Intermediate Accounting: FINAL - Ch. 16

Prior to 2017, Barkley Company issued 40,000 shares of 6% convertible, cumulative preferred stock, $100 par value. Each share is convertible into 5 shares of common stock. Net income for 2017 was $1,200,000. There were 600,000 common shares outstanding during 2017. There were no changes during 2017 in the number of common or preferred shares outstanding. diluted EPS with preferred stock:

(1.2M - 240000) + (240000)/600000+200000 = 1.5

advantages of restricted stock

1. Never becomes completely worthless 2. Generally results in less dilution to existing stockholders 3. Better aligns employee incentives with company incentives

If Searle's executives fail to exercise the remaining stock options before their expiration date, the company records the following at the date of expiration.

1/1/2027: Paid-in Capital - Stock Options 176,000 Paid-in Capital - Expired Stock Options 176,000

On November 1, 2016, the stockholders of Searle Company approve a plan that grants the company's five executives options to purchase 2,000 shares each of the company's $1 par value common stock. The company grants the options on January 1, 2017. The executives may exercise the options at any time within the next 10 years. The option price per share is $60, and the market price of the shares at the date of grant is $70 per share. Under the fair value method, the company computes total compensation expense by applying an acceptable fair value option-pricing model. The fair value option-pricing model determines Searle's total compensation expense to be $220,000. Assume that the expected period of benefit is two years, starting with the grant date. Searle would record the transactions related to this option contract as follows.

12/31/17: Compensation Expense 110,000 Paid-in Capital - Stock Options 110,000 12/31/18: Compensation Expense 110,000 Paid-in Capital - Stock Options 110,000

If Searle's executives exercise 2,000 of the 10,000 options (20 percent of the options) on June 1, 2020 (three years and five months after date of grant), the company records the following journal entry.

6/1/2020: Cash (2,000 x $60) 120,000 Paid-in Capital - Stock Options 44,000 Common Stock (2,000 x $1) 2,000 Paid-in Capital in Excess of Par - Common 162,000

Moore Corporation has outstanding 2,000, $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2017, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Prepare the entry to record the conversion of the bonds.

Bonds Payable 2,000,000 Discount on Bonds Payable 30,000 Common Stock (2,000 x 50 x $10) 1,000,000 Paid-in Capital in Excess of Par—Common 970,000

Gall Inc. issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $60 per share. The common stock is trading at $26 per share at the time of conversion. Prepare the entry to record the conversion.

Preferred Stock 50,000 Paid-in Capital in Excess of Par—Preferred 10,000 Common Stock (2,000 x $10) 20,000 Paid-in Capital in Excess of Par—Common 40,000

Allocating Compensation Expense

Recognizes compensation expense in the period in which it's EEs perform the service (service period).

Date to measure compensation

under the FV method, companies use acceptable option-pricing models to value the options at the date of grant

book value method

when the debtholder converts the debt to equity, the issuing company recognizes no gain or loss upon conversion

In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)? a. Annual preferred dividend b. Annual preferred dividend times (one minus the income tax rate) c. Annual preferred dividend times the income tax rate d. Annual preferred dividend divided by the income tax rate

a

The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee a. is granted the option. b. has performed all conditions precedent to exercising the option. c. may first exercise the option. d. exercises the option.

a

The date on which total compensation expense is computed in a stock option plan is the date a. of grant. b. of exercise. c. that the market price coincides with the option price. c. that the market price exceeds the option price.

a

A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is Dilutive ~Antidilutive a. Yes ~Yes b. Yes ~No c. No ~Yes d. No ~No

b

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

Under the intrinsic value method, compensation expense resulting from an incentive stock option is generally a. not recognized because no excess of market price over the option price exists at the date of grant. b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. recognized in the period of exercise.

c

determining compensation expense

compensation expense based on the fair value of the options expected to vest on the date they grant the option to employees

For stock appreciation rights, the measurement date for computing compensation is the date a. the rights mature. b. the stock's price reaches a predetermined amount. c. of grant. d. of exercise.

d

In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are a. weighted by the number of days outstanding. b. weighted by the number of months outstanding. c. considered outstanding at the beginning of the year. d. considered outstanding at the beginning of the earliest year reported

d

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

d

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

Which of the following is not a characteristic of a noncompensatory stock purchase plan? a. It is open to almost all full-time employees. b. The discount from market price is small. c. The plan offers no substantive option feature. d. All of these are characteristics.

d