acct 307 ch19
The effect of changes in estimated option forfeitures must be recognized
cumulatively in the year the estimate changes.
Plans that permit all employees to buy shares directly from their company at favorable prices are referred to as
employee share purchase plans.
Which of the following are among the factors that must be considered in order to estimate the total compensation associated with stock options? (Select all that apply.)
expected risk-free rate of return during the option term expected dividends on the underlying stock expected volatility of the stock price
Which of the following are among the factors that must be considered in order to estimate the total compensation associated with stock options? (Select all that apply.)
expected term of the option exercise price of the options current market price of the stock
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 Reason: It is assumed converted if its conversion were to result in a dilution of EPS.
Restricted stock awards are
included in the calculation of EPS if unvested.
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
Warrants, options, and rights are dilutive if the exercise price is
lower than the stocks' average market price.
Diluted EPS should be the
lowest possible EPS.
Total compensation associated with restricted stock awards typically is equal to the shares'
market price at grant date of the award
An actual conversion of dilutive convertible securities will (Select all that apply.)
not affect the reported amount of diluted EPS. decrease the reported amount of basic EPS.
Which of the following are subtracted when determining earnings available to common shareholders?
preferred stock dividends
Compensation relating to stock option grants should be
recognized over the service period for which employees receive options
Share-based plans that requires that the awardee continue to be employed by the granting company are typically referred to as
restricted stock plans
Correctly match the cause of issued shares with their effect on assets and shareholders' equity.
sale of new shares= assets and equity increase stock splits and stock dividends=assets and equity unaffected
Earnings per share is reported very frequently in the financial press because it
tends to summarize the company's performance.
Stock options are said to be "in the money" if
the current market price of the stock exceeds the option exercise price.
The way we take into account the dilutive effect of stock options is referred to as the
treasury stock method
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. Reason: [200,000 + (120,000 x 5/12)]
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? (Select all that apply.)
The numerator would reflect the after-tax savings of interest. The denominator would reflect the additional common shares assumed issued.
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.
A strategy that simplifies the determination of whether convertible securities are dilutive is to compare their____effect on earnings per share.
incremental
When estimates of options forfeitures change, the cumulative effect on compensation is recognized
in current earnings.
When stock options expire, compensation expense
is not affected.
Which of the following are likely advantages of employee share purchase plans for employees? (Select all that apply.)
A discount on the purchase price of the shares. The absence of brokerage fees to purchase the shares.
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
1000*15=15,000
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.
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.
Place the presentation of earnings per share in the correct order.
EPS-income from cont operations EPS-disc. operations EPS-net income
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? (Select all that apply.)
EPS—discontinued operations EPS—net income EPS—income from continuing operations
Which of the following are facts or conditions that are specifically set forth in stock option plans? (Select all that apply.)
The price at which option holders may purchase shares The time period during which option holders may purchase shares The maximum number of shares option holders may purchase
Which of the following scenarios will increase total assets and equity?
The sale of new 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.
In calculating EPS, preferred stock dividends are subtracted from the numerator because EPS represents earnings available to
common shareholders
Contingent issuable shares may be included in the calculation of
diluted EPS.
Investors' desire to focus on one number that may summarize a company's performance may explain the importance of
earnings per share.
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
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. Reason: 1,000 x $6
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 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.
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
Initially, recognition of compensation expense for performance-based plans requires that the achievement of the target is
probable.
For the purpose of deriving EPS, securities are considered dilutive if they are capable of
reducing earnings per share
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.
Securities that upon conversion or exercise of potential common shares would increase EPS are referred to as
antidilutive securities
For the purpose of calculating diluted EPS, convertible preferred stock is
assumed to have already been converted.
When restrictions are lifted on restricted stock units for par value stock, paid-in capital restricted stock is replaced by (Select all that apply.)
common stock paid-in capital - excess of par
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 paid-in capital—restricted stock. credit common stock. credit paid-in capital in excess of par.
Warrants, options, and rights are antidilutive if the exercise price is
higher than the stocks' average market price.
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
Compensation plans that are tied to the achievement of certain targets and are used to motivate key employees are referred to as
management compensation plans
Consistent with the revised FASB standard on stock options, the value of stock options
must be recognized as an expense.
Proceeds under the treasury stock method may include (Select all that apply.)
total compensation from nonvested awards. amounts received under the hypothetical exercising of the options.
The way we take into account the dilutive effect of stock options is referred to as the____stock method.
treasury
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.
Which of the following potential common shares may be included in the calculation of diluted EPS, but not basic EPS?
Convertible securities Restricted stock Contingent issuable shares Stock options
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 statements regarding the prevalence of stock option awards is correct?
Many large and medium-size companies grant stock options.
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? (Select all that apply.)
Other share-based plans Stock option plans
Proceeds under the treasury stock method may include (Select all that apply.)
Outstanding common shares
Which of the following are common types of restricted stock plans? (Select all that apply.)
Restricted stock units Restricted stock awards
What condition must be met to include contingent issuable shares in the calculation of diluted EPS?
The required condition already is being met.
Which of the following represent typical goals of executive compensation plans? (Select all that apply.)
To provide compensation to certain employees. To create performance incentives for certain employees.
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
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. (market price is higher than the exercise price)
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.)
common stock for $9,000. Reason: $1 x 9,000 shares paid-in capital in excess of par for $225,000. Reason: $180,000 + $54,000 - $9,000
Which of the following may result in potential common shares (dilute EPS)? (Select all that apply.)
convertible bonds convertible preferred stocks
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. Reason: [(200 + [80 x 6/12]) x 1.1] - 24/12
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 (Select all that apply.)
cash for $180,000. paid-in capital—stock options for $54,000.(9000*6)
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.
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. Reason: 1,000 x $6
In calculating diluted EPS under the treasury stock method, one component of the proceeds from the exercise of options include
cash received at exercise
True or false: Stock options have become an integral part of most medium and large companies.
true
In calculating diluted EPS, which of the following restricted stock awards is included in the calculation?
unvested restricted stock awards only
Correctly match the type of vesting of stock options with the correct description.
graded vesting- stock options vest over time; cliff vesting-stock options vest all at once