Chapter 19 Smartbook

At the beginning of the year, Solen Corp. had 100,000 shares of common stock outstanding. On April 1, the company issued an additional 60,000 shares. Weighted-average shares for the year will be

145,000 [100,000 + (60,000 x 9/12)]

Salt Company reports net income of $360 million for 2017; the company's tax rate is 40%. At the beginning of the year, 200 million common shares were outstanding. On July 1, Salt sold an additional 80 million shares and on October 1 distributed a 10% stock dividend. On December 1, the company reacquired 24 million of its outstanding shares. The company's weighted-average shares for the purpose of calculating basic EPS will be

262 million [(200 + [80 x 6/12]) x 1.1] - 24/12

Which of the following will qualify a company for having a simple capital structure for the purpose of earnings per share?

A company that has no outstanding securities that could potentially dilute EPS.

Stock options give employees the choice to purchase ___________ during a specific time period.

A specified number of shares of the firm's stock at a specified price.

Employee share purchase plans typically allow ________ to purchase company shares at favorable terms.

All employees

Stock splits and stock dividends

Assets and shareholders' equity are unaffected.

Sale of new shares

Assets and shareholders' equity increase.

For the purpose of calculating diluted EPS, convertible preferred stock is

Assumed to have already been converted.

Which of the following may result in potential common shares?

Convertible preferred stocks Convertible bonds

The effect of changes in estimated option forfeitures must be recognized

Cumulatively in the year the estimate changes.

Maggie Company issued options valued at $1 million to one of its executives that are contingent on the company achieving a 10% increase in sales revenue within the next 12 months. The company believes that it is possible that this target will be achieved. After 6 months, the company estimates that it is probable that the target will be achieved. Based on this new estimate, the company must

Debit compensation expense for $1 million.

Which of the following accounting numbers is reported most frequently by the media?

Earnings per share

Under current GAAP, stock options must be reported in the income statement at

Fair value

True or false: In calculating diluted EPS, convertible preferred stock is assumed converted only if the stock was issued during an earlier period.

False

When estimates of options forfeitures change, the cumulative effect on compensation is recognized

In current earnings.

Which method for valuing stock options typically resulted in the recognition of no compensation expense?

Intrinsic value method

Which of the following statements regarding the effect of the intrinsic value method on the valuation of stock options is correct?

It typically results in zero compensation expense.

Share-based plans typically are grouped into two major categories based on the conditions that must be met by employees in order to receive the benefits of the award. These categories are

Market-based plans. Performance-based plans.

Stock options are often used as employee incentives; therefore, stock options are typically exercisable

Several years after they were granted.

____________ ____________ plans give employees the choice to purchase a specified number of shares of the firm's stock at a specified price during a specified period of time.

Stock Option

Which of the following will result in the distribution of additional shares?

Stock dividends Stock splits

The fair value of stock options is measured when the

Stock options are granted

Cliff Vesting

Stock options vest all at one

Graded Vesting

Stock options vest over time

Donald Company grants stock options to certain employees. On the date of grant, Donald should measure total compensation based on

The fair value of the options

Which of the following is correct regarding the nature of restricted stock?

The shares typically are contingent on the continued employment of the awardee.

Which of the following is correct regarding stock options and other share-based plans?

They frequently specify a performance or market condition.

The way we take into account the dilutive effect of stock options is referred to as the ___________ stock method.

Treasury

True or false: Stock options have become an integral part of the most medium and large companies.

True; they represent a common form of compensation

On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. On the date of grant, the estimated value of the options is $6 per option. During 20X4, when the market value of the stock is $30 per share, 9,000 stock options were exercised. Utta Corp. should recognize this event by debiting

Cash for $180,000 Paid-in Capital - Stock Options for $54,000. (9,000 x $6)

Which of the following stock options is considered "in the money" relating to options with an exercise price of $15 per share?

Current stock price per share is $20

Which of the following are among the factors that must be considered in order to estimate the total compensation associated with stock options?

Exercise price of the options Expected term of the option Current market price of the stock

On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. On the date of grant, the estimated value of the options is $6 per option. During 20X4, 9,000 stock options were exercised. Utta Corp. should recognize this event by crediting (Select all that apply.)

PIC -- excess of par for $225,000 ($180,000 + $54,000 - $9,000) Common stock for $9,000 (9,000 shares x $1)

On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. The estimated value of the options is $6 per option. During 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. When the options expire, Utta should credit

Paid-in capital -- expired stock options for $6,000 ($1,000 x $6)

When a company reacquires its own shares, and weighted-average shares are calculated for the purpose of determining EPS, the reacquired shares that are subtracted from the weighted-average calculation are weighted for the

Period that they are not outstanding

Securities that may become common shares in the future are considered

Potential common shares

The treasury stock method takes into account the dilutive effect of stock options and assumes that the proceeds from the exercise of options are used to

Purchase treasury shares.

When it becomes probably that a performance target will not be met, previously recognized compensation expense must be:

Reversed

Mueller Company estimates that it is unlikely that a particular executive will achieve a specific performance target. Mueller already recognized compensation expense related to this performance plan. Mueller must ______ the related expense.

reverse, or credit

Typically stock options are exercisable

several years after the grant date.

Bonnie Inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. The bonds were issued at face. Each bond is convertible into 14 shares of common stock. The company's tax rate is 20%. What would be the effect of the assumed conversion on the numerator of diluted EPS?

$21,000 ($1,000 x 500 x 6% x (1 - 0.3))

Prefer Company reports net income of $360 million for 20X1; the company's tax rate is 40%. At the beginning of the year, 200,000 common shares were outstanding. On August 1, the company issued an additional 120,000 shares. Weighted-average shares will be

250,000 [200,000 + (120,000 x 5/12)]

Bonnie Inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. The bonds were issued at face. Each bond is convertible into 14 shares of common stock. The company's tax rate is 30%. What would be the effect of the assumed conversion on the denominator of diluted EPS?

7,000 shares would be added. 500 x 14

Under its restricted stock award plan, Katrin Corp. grants 100,000 of its $1 par value common shares to certain executives on January 2, 2018. The awards are contingent on continued employment for 4 years. Shares have a current market value of $10 per share. On January 2, 2022, Katrin's journal entry should include

A credit to common stock for $100,000.

Which of the following are likely advantages of employee share purchase plans for employees?

A discount on the purchase price of the shares. The absence of brokerage fees to purchase the shares.

When restrictions are lifted on restricted stock units for par value stock, paid-in capital restricted stock is replaced by

Common stock Paid-in capital -- Excess of par

Compensation plans that are tied to the achievement of certain targets and are used to motivate key employees are referred to as __________ compensation plans.

Executive, performance, share-based

The FASB's 1993 exposure draft on stock options proposed that the estimated value of stock options should be

Expensed

Falcon Company grants stock options to its upper and middle management employees. The options vest over a 4-year period, with 25% exercisable after 1 year, 25% after 2 years, another 25% after 3 years, and the remaining 25% after 4 years. This is an example of

Graded vesting.

Which of the following is a likely advantage of employee share purchase plans for employers?

Increased employee loyalty to the company.

When stock options expire, compensation expense

Is not affected

Which of the following are valid categories of stock option plans for tax purposes?

Nonqualified stock option plans Incentive stock option plans

Which of the following are subtracted when determining earnings available to common shareholders?

Preferred stock dividends

Initially, recognition of compensation expense for performance-based plans requires that the achievement of the target is

Probable

Which of the following represent typical goals of executive compensation plans?

To create performance incentives for certain employees. To provide compensation to certain employees.

In calculating EPS, preferred stock dividends are subtracted from the numerator because EPS represents earnings available to ________ shareholders.

common

Falken Company awards 1,000 shares of common stock to Robert Small. The shares are restricted and require that Robert remains with the company for at least 2 more years. The current market price of the shares is $15 per share. Total compensation associated with this restricted stock award is

$15,000

Under its restricted stock award plan, Katrin Corp. grants 100,000 of its $1 par value common shares to certain executives on January 2, 2018. The awards are contingent on continued employment for 4 years. Shares have a current market value of $10 per share. For the year ended December 31, 2021, Katrin should recognize compensation expense of

$250,000 (100,000 x 10)/4

If an employee is entitled to receive cash under a restricted stock units award plan, the sponsoring company should recognize:

A liability

Frohe Inc. sponsors a restricted stock units award plan under which employees can choose to receive either company stock or cash. During the vesting period, the company should recognize the award as a credit to a:

A liability account

On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. The estimated value of the options is $6 per option. During 20X4, 9,000 stock options were exercised. Utta Corp. should recognize this event by debiting

Cash for $180,000 PIC - Stock Options for $54,000 (9,000 x $6)

On January 2, 20X1, Muenster Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. The estimated value of the options is $4 per option. During 20X4, 8,800 stock options were exercised. In 20X5, the remaining stock options expire. How will the expiration of the stock options affect the company's compensation expense?

Compensation expense will not be affected.

Marian Company granted restricted stock units for its par value stock to its top executives. When the restriction is lifted, Marian should (Select all that apply.)

Debit PIC - Restricted stock. Credit Common Stock Credit PIC - Excess of par

Which of the following are among the factors that must be considered in order to estimate the total compensation associated with stock options?

Expected dividends on the underlying stock Expected risk-free rate of return during the option term Expected volatility of the stock price

If convertible securities are dilutive to EPS, the effect of the assumed conversion will

Increase the denominator by the additional common shares that would have been issued upon conversion. Increase the numerator by interest on bonds or preferred dividends that would have been avoided.

Accounting for stock option plans consistent with the FASB's recommendation provided two choices for valuing stock options. What were these choices?

Intrinsic Value Method Fair Value Method

On the date when stock options are granted, the sponsoring company should

Measure the fair value of the options

Consistent with the revised FASB standard on stock options, the value of stock options

Must be recognized as an expense

Munster Company issued options to a key executive that are contingent on the company achieving a 10% increase in sales revenue within the next 12 months. The company believes that it is likely that this target will be achieved and accrues $5 million in related compensation expense. After 9 months, the company estimates that it is possible, but not likely that the target will be achieved. Based on this new estimate, the company must

Credit compensation expense for $5 million.

When a company reacquires its own shares, and weighted-average shares are calculated for the purpose of determining EPS, the reacquired shares that are subtracted from the weighted-average calculation are weighted for the

Period that they are not outstanding.

Accounting for stock options plans consistent with the FASB's recommendation provided two choices for valuing stock options. What were these choices?

Intrinsic Value Method Fair Value Method

When it becomes probable that a performance target will not be met, previously recognized compensation expense must be:

Reversed

Which of the following methods will affect both the numerator and the denominator of diluted earnings per share?

The "if converted" method

The "if converted method" assumes that convertible securities were converted into common stock at what point?

The beginning of the current period

Which of the following statements regarding the prevalence of stock option awards is correct?

Many large and medium-size companies grant stock options.

Total compensation associated with restricted stock awards typically is equal to the shares'

Market price at grant date of the award.

Muller Company sponsors a performance-based stock option plan. When the options are granted, Muller should recognize related compensation expense if it is _______ that the performance target will be met.

Probably

For the purpose of deriving EPS, securities are considered dilutive if they are capable of

Reducing earnings per share

Share-based plans that requires that the awardee continue to be employed by the granting company are typically referred to as

Restricted stock plans

Incentive Stock Option Plan

The employer granting the stock options cannot deduct stock option-related values for tax purposes. The recipient pays taxes only when the shares acquired under the plan are sold.

On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. The estimated value of the options is $6 per option. During 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. Utta should recognize the expiration by debiting

PIC - Stock Options for $6,000 (1,000 x $6)

On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price of $20 per share. On the date of grant, the estimated value of the options is $6 per option. During 20X4, 9,000 stock options were exercised. Utta Corp. should recognize this event by crediting

PIC - excess of par for $225,000 ($180,000 + $54,000 - $9,000) Common stock for $9,000 ($1 x 9,000 shares)

Under a ______ stock option incentive plan, the exercise price of stock options must be ______ the market price at the grant date.

Qualified; equal to

Compensation relating to stock option grants should be

Recognized over the service period for which employees receive options.

Stock options are said to be "in the money" if

The current market price of the stock exceeds the option exercise price.

What factors would affect the calculation of diluted EPS if convertible bonds are assumed to have been converted into common stock of the issuing company?

The denominator would reflect the additional common shares assumed issued. The numerator would reflect the after-tax savings of interest.

Nonqualified Stock Option Plan

The employer granting the stock options can deduct the difference between the exercise and the market price at the exercise date for tax purposes. The recipient must pay taxes on the difference between the exercise price and the market price of the stock at the exercise date.

Earnings per share is reported very frequently in the financial press because it

Tends to summarize the company's performance.