Exam 2-Ch19
The effect of changes in estimated option forfeitures must be recognized
cumulatively in the year the estimate changes.
For performance-based plans, changes in the estimated probability of meeting the target are recognized in (the) ______ period(s).
current
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 not 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.
Holger Company reported a net loss for the year ended. The company has 40,000 stock options with a $20 exercise outstanding. The average market price of the stock is $25. If Holger were to include the dilutive stock options in calculating dilutive EPS, its net loss per share would
decrease.
Contingent issuable shares may be included in the calculation of
diluted EPS.
The incremental effect of convertible preferred stock is determined by dividing ______ by _______.
dividends that wouldn't be paid; additional common shares from conversion
One unintended potential consequence of generous share-based awards is ___ management.
earnings
A single number that summarizes a company's performance and to which investors pay reasonable attention is the:
earnings per share.
The two components of the time value relating to options are the
effect of the time value of money. volatility value.
Plans that permit all employees to buy shares directly from their company at favorable prices are referred to as
employee share purchase plans.
If the employer can elect to settle SAR awards with company stock, SAR awards are classified as
equity.
A strategy that simplifies the determination of whether convertible securities are dilutive is to compare their ___ effect on earnings per share.
incremental
When stock options expire, compensation expense
is not affected
Warrants, options, and rights are dilutive if the exercise price is
lower than the stocks' average market price.
Total compensation associated with restricted stock awards typically is equal to the shares'
market price at grant date of the award.
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
paid-in capital—stock options for $6,000.
A company has a complex capital structure if it has
potential common 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
If a company issues non-qualifying stock options to employees, it
recognizes a deferred tax asset related to compensation expense recorded in current period accounting income that is not yet deductible
For the purpose of deriving EPS, securities are considered dilutive if they are capable of
reducing earnings per share.
Deferred compensation associated with restricted stock grants should be reported as a
reduction of stockholders' equity.
If an employee share purchase plan (ESPP) is considered noncompensatory, how does the company recognize compensation expense for the purchase of the related shares?
the company does not recognize compensation expense
Stock options are said to be "in the money" if
the current market price of the stock exceeds the option exercise price.
On July 1, Schmidt Co. issued a 2-for-1 split. One month later, the company reacquired 20,000 of its shares. When calculating weighted-average shares, the split should not be applied to the reacquired shares because
the reacquired shares already reflect the split.
Which of the following is true under IFRS with respect to the recognition of compensation expense for graded vesting options?
the straight-line method is prohibited
In calculating diluted EPS, which of the following restricted stock awards is included in the calculation?
unvested restricted stock awards only
The time between the date that options are granted and the first date they can be exercised is referred to as the ___ period.
vesting
The ___ value represents the possibility that the option holder might profit from market price appreciation.
volatility
On January 1 of Year 1, Purple Company issues SARs that entitle executives to receive compensation equal in value to the excess of the market price at exercise over the share price at the grant date. The executives may choose whether to receive cash or shares at exercise. The SARs vest over a 4 year period (they fully vest at the end of Year 4). The fair value of the SARs on the date of grant (January 1 of Year 1) is $6 per SAR. On December 31 of Year 1 and Year 2, the fair value is re-estimated as $6.50 and $6.80, respectively. Assuming that 1,000,000 SARs are expected to vest, how much compensation expense will Purple recognize in Year 2?
$1,775,000
Kolb Corp. has $1 million face amount, 6% convertible preferred stocks issued at par outstanding. Each $100 par value stock can be converted into 5 shares of common stock. The company's tax rate is 40%. The incremental effect of the convertible preferred stocks on diluted EPS will be
$1.20.
Salt Company reports net income of $360 million for 20X1; the company's tax rate is 40%. At the beginning of the year, 200 million common shares were outstanding. On July 1, Salt sells an additional 80 million shares. On October 1, the company distributed a 10% stock dividend. Rounding to the nearest cent, the company's basic EPS will be
$1.36.
What conditions must be met by employee share purchase plans to allow for uncomplicated recognition of the share purchases and no compensation expense to be recognized?
Employees must decide within 1 month of the share price being fixed whether to buy shares. Discounts on the share purchase price do not exceed 5%. Substantially all employees can participate in the plan.
Which of the following are common types of restricted stock plans?
Restricted stock awards Restricted stock units
What counterarguments did the FASB make in response to constituents' criticism on the 1993 stock option exposure draft?
The value of stock options can be measured/estimated. Options represent valuable compensation at the option grant date.
When the tax benefit derived from nonqualified stock options is less than the amount recognized as a deferred tax asset, the company should recognize the difference by
increasing income tax expense.
Schuller Company has common shares, non-convertible preferred stock, and convertible bonds outstanding. For the purpose of determining EPS, what type of capital structure does Schuller Company have?
Complex
When we include options, rights, and warrants in the calculation of diluted EPS, we pretend that the potential increase in shares
has already occurred.
When stock options are allowed to lapse, paid-in capital from stock options should be reclassified as:
paid-in capital from expired stock options
Basic EPS Diluted EPS
Ignores the dilutive effect of potential common shares Considers the dilutive effect of potential common shares
Which of the following must be presented in the financial statement notes relating to EPS?
Material subsequent events that would have affected EPS. A reconciliation of the numerator and denominator used for basic EPS to those used for diluted EPS. Potential common shares not included in diluted EPS. Adjustments to the numerator for preferred dividends.
Green Forest Company properly reports only basic earnings per share in its annual report. The company must have
a simple capital structure.
When estimates of options forfeitures change, the cumulative effect on compensation is recognized
in current earnings.
The price-earnings ratio indicates a company's earnings quality by
indicating the multiple the market is willing to pay for earnings
The benefit the holder of an option would realize by exercising the option rather than buying the underlying stock directly is referred to as ___ value.
intrinsic
Compensation expense related to share-based awards is recognized regardless of whether the market-related conditions are met because
option-pricing models already implicitly reflect market conditions.
A low dividend payout ratio may indicate that the company is
planning to reinvest its earnings.
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 stock is equal to the exercise price and the company estimates that 7% of the options will be forfeited. On the date options are granted, their estimated value is $6 per option. For the year ended December 31, 20X1, Utta should
recognize compensation expense of $18,600.
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
Greener Company's accountant calculates the company's basic EPS. In addition to common stock, the company also has nonconvertible, cumulative preferred stock outstanding. When calculating EPS, the accountant should
subtract the preferred stock dividends from the numerator.
Adam Company's net income for the year is $100 million. Weighed-average shares are 50 million shares. In addition to common shares, the company also has $50 million par value, 8% cumulative preferred stock outstanding. The company's basic EPS will be
$1.92
Cater Company issues 100 shares of restricted stock to Berta Miller. Which of the following incentives does this stock most likely provide for Berta?
To remain with Cater Company.
The fair value of stock options is measured when the
stock options are granted.
During the year 20X1, Corner Inc. has 10,000 stock options outstanding. The option exercise price is $10 per share. The average market price of the stock is $20. Consistent with the treasury stock method, how many incremental shares should Corner Inc. include in the weighted-average shares relating to its stock options?
5,000 shares
Stock options issued by Klein Company were exercised on September 1 of the current year. For the purpose of applying the treasury stock method when calculating diluted EPS, incremental shares assumed to be issued should be weighted for
8 months.
What stock price is utilized to calculate the assumed repurchase of shares when calculating diluted EPS?
Average market price during the year
Place the presentation of earnings per share in the correct order.
EPS-income from continuing operations EPS-discontinued operations EPS-net income
Unlike restricted stock, recipients of restricted stock units (RSUs) benefit by the value of the shares immediately at the date of issuance.
False
Which of the following is true with respect to the accounting profession's response to the demand for comparable EPS numbers?
Inconsistencies in calculating EPS have been minimized.
Incentive stock option plan Nonqualified stock option plan
The employer granting the stock options cannot deduct stock option-related values for tax purposes The employer granting the stock options can deduct the difference between the exercise and the market price at the exercise date for tax purposes.
Which of the following are facts or conditions that are specifically set forth in stock option plans?
The maximum number of shares option holders may purchase The time period during which option holders may purchase shares The price at which option holders may purchase shares
Incentive stock option plan Nonqualified stock option plan
The recipient pays taxes only when the shares acquired under the plan are sold. The recipient must pay taxes on the difference between the exercise price and the market price of the stock at the exercise date.
Accounting for share-based plans depends on the type of condition that must be fulfilled by the employee to achieve the share-based award.
True
Frohe Inc. sponsors a restricted stock units award plan under which employees can choose to receive cash. During the vesting period, the company should recognize the award as a credit to a:
a liability account
Under its restricted stock award plan, Kilian Corp. grants 100,000 of its $1 par value common shares to certain executives on January 2, 2018. The award is contingent on continued employment for 4 years. Shares have a current market value of $10 per share. On January 2, 2020, 15% of the share awards were forfeited. Kilian should credit
compensation expense for $75,000.
When a company revises its estimate of total compensation because the expected probability changes, the company should record the effect of the change in the ___ period.
current
The adjustment for the conversion of convertible preferred stock is applied to
diluted EPS only
The accounting method for stock options affects reporting of:
expense
The FASB's 1993 exposure draft on stock options proposed that the estimated value of stock options should be
expensed.
Pro forma earnings typically are ______ than GAAP earnings because companies ___________ that are not perceived as predictive.
higher; exclude expenses
Yves Company has convertible securities that are dilutive with respect to some components of reported EPS, but are antidilutive to other components. Which financial statement line item should be used to determine whether to include the potential common shares in the calculation of diluted EPS?
income from continuing operations
The incremental effect of convertible bonds is the after-tax ___ saved divided by the additional common shares from the conversion.
interest
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 company estimates that 7% of the options will be forfeited. On the date of grant, the estimated value of the options is $6 per option. During 20X2, Utta increases its estimate of stock option forfeitures to 10%. For the year ended December 31, 20X2, Utta should
recognize compensation expense of $17,400.
Under IFRS, a deferred tax asset relating to stock option plans is recognized when
the options that generate a future tax benefit are "in the money."
The value of stock options has a time value component because
the value of the options may change between the date of grant and the time the options are exercised. options do not have to be exercised immediately.
The way we take into account the dilutive effect of stock options is referred to as the ___ stock method.
treasury
Pfeffer 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 August 1, the company issued an additional 120 million shares. Pfeffer's basic EPS will be
$1.44.
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 sells an additional 80 million shares. The company's basic EPS will be
$1.50.
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.
Wald Corp. allows its employees to purchase shares at a 10% discount. During the current month, employees purchased 1,000 shares for $22.50 per share. Wald should recognize compensation expense of
$2,500.
During the current year, Smith Corp. distributed a 50% stock dividend. No other changes in the number of outstanding shares occurred during the year. Current year EPS is $3 per share and the prior year reported EPS was also $3. The EPS number reported in the current year comparative financial statements for the prior year should be
$2.
Bonnie Inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. The bonds were issued at 102 % and the premium is amortized straight-line over 10 years. 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 numerator of diluted EPS?
$20,300
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 numerator of diluted EPS?
$21,000
Fuller Corp. has 10,000 options outstanding that allow employees to purchase each share of stock for $10. The market price of the stock is $14. The intrinsic value of the related options is
$4 per share.
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 shares.
Pfeffer 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.
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.
Salt Company reports net income of $360 million for 20X1; the company's tax rate is 40%. At the beginning of the year, 200 million common shares were outstanding. On July 1, Salt sells an additional 80 million shares. On October 1, the company distributed a 10% stock dividend. The company's weighted-average shares for the purpose of calculating basic EPS will be
264 million.
Western Company has net income of $200 million in 2018. If net income is 2019 is $175 million or more, executives will receive 2 million additional shares of common stock. How does this effect the calculation of diluted EPS?
Add 2 million additional shares to the denominator
Disclosure notes related to EPS should include:
Antidilutive common shares not included in EPS Subsequent events that would affect the calculation Adjustments to the numerator for preferred dividends
Which of the following is a remaining difference between IFRS and U.S. GAAP with respect to earnings per share?
Application of the treasury stock method
On January 2, 201X1, 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.
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 is an acceptable alternative for recognizing restricted stock grants at the date of grant?
Debit deferred compensation for the total value of the granted shares.
Which of the following EPS calculations considers the effect of potential common shares?
Diluted EPS
What additional factors must be considered when deriving basic EPS assuming that net income and the number of shares outstanding at the beginning of the reporting period are already known?
Dividends earned by preferred stockholders. Changes in the number of shares outstanding during the current year.
Expensing of the value of stock options
Does not affect cash flows
Accounting for changes in estimated forfeitures of stock options is consistent with other changes in accounting estimates, which require prospective accounting treatment.
False
In calculating diluted EPS,convertible preferred stock is assumed converted only if the stock was issued during an earlier period.
False
The adjustment for the assumed conversion of preferred stock affects both basic and diluted EPS computations.
False
Restricted stock Restricted stock units
Issued at time of grant Issued after a vesting period
If employees can elect to receive cash, SAR awards are classified as
Liabilities.
Which of the following shares may be included in the calculation of basic EPS?
Outstanding common shares
Which of the following accounting treatments is acceptable for recognizing compensation expense related to stock options that vest over several years (graded vesting options)?
Recognize total compensation expense over a weighted-average time period.
Which of the following are considered share-based compensation plans?
SARs stock options
A stock dividend or stock split would affect which of the following shares?
Shares acquired prior to the dividend or split Shares sold prior to the dividend or split
Which of the following plans frequently specify a performance condition or a market condition that must be satisfied before employees are allowed the benefits of the reward?
Stock option plans Other share-based plans
Which of the following are likely advantages of employee share purchase plans for employees?
The absence of brokerage fees to purchase the shares. A discount on the purchase price of the shares.
Which of the following events strongly contributed to the reemergence of the debate about accounting for stock options?
The collapse of Enron and other large accounting frauds.
Which of the following represent primary reasons given by opponents of the FASB's 1993 exposure draft on stock options?
The fair value of stock options cannot be measured. The stock options have zero fair value when the options are issued. Expensing would lead to unacceptable economic consequences.
Which of the following scenarios will increase total assets and equity?
The sale of new shares
Which of the following is correct regarding the nature of restricted stock?
The shares typically are contingent on the continued employment of the awardee.
The incremental effect of conversion of preferred stock is calculated as the preferred dividends that would not be paid divided by additional common shares from conversion.
True
Under which reporting standards are companies allowed to use the straight-line method to account for compensation expense when stock options vest over time (i.e., graded vesting)?
U.S. GAAP only
Which of the following factors (each considered independently) will tend to lower the value of stock options?
a higher exercise price higher dividends
On the date of grant, Gunter Inc. estimated the fair value of restricted stock units. After recognizing cash compensation for two years, but before the restriction is lifted, the fair value of the stock increased. Gunter should:
adjust compensation expense and liability
Starfish Company has a SAR plan, in which it awards employees share appreciation on each stock appreciation right held. It allows its employees to choose whether these amounts are received in cash or shares. How should Starfish classify the SAR?
as a liability
Changes in the estimated total compensation relating to SARs classified as a liability are recognized
as part of compensation expense during the period that the estimate changes
Which groups or organizations tended to oppose the FASB's 1993 exposure draft that proposed expense recognition of the value of stock options?
auditors the SEC corporate executives
Stock appreciation rights may be payable in ___ or ___ .
cash;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
A primary goal of the rules governing the calculation of EPS is to achieve ___ between companies.
comparability
On January 2, 20X1, Werner Corp. grants 20,000 stock options with a 2-year vesting period to employees. On the grant date, the market price of the stock is equal to the exercise price. The estimated value of the options is $5 per option. On December 31, 20X1, the company should debit
compensation expense.
Which of the following types of securities potentially could be dilutive with respect to EPS?
convertible bonds
Which of the following would prevent Norbert Company from having a simple capital structure for the purpose of reporting EPS?
convertible preferred stocks
Which of the following securities represent potential common shares that need to be considered when determining diluted EPS?
convertible preferred stocks stock options convertible bonds
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.
Basic EPS is determined by dividing:
earnings available to common shareholders by weighted-average common shares outstanding.
Share-based awards may lead to
earnings management.
Which of the following accounting numbers is reported most frequently by the media?
earnings per share
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
If the underlying stock pays no dividends, the time value of money component of a stock option is the difference between the ________ and its ____________.
exercise price; discounted present value
The ___ price of the shares does not affect the recognition of employees' exercise of stock options.
fair
The accounting issues that arise in connection with share-based compensation include determining the ______ value of the compensation.
fair
Accounting for stock option plans consistent with the FASB's recommendation provided two choices for valuing stock options. What were these choices?
fair value method intrinsic value method
Under current GAAP, stock options must be reported in the income statement at
fair value.
Under ___ vesting, companies can choose to estimate a single fair value for the options, even though they vest over different time periods, and then allocate the total compensation cost equally over the entire vesting period.
graded
Restricted stock awards are
included in the calculation of EPS if unvested.
If antidilutive options or warrants were included in the calculation of diluted EPS, the resulting EPS would
increase.
Selina Inc. sponsors a restricted stock units awards plan under which employees may elect to receive cash. When Selina debits "compensation expense," it should credit:
liability - restricted stock
In calculating diluted EPS, the order of entering potentially dilutive securities is important because a convertible security that appears to be dilutive
may in fact be anti-dilutive
Which of the following are valid categories of stock option plans for tax purposes?
nonqualified stock option plans incentive stock option plans
Frohe Inc. sponsors a restricted stock units award plan under which employees can choose to receive either company stock or cash. Frohe should recognize compensation expense:
over the service period
Total estimated compensation related to SARs classified as a liability is expensed
over the service period
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
paid-in capital—stock options for $54,000. cash for $180,000.
On January 2, 20X1, Werner Corp. grants 20,000 stock options with a 2-year vesting period to employees. On the grant date, the market price of the $1 par value stock is equal to the exercise price. The estimated value of the options is $5 per option. On December 31, 20X1, the company should credit
paid-in capital—stock options.
Securities that may become common shares in the future are considered
potential common shares.
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.
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
On January 2, 20X1, Utta Corp. (a calendar-year company) grants 10,000 stock options with a 3-year vesting period to certain employees. On the grant date, the market price of the stock is equal to the exercise price and the company estimates that 7% of the options will be forfeited. On the date of grant, the estimated value of the options is $6 per option. For the year ended December 31, 20X3, Utta should
recognize compensation expense of $18,600.
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 stock is equal to the exercise price. On the date of grant, the estimated value of the options is $6 per option. For the year ended December 31, 20X1, Utta should
recognize compensation expense of $20,000.
Compensation relating to stock option grants should be
recognized over the service period for which employees receive options.
If share-based awards are contingent on the achievement of specific market conditions, compensation expense is
recognized regardless of whether the conditions are met.
Public outrage about high profile fraud cases renewed interest in requiring stock option compensation to be __________.
reported in income statements
Stock award plans that are used to motivate employees to remain with the granting company are referred to as _______stock awards.
restricted
Typically stock options are exercisable
several years after the grant date
Stock options are often used as employee incentives; therefore, stock options are typically exercisable
several years after they were granted.
Emilia is determining weighted-average shares for the purpose of calculating EPS. If a stock split occurred during the year, Emilia should adjust which shares for the split?
shares sold before the split shares acquired before the split
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. On October 1, the company distributed a 10% stock dividend and, on December 1, reacquired 24 million of its outstanding shares. The company's basic EPS is
$1.37.
During 20X1, Blumen Corp. has 10,000 unexercised stock options outstanding. The option price is $10 per share, and the average market price during 20X1 is $16 per share and the end-of-year market price is $15 per share. Consistent with the application of the treasury stock method, how many shares should Blumen include in the denominator for calculating diluted EPS?
3,750 shares
The popularity of stock options as a form of share-based compensation has increased steadily over time.
False
Which of the following is a likely advantage of employee share purchase plans for employers?
Increased employee loyalty to the company.
Which of the following statements regarding the prevalence of stock option awards is correct?
Many large and medium-size companies grant stock options.
Which of the following methods will affect both the numerator and the denominator of diluted earnings per share?
The "if converted" method
Which of the following statements regarding accounting for changes in estimated forfeitures of stock options is correct?
The accounting treatment does not follow the general rule for changes in estimates.
Emily wants to calculate basic earnings per share. She has information about the number of shares outstanding at the beginning of the year and the changes in the number shares during the current year. What other information does Emily need?
The amount of net income Dividends earned by preferred stockholders.
What factor typically determines the accounting treatment for share-based plans?
The type of condition that must be fulfilled by employees of the sponsoring company.
Stock options have become an integral part of most medium and large companies.
True
U.S. GAAP IFRS
When the related compensation expense is recognized When the stock option has intrinsic value
If an employee is entitled to receive cash under a restricted stock units award plan, the sponsoring company should recognize:
a liability
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
Awards of shares, stock options, and cash payments tied to the market price of shares are common types of share-based _______
compensation
Wald Corp. allows its employees to purchase shares at a 10% discount. During the current month, employees purchased 1,000 shares. Wald should recognize the difference between the fair value of the shares and the cash received as a debit to
compensation expense
Under U.S. GAAP, a deferred tax asset relating to stock option plans is recognized when
compensation expense for granted stock options is recognized.
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 volatility of the stock price expected risk-free rate of return during the option term exercise price of the options expected term of the option current market price of the stock
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.
The method that assumes that a conversion into common stock occurred at the later of the beginning of the period or the time the convertible security is issued is referred to as the ____ method.
if converted
When the effect of potential common shares is dilutive on EPS for _______, it should be included in all components of diluted earnings per share.
income from continuing operations
Antidilutive securities are excluded from the calculation of EPS because they would
increase EPS.
If convertible bonds are assumed to have been converted, the numerator would be assumed to ____ by the ______ effect of the interest saved.
increase; after-tax
When the tax benefit derived from nonqualifying stock options exceeds the amount recognized as a deferred tax asset, the company should recognize the difference by
increasing paid-in capital.
If a company has only one type of convertible security and no equity contracts outstanding, the convertible security will be dilutive if its incremental effect on EPS is
lower than basic EPS.
Accounting for employee share purchase plans is simplified if the plan meets three conditions. One of these conditions requires that the discount on the share purchase price is:
no greater than 5%
Carter Company issues 100 shares of restricted stock to Berta Miller, who has worked for the company for 5 years. The stock grant requires that Berta remain with the company another 4 years. Compensation expense relating to the value of this restricted stock should be recognized
over a 4-year period.
Total compensation related to SARs classified as equity is expensed
over the service period
When it becomes probable that a performance target will not be met, previously recognized compensation expense must be:
reversed
Antidilutive common shares
should be disclosed in the notes.
___ ___ 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
Compensation associated with restricted stock grants should be amortized over the
stock's vesting period.
Munch has $500,000 of convertible 6% preferred stock outstanding. The shares can be converted to 40,000 common shares. Munch's tax rate is 40%. For purposes of determining whether the preferred shares are dilutive, the incremental effect of the preferred shares is:
$0.75
Marian Company's net income is $200,000; between January 1 and June 30, the company had 450,000 shares outstanding. On July 1, the company reacquired 100,000 shares. Assuming no other stock transactions occurred, Marian will report basic EPS of:
$0.50 per share
Salt Company reports net income of $360 million for 20X1; the company's tax rate is 40%. Throughout the year, 200 million common shares were outstanding. Salt's basic EPS will be
$1.80.
Assume that the stock price rises from $50 to $55. An employee with stock appreciation rights (SAR) would earn cash or shares equal to ___ per SAR.
$5
Stock options issued by Rahm Company were exercised on April 1 of the current year. When applying the treasury stock method to calculate diluted EPS, incremental shares assumed to be issued should be weighted for
3 months
A 30% stock dividend increases outstanding shares by
30%.
Which group or organization tended to support the FASB's 1993 exposure draft that proposed expense recognition of the value of stock options?
Academia
Vested restricted stock awards are
Already outstanding and included in the denominator of basic EPS
Which of the following represent accounting issues that are common to all share-based compensation plans?
Determining the fair value of the compensation. Expensing the compensation over the period in which participants perform service
Which method for valuing stock options typically resulted in the recognition of no compensation expense?
Intrinsic value method
Which of the following is true regarding commonly reported pro forma EPS?
It may exclude some expenses or losses.
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.
Kilian Company issued stock options on August 1, 20X1. For the purpose of calculating dilutive EPS for the year ended December 31, 20X2, the options should be assumed to have been exercised on
January 1, 20X2.
Which of the following represents an important accounting issue with respect to stock option plans?
Measurement of the related compensation
What condition must be met to include contingent issuable shares in the calculation of diluted EPS?
Meeting the target performance level is already complete.
If dilutive, which of the following will affect only the denominator of dilutive EPS?
Stock options
Which of the following potential common shares may be included in the calculation of diluted EPS, but not basic EPS?
Stock options Restricted stock Convertible securities Contingent issuable shares
Which of the following is ignored when recognizing the exercise of stock options?
The market price of the related shares
Which of the following statements regarding the role of antidilutive securities in the calculation of EPS is correct?
They are ignored when calculating both basic and diluted EPS.
Which of the following statements regarding stock appreciation rights (SARs) is correct?
They enable employees to benefit from increases in the company's stock without having to purchase shares.
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.
Restricted stock units that are payable in cash are classified as
a liability
The incremental effect of convertible bonds is the _____ interest saved divided by the ____ common shares from the conversion.
after-tax; additional
Proceeds under the treasury stock method may include
amounts received under the hypothetical exercising of the options. total compensation from nonvested awards.
Securities that upon conversion or exercise of potential common shares would increase EPS are referred to as ___ securities.
antidilutive
When calculating diluted EPS, the order of entering potentially dilutive securities is important because a security that appears dilutive may actually be ___ when other convertible securities are assumed to be converted first.
antidilutive
Horst Company has 50,000 stock options outstanding. The option exercise price is $13 per share, the average market price of the stock was $12 per share during the year, and the end-of-year stock price was $14. For the purpose of calculating EPS, these stock options are
antidilutive.
Restricted stock units are classified as a liability if they are payable in
cash
The distinction between share-based awards that are considered equity and those that are considered liabilities is based on whether the employer is obligated to transfer ___ to the employee.
cash
In calculating diluted EPS under the treasury stock method, one component of the proceeds from the exercise of options include
cash received at exercise
In calculating EPS, preferred stock dividends are subtracted from the numerator because EPS represents earnings available to ___ shareholders.
common
Basic EPS represents the income earned by one share of
common stock.
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 award is contingent on continued employment for 4 years. Shares have a current market value of $10 per share. On January 2, 2021, 10% of the share awards were forfeited. Katrin should credit
compensation expense for $75,000.
Under U.S. GAAP, a deferred tax asset related to stock option plans is recorded when ________________ and reversed when ________________.
compensation expense is recognized; the options are exercised
Which of the following may result in potential common shares?
convertible preferred stocks convertible bonds
Marian Company granted restricted stock units for its par value stock to its top executives. When the restriction is lifted, Marian should
credit paid-in capital in excess of par. debit paid-in capital—restricted stock. credit common stock.
During 2017, Weimar Corp. issued a 15% stock dividend. In its 2017 comparative financial statements, the company should present
current year EPS and restated EPS for prior years presented.
The journal entry to record unexercised stock options that have been allowed to lapse includes
debit to paid-in-capital-stock options credit to paid-in-capital-expiration of stock options
An actual conversion of dilutive convertible securities will
decrease the reported amount of basic EPS. not affect the reported amount of diluted EPS.
The time value of money component of stock options is the difference between the exercise price and the
discounted present value minus the present value of expected dividends.
Total compensation expense related to SARs classified as equity is based on the the value of the SARs at the
grant date
The ______ a stock's volatility, the higher the ______ to the option holder.
greater; potential profit
Jay Corp. has convertible bonds outstanding; their incremental effect on EPS is $0.95. Jay should include this bond in the calculation of diluted EPS, if basic EPS is
higher than $0.95.
Warrants, options, and rights are antidilutive if the exercise price is
higher than the stocks' average market price.
Which of the following are the essential components of option values?
intrinsic value time value
Option values include the following essential components ___value and a(n) ___ value.
intrinsic;time
Diluted EPS should be calculated using different combinations of potential common shares to find the combination that yields the:
lowest possible EPS.
The rules surrounding the calculation of earnings-per-share are designed to _____ comparability by _______ differences in the calculation from one company to the next.
maximize; minimizing
On the date when stock options are granted, the sponsoring company should
measure the fair value of the options.
Potential shares that are not included in dilutive EPS
must be disclosed in the notes.
Consistent with the revised FASB standard on stock options, the value of stock options
must be recognized as an expense.
If convertible bonds are issued during a reporting period, then when calculating diluted EPS, it is assumed their conversion occurs
on the date of issuance
From an accounting perspective, the significance of the stock option vesting period is that it is the time period
over which compensation expense is allocated.
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
paid-in capital in excess of par for $225,000. common stock for $9,000.
Because options are not exercised immediately, their valuation includes a(n) ___ ___ component.
time value
Pfeffer Company reports net income of $120,000 for 20X1; the company's tax rate is 40%. Throughout the year, 200,000 common shares were outstanding. Pfeffer's basic EPS will be
$0.60.
Waldemar Company's net income for the year is $300 million. Weighed-average shares are 150 million shares. In addition to common shares, the company also has $100 million par value, 6% cumulative preferred stock outstanding. The company's basic EPS will be
$1.96.
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.
A 2-for-1 stock split increases outstanding shares by
100%.
Which of the following represent continuing differences between IFRS and U.S. GAAP with respect to the calculation of EPS?
Application of the treasury stock method. The treatments of contracts that can be settled in cash, stock, or contingent issuable stock.
Vogel Corp. issued 1 million face amount convertible bonds on April 1 of the current year. For the purpose of determining diluted EPS, the bonds are assumed to be converted on
April 1.
A company with a simple capital structure must report which of the following EPS numbers?
Basic EPS
Intrinsic Value Time Value Volatility Value
Benefit the holder would realize by exercising the option rather than buying the stock directly Benefit that accrues due to the passage of time Likelihood that the option holder might benefit from price appreciation
Which of the following can be used to satisfy SARs awards?
Cash Shares
Which of the following strategies will simplify the determination of whether convertible securities are dilutive or antidilutive to EPS?
Comparing the incremental effect of the conversion.
If dilutive, which of the following will affect neither the numerator, nor the denominator of dilutive EPS?
Contingent issuable shares for which condition has not been met
If dilutive, which of the following will affect both the numerator and the denominator of dilutive EPS?
Convertible preferred stock Convertible bonds
Which of the following scenarios will increase stockholders' equity?
The sale of new shares
Which of the following represent typical goals of executive compensation plans?
To create performance incentives for certain employees. To provide compensation to certain employees.
Which of the following represents a primary goal of calculating earnings per share?
To enhance financial statement comparability.
For the purpose of calculating diluted EPS, convertible preferred stock is
assumed to have already been converted.
Which organizations or groups initially opposed a 1993 proposed accounting standard on stock options?
Congress SEC
On the date of grant, Sadler Corp. estimated the fair value of restricted stock units representing common shares issued under its RSU plan. At the end of the vesting period, employees can elect to receive cash instead of common stock. After recognizing compensation for two years, but before the restriction is lifted, the fair value of the stock increased. Sadler should:
adjust compensation expense and increase the liability
Stock options, rights, and warrants must be considered when calculating ___ EPS.
diluted
The price-earnings ratio provides an indication of a company's
quality of earnings.
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 must be presented in a company's financial statements (which include the financial statement notes), assuming that the related financial statement items exist for that company?
EPS—income from continuing operations EPS—net income EPS—discontinued operations
Which of the following is correct regarding stock options and other share-based plans?
They frequently specify a performance or market condition.
During 20X1, Margot Corp. has 10,000 unexercised stock options outstanding. The option price is $10 per share, the average market price during 20X1 is $14 per share, and the end-of-year market price is $13 per share. Consistent with the application of the treasury stock method, how many shares is Margot Corp. assumed to repurchase (round to the nearest share)?
7,143 shares
Gruen Inc. has 1,000, $100 par, 6% preferred stocks outstanding during the entire year. Each preferred stock can be converted into 2 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 assuming the preferred stocks were dilutive?
The denominator would increase by 2,000 shares.
Western Company has net income of $100 million in 2018. If net income in 2019 is $175 million or more, executives will receive 2 million additional shares of common stock. How does this effect the calculation of diluted EPS?
Ignore the 2 million additional shares
Gruen Inc. has 1,000, $100 par, 6% preferred stocks outstanding during the entire year. Each preferred stock can be converted into 2 shares of common stock.The company's tax rate is 30%. What would be the effect of the assumed conversion on the numerator of diluted EPS assuming the preferred stocks were dilutive?
The numerator would be $6,000 greater.
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.
probable
Katie Company issued stock options on February 1, 20X1. For the purpose of calculating dilutive EPS, the options should be assumed to have been exercised on
February 1, 20X1.
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 numerator would reflect the after-tax savings of interest. The denominator would reflect the additional common shares assumed issued.
The goal of diluted EPS is to report the _____ potential dilution that might result from the conversion or exercise of securities and equity contracts.
highest
During the vesting period, current year compensation expense for a SAR classified as a liability equals
the fraction of total compensation attributed to the service period that has elapsed reduced by amounts expensed in prior periods
Hager Company's accountant calculates the company's basic EPS. In addition to common stock, the company also has nonconvertible, noncumulative preferred stock outstanding. No dividends were declared during the current year. When calculating EPS, the accountant should
ignore the preferred stock dividends when calculating the numerator.
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.
Which of the following factors (each considered independently) will tend to increase the value of stock options?
increases in the market price of the underlying stock volatility of the stock price a longer option term
Vogel Corp.'s denominator for calculating diluted EPS is 57,300 weighted-average shares. Included in the denominator were 5,000 shares related to convertible preferred stocks assumed to have been converted. If the convertible preferred stock had actually been converted, the weighted-average shares for purposes of diluted EPS would have been
57,300 shares.
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.
Which of the following statements regarding the current trend in the popularity of share-based awards are correct?
Restricted stock plans are gaining popularity. Stock options are becoming less popular.
Graded vesting Cliff vesting
Stock options vest over time. Stock options vest all at once.
Which of the following will result in the distribution of additional shares?
Stock splits Stock dividends
On January 2, 20X1, Utta Corp. (a calendar-year company) grants 15,000 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 market value of each option is $5. The company's average tax rate is 30%. To reflect the tax effect of these nonqualifying stock options, Utta Corp. should
credit income tax expense for $7,500. debit deferred tax asset for $7,500.
Dividends per common share divided by earnings per share provides an indication of
dividend payout.
If all three conditions for simplifying employee share purchase plan accounting are met, the related share purchase:
does not result in compensation expense
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.
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
performance-based plans. market-based plans.
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.
Bonnie Inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. The bonds were issued at 98 % and the discount is amortized straight-line over 10 years. 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 numerator of diluted EPS?
$21,700