INT III - Chapter 19

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Compensation expense resulting from a compensatory stock option plan is generally A. recognized in the period of exercise. B. recognized in the period of the grant. C. allocated to the periods benefited by the employee's required service. D. allocated over the periods of the employee's service life to retirement.

C. allocated to the periods benefited by the employee's required service.

In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the A. preferred dividends in arrears. B. preferred dividends in arrears times (one minus the income tax rate). C. annual preferred dividend times (one minus the income tax rate). D. None of these answers are correct.

D. None of these answers are correct.

When computing diluted earnings per share, convertible bonds are A. ignored. B. assumed converted whether they are dilutive or antidilutive. C. assumed converted only if they are antidilutive. D. assumed converted only if they are dilutive.

D. assumed converted only if they are dilutive.

On January 1, 2018, Ellison Company granted Sam Wine, an employee, an option to buy 1,000 shares of Ellison Co. stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $6,000. Wine exercised his option on October 1, 2018 and sold his 1,000 shares on December 1, 2018. Quoted market prices of Ellison Co. stock in 2018 were: July 1 $30 per share October 1 $36 per share December 1 $40 per share The service period is for three years beginning January 1, 2018. As a result of the option granted to Wine, using the fair value method, Ellison should recognize compensation expense for 2018 on its books in the amount of a. $6,000. b. $2,000. c. $1,500. d. $0.

b. $2,000.

On January 2, 2018, Worth Co. issued at par $2,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2018. Worth had 200,000 shares of common stock outstanding during 2018. Worth's 2018 net income was $900,000 and the income tax rate was 30%. Worth's diluted earnings per share for 2018 would be (rounded to the nearest penny): a. $5.00. b. $4.54. c. $4.50. d. $4.72.

b. $4.54.

On January 1, 2017, Sharp Corp. granted an employee an option to purchase 15,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $350,000. The option became exercisable on December 31, 2018, after the employee completed two years of service. The market prices of Sharp's stock were as follows: January 1, 2017 $30 December 31, 2018 50 For 2018, should recognize compensation expense under the fair value method of a. $225,000. b. $75,000. c. $175,000. d. $0.

c. $175,000.

Stine Inc. had 1,000,000 shares of common stock issued and outstanding at December 31, 2017. On July 1, 2018 an additional 1,000,000 shares were issued for cash. Stine also had stock options outstanding at the beginning and end of 2018 which allow the holders to purchase 300,000 shares of common stock at $28 per share. The average market price of Stine's common stock was $35 during 2018. The number of shares to be used in computing diluted earnings per share for 2018 is a. 2,240,000 b. 2,060,000 c. 1,740,000 d. 1,560,000

d. 1,560,000


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