reported using a prospective approach.
Which of the following statements is true regarding diluted earnings per share?
Contingently issuable shares are considered outstanding in the computation of diluted EPS when any conditions for issuance are currently being met. Contingently issuable shares are considered to be outstanding in the computation of diluted EPS if the target performance level already is being met.
On July 15, 2021, M.W. Morgan Distribution sold land for $35 million that it had purchased in 2016 for $22 million. What would be the amount(s) related to the sale that Morgan would report in its statement of cash flows for the year ended December 31, 2021, using the direct method? The indirect method?
DM Cash inflow from investing activities = 35 IM Cash inflow from investing activities = 35 Operating Activities: Negative adj to NI = (13) Cash 35 Gain on SOL (plug) 13 Land (cost) 22 Morgan would report the cash inflow of $35 million from the sale as a cash inflow from investing activities in its statement of cash flows. The $13 million gain is not a cash flow and would not be reported when using the direct method. For that reason, when using the indirect method, the gain would be subtracted from net income (which includes the gain) to avoid double-counting it.
Irwin, Inc. constructed a machine at a total cost of $35 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. The machine was being depreciated over a 10-year life using the straight-line method. The residual value is expected to be $2 million. At the beginning of 2021, Irwin decided to change to the sum-of-the-years'-digits method. Ignoring income taxes, prepare the journal entry relating to the machine for 2021.
Depr Exp 5.78 Acc Depr 5.78 A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method is similar to changing the economic useful life of a depreciable asset, and therefore the two events should be reported the same way. Accordingly, Irwin reports the change prospectively; previous financial statements are not revised. Instead, the undepreciated cost remaining at the time of the change would be depreciated by the sum-of-the-years'-digits method over the remaining useful life. Asset cost 35.0 Acc Depre (9.9)* Est Res Val (2.0) 23.1 *(35-2)/10 = 3.3 * 3 = 9.9 Calculation of SYD depreciation (7/28*) x 23.1 mil = $5.78 mil *n(n+1)/2=28
Irwin, Inc. constructed a machine at a total cost of $35 million. Construction was completed at the end of 2017 and the machine was placed in service at the beginning of 2018. The machine was being depreciated over a 10-year life using the sum-of-the-years'-digits method. The residual value is expected to be $2 million. At the beginning of 2021, Irwin decided to change to the straight-line method. Ignoring income taxes, prepare the journal entry relating to the machine for 2021.
Depreciation Exp 2.4 Accumulated Depr 2.4 A change in depreciation method is considered a change in accounting estimate resulting from a change in accounting principle. In other words, a change in the depreciation method is similar to changing the economic useful life of a depreciable asset, and therefore the two events should be reported the same way. Accordingly, Irwin reports the change prospectively; previous financial statements are not revised. Instead, the company simply employs the straight-line method from then on. The undepreciated cost remaining at the time of the change would be depreciated straight line over the remaining useful life. Asset's Cost 35 Acc Depr (16.2) Estimated Res Val (2.0) / 7 years Annual S-L Depr 2.4 ((10+9+8)/55*) x [$35-$2] mil = $16.2mil *n(n+1)/2 = 55
At December 31, 2020 and 2021, Funk & Noble Corporation had outstanding 820 million shares of common stock and 2 million shares of 8%, $100 par value cumulative preferred stock. No dividends were declared on either the preferred or common stock in 2020 or 2021. Net income for 2021 was $426 million. The income tax rate is 25%. Calculate earnings per share for the year ended December 31, 2021.
EPS = 426 (net income) - 16 (8% * 200 mil) / 820 (common shares outstanding) = $0.50 Since the preferred stock is cumulative, the dividends (8% × $200 million = $16 million) are deducted even though no dividends were declared. There are no potential common shares, so a single calculation of EPS is appropriate.
McDonnell-Myer Corporation reported net income of $741 million. The company had 544 million common shares outstanding at January 1 and sold 36 million shares on February 28. As part of an annual share repurchase plan, 6 million shares were retired on April 30 for $47 per share. Calculate McDonnell-Myer's earnings per share for the year.
EPS = 741 (net income) / 544 (shares jan 1) + 36 (10/12) (new shares in Feb) - 6 (8/12) (shares retired in April) = $1.30
A company can report interest payments and interest received as operating cash flows using
Either U.S. GAAP and IFRS. GAAP requires interest payments and interest received to be reported as an operating activity. IFRS allows interest payments to be reported as either an operating activity or financing activity and interest received as either an operating activity or investing activity.
In 2021, internal auditors discovered that PKE Displays, Inc., had debited an expense account for the $350,000 cost of a equipment purchased on January 1, 2018. The equipment's useful life was expected to be five years with no residual value. Straight-line depreciation is used by PKE. Ignoring income taxes, prepare the journal entry PKE use to correct the error
Equipment 350,000 Acc Depr 210,000 R/E 140,000 Correct 2018 Equip 350,000 Cash 350,000 2018 Expense 70,000 Acc Depr 70,000 2019 Expense 70,000 Acc Depr 70,000 2020 Expense 70,000 Acc Depr 70,000 Incorrect 2018 Expense 350,000 Cash 350,000 2018 Depr entry omitted 2019 Depr entry omitted 2020 Depr entry omitted During the three-year period, depreciation expense was understated by $210,000, but other expenses were overstated by $350,000, so net income during the period was understated by $140,000, which means retained earnings is currently understated by that amount. During the three-year period, accumulated depreciation was understated, and continues to be understated by $210,000. Accumulated depreciation ($70,000 × 3 years) = $210,000 Retained earnings ($350,000 − $210,000) = $140,000
When DeSoto Water Works purchased equipment at the end of 2020 at a cost of $65,000, the company debited Buildings and credited Cash $65,000. The error was discovered in 2021. Prepare the journal entry DeSoto will use to correct the error.
Equipment 65,000 Buildings 65,000 Other step(s) that would be taken in connection with the error: When comparative balance sheets are reported that include 2020, the 2020 balance sheet would be restated to reflect the correction. A disclosure note should describe the error and the impact of its correction on each financial statement line item and any per-share amounts affected for each prior period presented. In this case, because the machine was purchased at the end of 2020, depreciation in 2020 is correct and net income for 2020 is not impacted by the error.
A business is deemed to have a complex capital structure when it has outstanding:
Executive stock options
Agee Technology, Inc., issued 9% bonds, dated January 1, with a face amount of $400 million on July 1, 2021, at a price of $380 million. For bonds of similar risk and maturity, the market yield is 10%. Interest is paid semi-annually on June 30 and December 31. Prepare the journal entry to record interest at the effective interest rate at December 31. What would be the amount(s) related to the bonds that Agee would report in its statement of cash flows for the year ended December 31, 2021, if it uses the direct method?
General Journal Entry Int Exp 19 Disc on B/P 1 Cash 18 Cash paid Cash inflow from financing activities = 380 Cash outflow from operating activities = (18) a. Interest expense (10% × ½ × $380) = $19Cash (paid to bondholders) (9% × ½ × $400) = $18 b. Agee would report the cash inflow of $380 million from the sale of the bonds as a cash inflow from financing activities in its statement of cash flows. The $18 million cash interest paid is a cash outflow from operating activities because interest is an income statement (operating) item.
State Materials, Inc. changed from the FIFO method of costing inventories to the weighted average method during 2021. When reported in the 2021 comparative financial statements, the 2020 inventory amount will be:
Increased or decreased, depending on how prices changed during 2021. It will be restated to the balance it would have if the average method had been used all along.
In 2021, Adonis Industries changed its method of valuing inventory from the average cost method to the FIFO method. At December 31, 2020, Adonis's inventories were $47.6 million (average cost). Adonis's records indicated that the inventories would have totaled $64 million at December 31, 2020, if determined on a FIFO basis. Ignoring income taxes, what journal entry will Adonis use to record the adjustment in 2021?
Inv 16.4 R/E 16.4 Inv ($64 mil - $47.6 mil) = $16.4 mil
Niles Company granted 9 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 $5 per share on January 1, 2020, the grant date of the restricted stock award. When calculating diluted EPS at December 31, 2021, what will be the net increase in the weighted-average number of shares outstanding if the market price of the common shares averaged $5 per share during 2021? Net increase in the weighted-average number of shares outstanding =
Net increase in the weighted-average number of shares outstanding = 6 The total compensation for the award is $45 million ($5 market price per share × 9 million shares). Because the stock award vests over three years, it is expensed as $15 million each year for three years. At the end of 2021, the second year, $30 million has been expensed and $15 million remains unexpensed, so $15 million would be the assumed proceeds in an EPS calculation. If the market price averages $5, the $15 million will buy back 3 million shares and we would add to the denominator of diluted EPS 6 million common shares: No adjustment to the numerator / 9 million - 3* million = 6 million * purchase of treasury shares $15 million / $5 (avg Market Price) = 3 million shares
Sun Company owns 14.5 million shares of stock of Center Company classified as available for sale. During 2021, the fair value of those shares increased by $19 million. What effect did this increase have on Sun's 2021 statement of cash flows?
No effect. There was no flow of cash.
Three programmers at Feenix Computer Storage, Inc., write an operating systems control manual for Hill-McGraw Publishing, Inc., for which Feenix receives royalties equal to 12% of net sales. Royalties are payable annually on February 1 for sales the previous year. The editor indicated to Feenix on December 31, 2021, that book sales subject to royalties for the year just ended are expected to be $300,000. Accordingly, Feenix accrued royalty revenue of $36,000 at December 31 and received royalties of $36,500 on February 1, 2022. What adjustments, if any, should be made to retained earnings or to the 2021 financial statements?
No journal entry required The fact that more royalty revenue was received in February than anticipated in December represents a change in estimate. No adjustments are made to any 2021 financial statements.
The discovery of the error in 2023 that Al Dente Pasta Company overstated its inventory by $10 million at the end of 2021, before adjusting or closing entries, would require: A credit to inventory of $10 million A decrease in R/E An increase in R/E None of the choices
None of the choices. By then, this counterbalancing error would have "corrected itself."
On January 2, 2021, Snow Company began using straight-line depreciation for a certain class of assets. In the past, the company had used double-declining-balance depreciation for these assets. As of January 2, 2021, the amount of the change in accumulated depreciation is $120,000. The appropriate tax rate is 25%. The separately reported change in 2021 earnings is: An increase of $120,000 A decrease of $120,000 An increase of $90,000 None of these answer choice is correct
None of these answer choices is correct. A change in depreciation method is reported prospectively. Therefore, no cumulative effect of the change is reported in earnings.
When calculating diluted EPS, which of the following, if dilutive, would cause the weighted average number of shares to increase? Dividends on PS Stock Options a. Yes No b. Yes Yes c. No Yes d. No No
Option C Any dividend adjustment (due to convertible preferred stock) would be added to the numerator of the EPS fraction.
Common stock options that are antidiultive generally affect the calculation of: Basic EPS Diluted EPS a. Yes Yes b. Yes No c. No No d. No Yes
Option C Common stock options are not considered in basic EPS but are added to the number of shares if they are dilutive. Antidilutive stock options are ignored.
In 2021, the Barton and Barton Company changed its method of valuing inventory from the FIFO method to the average cost method. At December 31, 2020, B & B's inventories were $32 million (FIFO). B & B's records indicated that the inventories would have totaled $23.8 million at December 31, 2020, if determined on an average cost basis. Ignoring income taxes, what journal entry will B & B use to record the adjustment in 2021?
R/E 8.2 Inventory 8.2 Inv ($32 mil - $23.8 mil) = $8.2 mil
Which of the following statements is untrue regarding the statement of cash flows?
The indirect method derives cash flows indirectly by starting with sales revenue and "working backwards" to convert that amount to a cash basis. The indirect method starts with net income, not sales revenue.
First Link Services granted 8 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 $6 per share on the grant date of the restricted stock award. 1. Ignoring taxes, what is the total compensation cost pertaining to the restricted shares?2. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives? Total compensation cost __________ million Effect on Earnings __________ _________ million
Total compensation cost = 48 million Effect on earnings is decreased by 16 million. $6 (FV/Share) * 8 million (shares granted) = 48 million
Under its executive stock option plan, National Corporation granted 12 million options on January 1, 2021, that permit executives to purchase 12 million of the company's $1 par common shares within the next six 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, $17 per share. The fair value of the options, estimated by an appropriate option pricing model, is $5 per option. No forfeitures are anticipated. 1. Ignoring taxes, what is the total compensation cost pertaining to the stock options?2. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives? Total compensation cost __________ million Effect on Earnings __________ _________ million
Total compensation cost = 60 million Effect on earnings is decreased by 20 million. $5 (FV/Share) * 12 million (shares granted) = 60 million
When calculating basic earnings per share, net income is reduced by dividends on nonconvertible cumulative preferred stock:
Whether declared or not. Since cumulative preferred dividends carry over as dividends in arrears and will eventually be paid, the current year's dividends, whether paid or not, are deducted from the current year's net income when calculating basic EPS.