Chapter 16 Dilutive Securties and Earnings Per Share

Olive Branch Inc. had 400,000 shares of common stock issued and outstanding at December 31, 2013. On July 1, 2014 an additional 200,000 shares were issued for cash. Olive Branch also had stock options outstanding at the beginning and end of 2014 which allow the holders to purchase 60,000 shares of common stock at $28 per share. The average market price of Olive Branch's common stock was $35 during 2014. The number of shares to be used in computing diluted earnings per share for 2014 is 288,000 512,000 612,000 660,000

The weighted average number of shares outstanding is: (400,000 × 6/12) + (600,000 × 6/12) + [((35 - 28)/ 35) × 60,000] = 512,000.

Companies remeasure compensation expense each period for liability-based stock-appreciation rights. True False

True

IFRS requires that the issuer of convertible debt record the liability and equity components separately. True False

True

Nondetachable warrants do not require an allocation of the proceeds between the bonds and the warrants. True False

True

When a company has cumulative preferred stock outstanding, the preferred dividend is subtracted from net income in the earnings per share calculation whether the dividend has been declared or not. True False

True

he recording of convertible bonds at the date of issue is the same as the recording of straight debt issues. True False

True

n a complex capital structure, diluted earnings per share is not reported when the securities included in the capital structure are antidilutive. True False

True

When convertible debt is retired: neither gains nor losses are recognized. only gains on retirement are recognized. either a gain or a loss on retirement is recognized. only losses on retirement are recognized.

either a gain or a loss on retirement is recognized.

When a bond issuer offers some form of additional consideration (a "sweetener") to induce conversion, the sweetener is accounted for as a(n) none of these answer choices is correct. extraordinary item. expense. loss.

expense.

The issuance of warrants arises under all of the following situations except to: provide compensation to executives. make different types of securities more attractive to new investors. give existing stockholders a preemptive right to purchase stock. give bondholders the preemptive right to purchase additional stock.

give bondholders the preemptive right to purchase additional stock.

The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be treated as a prior period adjustment. reflected currently in income as an extraordinary item. treated as a direct reduction of retained earnings. reflected currently in income, but not as an extraordinary item.

treated as a direct reduction of retained earnings.

At December 31, 2014, Twin Rivers Company had 450,000 shares of common stock issued and outstanding, 350,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on September 1, 2014. Net income for the year ended December 31, 2014, was $1,160,000. What should be Twin Rivers' 2014 earnings per common share, rounded to the nearest penny? $3.03 $3.32 $2.58 $2.73

$1,160,000/[350,000 + (100,000 × 4/12) = $3.03.

On January 1, 2014, Western Carolina Company granted Andy Eggers, an employee, an option to buy 2,000 shares of Western Carolina Co. stock for $25 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $21,000. Eggers exercised his option on September 1, 2014, and sold his 2,000 shares on December 1, 2014. Quoted market prices of Western Carolina Co. stock during 2014 were January 1 $25 per share September 1 $30 per share December 1 $34 per share The service period is for three years beginning January 1, 2014. As a result of the option granted to Eggers, using the fair value method, Western Carolina should recognize compensation expense for 2014 on its books in the amount of $4,200. $15,000. $21,000. $7,000.

$7,000.

In 2014, Chartres Inc., issued for $105 per share, 60,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Chartre's $25 par value common stock at the option of the preferred stockholder. In April 2015, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? $1,800,000. $2,300,000. $60,000. $900,000.

...

Pesca Company had 820,000 shares of common stock outstanding on January 1, issued 360,000 shares on April 1 and purchased 24,000 shares of treasury stock on December 1. The weighted average shares outstanding for the year is 1,178,000. 1,088,000. 1,156,000. 888,000.

1,088,000.

Which earnings per share amounts are reported in a complex capital structure? Basic and diluted EPS. Basic and simple EPS. Basic EPS only. Diluted EPS only.

Basic and diluted EPS.

What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively? Decrease and increase Increase and decrease Increase and no effect Decrease and no effect

Decrease and increase

Earnings per share is reported for both common and preferred stock. True False

False

GAAP requires that the issuer of convertible debt record the liability and equity components separately. True False

False

If there are multiple potentially dilutive securities, the one that should be used first to recalculate earnings per share is the one that is least dilutive. True False

False

The measurement date for stock appreciation rights is the date of grant. True False

False

All of the following statements are true regarding IFRS and their treatment of financial instruments, including dilutive securities, except: a significant difference in IFRS and U.S. GAAP exists with respect to the accounting for convertible debt. under IFRS, the fair value of shares and options awarded to employees is recognized over the period to which the employees' services relate. IFRS records combined bond issue's debt with equity components. under IFRS, convertible bonds are "bifurcated".

IFRS records combined bond issue's debt with equity components.

What will the numerator of the diluted EPS calculation consist of when convertible preferred stock is being included? Net income - Preferred dividends. Net income + Preferred dividends. Net income + Preferred dividends (Net of tax effect). Net income.

Net income.

If preferred stock is cumulative, and dividends have not been declared in the past two years or in the current year, what amount should be deducted from net income in the EPS calculation? Only the dividends in arrears. Only the current year's dividend. Both the current year's dividend and the dividends in arrears. Nothing should be deducted because no dividends were declared.

Only the current year's dividend.

Which of the following is not one of the commonly used stock compensation plans? Restricted-stock plans. Stock appreciation rights plans. Stock conversion plans. Stock option plans.

Stock conversion plans.

Lake Norman Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32). The price paid for 2,000, $1,000 bonds with the warrants attached was $205,000. The market price of the Lake Norman bonds without the warrants was $180,000, and the market price of the warrants without the bonds was $20,000. What amount should be allocated to the warrants? $20,000 $20,500 $25,000 $24,000

The amount allocated to the warrants is: [$20,000 ÷ ($20,000 + $180,000)] × $205,000 = $20,500.

On June 30, 2014, an interest payment date, $1,000,000 of Greenville Co. bonds were converted into 25,000 shares of Greenville Co. common stock each having a par value of $5 and a market value of $54. There is $350,000 unamortized discount on the bonds. Using the book value method, Greenville would record a $350,000 increase in paid-in capital in excess of par. a $525,000 increase in paid-in capital in excess of par. a $135,000 increase in paid-in capital in excess of par. no change in paid-in capital in excess of par.

The increase to paid-in capital in excess of par is $1,000,000 - (25,000 x $5) - $350,000 = $525,000.

On 2013, Newton Inc. issued for $105 per share, 100,000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Newton's $30 par value common stock at the option of the preferred stockholder. In August 2014, all of the preferred stock was converted into common stock. The market value of the common stock at the date of the conversion was $30 per share. What total amount should be credited to additional paid-in capital, common stock as a result of the conversion of the preferred stock into common stock? $1,250,000. $375,000. $1,500,000. $780,000.

The preferred stock has a value of ($105 X 100,000 shares) $10,500,000. The common stock has a par value of ($30 X 300,000 shares) $9,000,000. The difference, $1,500,000, represents additional paid-in capital, common stock.

Under the fair-value method of recording stock options, companies will report the same compensation expense relative to the intrinsic-value method. a lower compensation cost relative to the intrinsic- value method. no increase in compensation expense. a higher compensation cost relative to the intrinsic-value method.

a higher compensation cost relative to the intrinsic-value method.

The proceeds from the sale of debt with detachable stock warrants should be allocated between the two securities based on the: face value of the bonds and market value of the warrants. face value of the bonds. fair market value of the bonds. aggregate fair market value of the bonds and the warrants.

aggregate fair market value of the bonds and the warrants.

Disclosure for compensation plans should include all of the following except the: number of shares under option. significant assumptions used to estimate the fair values of the stock options. all of these answer choices are required disclosures. weighted average fair value of options granted during the year.

all of these answer choices are required disclosures.

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

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

The diluted EPS computation considers all of the following except the impact of: convertible securities. stock options. stock warrants. antidilutive securities.

antidilutive securities.

In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would fairly present diluted earnings per share on a prospective basis. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share. be antidilutive.

be antidilutive.

The conversion of preferred stock may be recorded by the market value method. incremental method. book value method. par value method.

book value method.

Convertible bonds are usually converted into: stock warrants. preferred stock. common stock. other bonds at a lower interest rate.

common stock.

Kelley Co. has $2,000,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value common stock. The bonds pay interest on January 31 and July 31. On July 31, 2014, the holders of $500,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the common stock was $36. The total unamortized bond premium at the date of conversion was $112,500. Kelley should record, as a result of this conversion, a credit of $28,125 to Premium on Bonds Payable. credit of $421,875 to Paid-in Capital in Excess of Par. loss of $540,000. credit of $78,125 to Paid-in Capital in Excess of Par.

credit of $78,125 to Paid-in Capital in Excess of Par.

Dilutive convertible securities must be used in the computation of basic earnings per share only. diluted earnings per share only. none of these answer choices is correct. diluted and basic earnings per share.

diluted earnings per share only.

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 preferred dividends in arrears. preferred dividends in arrears times (one minus the income tax rate). annual preferred dividend times (one minus the income tax rate). none of these answer choices is correct.

none of these answer choices is correct.

Detachable stock warrants outstanding should be classified as contingent liabilities. prepaid expenses. reductions of capital contributed in excess of par value. paid-in capital.

paid-in capital.

The treasury stock method of computing incremental shares applies to: all convertible securities. convertible bonds only. stock options and warrants. convertible preferred stock only.

stock options and warrants.

Complex capital structures require all of the following disclosures except: a reconciliation of the numerators and denominators of the basic and diluted per share computations. the effect of conversions before year-end. a description of pertinent rights of the various securities outstanding. the effect given preferred dividends in determining income available to common stockholders.

the effect of conversions before year-end.

Accounting for stock option plans must be based on: either the fair value method or the intrinsic value method. the intrinsic value method. the fair value method. the option-pricing method.

the fair value method.