Test 2

Realty1 has 40,000 outstanding stock options. Its net income for the year is $250,000. Each option allows the holder to purchase a share of stock for $8. The average market value of the shares for the year was $17. What is the dilution ratio per common from the options?

0.00

Calculating Basic and Diluted EPS Inputs: Net Income $ 1,000 P/S dividend - Convertible Stock $ 25 P/S dividend - Non-Convertible Stock $ 50 Weighted avg shares outstanding 2,500 Tax Rate 20% Interest Expense on Convertible Bonds $ 150 B/P => # of common shares 500 B/P number of months outstanding 6 months P/S => # of common shares 1,200 P/S number of months outstanding 8 months # of Options outstanding 500 Non-Qualified Plan? -N/A # of months Options outstanding in current year 12 months Exercise Price of options $ 10.00 Un-expensed Total Compensation $ 100.00 Avg Mkt price of common stock $ 15.00 From the information provided in the attachment, what is diluted earnings per share? ($x.xx)

0.27

On January 1, Year 1, Axis Corporation granted employees 5,350 stock options for 5,350 shares of $3 par value common stock. The exercise price on the date of issue was equal to the market price of $24. There is a two-year vesting period and the options expire in four years. Employees have the right to sell back the shares to the corporation within six months of exercise. The fair value of the options has been estimated to be $39 per option and the company does not expect any forfeitures of the options. What is the amount of compensation expense for Year 1?

104325 Because the employee has the right to sell back the acquired shares within 6 months of exercise, these options are liability-classified awards. The options have no intrinsic value, as the market price is equal to the exercise price on the date of issue. The company must recognize compensation expense equal to the number of options times the fair value, and this amount is amortized over the vesting period. 5,350 options × $39/option = $208,650. $208,650 / 2 years = $104,325 per year compensation expense.

Executrain has 50,000, 7%, bonds outstanding for the second half of the year. Each $1,000 bond, sold July 1 at par, is convertible into 10 shares of common stock. The corporate tax rate is 40%. What is the dilution ratio per common share from the convertible bonds?

2.10

On January 1, 2021, Bubert Corporation issues 8,500 shares of $2 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $25 and there is a four-year vesting period. What is the amount of deferred compensation recorded on January 1, 2021?

212500

Schmidt Electronics offered an incentive stock plan to its employees. On January 1, Year 1, 90,000 options were granted for 90,000 $1 par common shares. The exercise price equals the $6 market price of the common stock on the grant date. The vesting period is 3 years. The options cannot be exercised before January 1, Year 4, and expire on December 31, Year 5. Each option has a value of $3 based upon an option pricing model.At the end of the first year, it is expected that 100% of employees will exercise the options. By the end of Year 2, it is expected that only 80% of the options will be exercised. Assume that Schmidt chooses to adjust the fair value of the options for the estimated forfeitures. What is the amount of compensation expense recorded in Year 2? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

54000 Description: Year 1 Year 2Total compensation expense at fair value(90,000 × $3) Yr1 $270,000 Yr2 $270,000 Vesting probability × 100% × 80% Expected compensation expense $270,000 $216,000 Cumulative rate of amortization 1/3 2/3 Cumulative compensation expense$90,000 $144,000 Less: Expense recognized in prior years (90,000) Compensation expense (income): Current year $90,000 $54,000

On January 1, 2021, Bubert Corporation issues 12,500 shares of $2 par restricted stock to its key executives. The market value of unrestricted shares of the same stock on the date of issue is $19 and there is a four-year vesting period. What is the amount of compensation expense recorded on December 31, 2021?

59375 On the date that the restricted shares are issued, Deferred Compensation is debited for the number of shares times the market price, 12,500 shares × $19 = $237,500. This amount is amortized over the four-year vesting period and compensation expense for each year is $237,500/4 = $59,375.

On January 1, Year 1, Freeman Corporation granted 120,000 stock options to key employees which allowed these employees to purchase 120,000 shares of the corporation's common stock at $30 per share. These options are intended to compensate employees for the next three years. The options may be exercised within a four-year period beginning January 1, Year 4, by the grantees still employed by the company. No options were terminated during Year 1, but Freeman does have an experience of 5% forfeitures over the life of the stock options. Freeman uses the estimated forfeiture rate to estimate compensation expense. The market price of the stock was $35 per share at the date of grant. Freeman used an appropriate pricing model and estimated the value of an option at $20. What amount should be charged to compensation expense for the year ended December 31, Year 1? (Do not round intermediate calculations. Only round your final answer to the nearest dollar.)

760000 Explanation: (120,000 × $20) = ($2,400,000 × 95%)/3 = $760,000

Gray Corporation reported $500,000 in interest expense for the current year for bonds that were issued in prior years. Gray's tax rate is 40%. By what amount is the numerator of diluted EPS positively adjusted? A. $300,000 B. $0 C. $200,000 D. $500,000

A. $300,000

Which of the following statements is false? A. Employees holding stock appreciation rights are required to purchase shares on the vesting date. B. The liability for a SAR is measured as the difference between the stock price and the pre-established price. C. The employee benefits from stock appreciation rights only if the stock price increases. D. Stock appreciation rights are a form of compensation similar to a bonus.

A. Employees holding stock appreciation rights are required to purchase shares on the vesting date.

Robertson Corporation reported net income for Year 1 of $220,000 and Year 2 of $340,000. The weighted-average common shares outstanding 140,000 in Year 1 and 130,000 in Year 2. Robertson also has 10,000 shares of $100 par value, cumulative, 5% preferred stock outstanding in both years. Dividends were not declared in Year 1, but both years' dividends were declared and paid in Year 2. Compute EPS for both years. (Round your answers to the nearest cent.) A. Year 1, $1.21; Year 2, $2.23 B. Year 1, $1.57; Year 2, $2.62 C. Year 1, $1.21; Year 2, $2.62 D. Year 1, $1.21; Year 2, $1.21

A. Year 1, $1.21; Year 2, $2.23

Which one of the following is required in the notes to the financial statements for EPS? A. a discussion of antidilutive securities that were excluded from the computation of diluted EPS B. adjustments to the denominator for preferred dividends C. all stockholder transactions that occurred after the close of the year D. detailed calculations of weighted average shares outstanding for the period

A. a discussion of antidilutive securities that were excluded from the computation of diluted EPS ref page 1195 of textbook

On January 1, Year 1, Fields Corporation granted 500,000 stock options to certain executives. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. The vesting period is 3 years. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $12 on the date of grant. What amount should Fields recognize as compensation expense for Year 1? A. $0 B. $2,000,000 C. $6,000,000 D. $750,000

B. $2,000,000

Which of the following statements regarding stock options is true? A. An employee will exercise a stock option only when the current market price of the stock is less than the option price. B. Employee stock options are a restricted form of a call option. C. Unexercised options may be sold or transferred in the open market. D. Companies expense stock-based compensation at the fair value of the stock on the expected date of exercise.

B. Employee stock options are a restricted form of a call option.

The accounting for cash flow hedges requires the valuing of a derivative at its: A. carrying value. B. fair value. C. historical cost. D. amortized cost.

B. fair value.

A company with convertible bonds outstanding will need to adjust the denominator of the diluted EPS equation. If the bonds are outstanding all year, the adjustment will consist of the ________. A. conversion ratio times the number of bonds outstanding net of taxes B. number of bonds issued during the current year C. conversion ratio times the number of bonds outstanding D. number of bonds in the debt issue

C. conversion ratio times the number of bonds outstanding

A company with convertible bonds outstanding will assume hypothetical conversion at the earliest point of the year to compute diluted EPS. The numerator is ________. A. decreased by the interest paid on the bonds during the fiscal year B. increased by the interest paid on the bonds during the fiscal year C. increased by the after-tax interest expense on the bonds for the fiscal year D. decreased by the after-tax interest paid on the bonds during the fiscal year

C. increased by the after-tax interest expense on the bonds for the fiscal year ref page 1183 in textbook

On January 1, Year 1, Fields Corporation granted 200,000 stock options to certain executives. The vesting period is 3 years. The options are exercisable no sooner than December 31, Year 3 and expire on January 1, Year 7. Each option can be exercised to acquire one share of $10 par common stock for $15. An appropriate option-pricing model estimates the fair value of each option to be $11 on the date of grant. Fields chooses to adjust the fair value of the options for the estimated forfeitures. If unexpected turnover in Year 2 caused Fields to estimate that 12% of the options would be forfeited, what amount of compensation expense should Fields recognize in Year 2? (Round intermediate calculations and your final answer to the nearest dollar.) A. $1,290,667 B. $0 C. $733,333 D. $557,334

D. $557,334 Compensation expense recognized in Year 1 = (200,000 × $11 = $2,200,000)/3 = $733,333. Expected value of options at end of Year 2 = 200,000 × $11 = $2,200,000 × 88% = $1,936,000 Cumulative compensation expense at end of Year 2 = $1,936,000 × 2/3 = $1,290,667 Compensation expense for Year 2 = Cumulative expense $1,290,667 recognized in Year 1 $733,333 = $557,334

Greenwell Coffee Company began operations on the first day of the year. On that day they issued 100,000 shares. On March 1 they issued 23,000 shares and on July 1, another 30,000 shares. On December 1, Greenwell repurchased 6,000 shares of outstanding shares. Compute the weighted-average shares of stock for the first year of operation. (Round your final answer to the nearest whole number.) A. 134,167 B. 134,667 C. 147,000 D. 133,667

D. 133,667

On January 1, 2020, Cable Corporation issues 6,000 stock-appreciation rights to its key executives. The terms of the plan state that the holders of the rights will receive a cash payment equal to the difference between the market price of the stock on the date of exercise and the pre-established price of $9 per share. There is a three-year vesting period and the rights may be exercised on January 1, 2023. The rights expire on January 1, 2025. The closing market prices follow: December 31, 2020 $12 per share December 31, 2021 $15 per share December 31, 2022 $14 per share What is the appropriate journal entry on December 31, 2021? (Do not round any intermediate calculations. Round your final answer to the nearest dollar.) A. Dr Obligation under SAR Plan 6,000, Cr Deferred Compensation 6,000 B. Dr Compensation Expense 72,000, Cr Obligation under SAR Plan 72,000 C. Dr Compensation Expense 2,000, Cr APIC - SAR 2,000 D. Dr Compensation Expense 18,000, Cr Obligation under SAR Plan 18,000

D. Dr Compensation Expense 18,000, Cr Obligation under SAR Plan 18,000

Which of the following is not a situation in which employee compensation is classified as a liability? A. The option is granted for the acquisition of securities classified as liabilities, such as redeemable preferred stock. B. The employee can sell back the acquired shares to the employer corporation at the exercise price within a reasonable period of time. C. The compensation is in the form of cash-settled stock appreciation rights. D. The option is granted for the acquisition of securities classified as equity securities.

D. The option is granted for the acquisition of securities classified as equity securities.

If an unexpected forfeiture of options occurs under a stock option plan, the change in compensation is treated as ________. A. an adjustment to additional paid in capital B. a change in other comprehensive income C. an adjustment to common stock D. a change in estimate

D. a change in estimate

Harvey Inc. reported net earnings of $700,000 for the year. Harvey has 200,000 shares of common stock outstanding all year. Two years ago, the company granted 20,000 stock options that allow employees to purchase 20,000 shares for $15 each. The company stock has averaged $20 in the market during the year. Compute the basic and diluted EPS. A. basic EPS $3.41; diluted EPS $3.41 B. basic EPS $3.50; diluted EPS $2.34 C. basic EPS $3.50; diluted EPS $3.50 D. basic EPS $3.50; diluted EPS $3.41

D. basic EPS $3.50; diluted EPS $3.41

When computing basic EPS, the numerator includes net income minus the ________. A. cost of interest paid on bonds, net of tax B. cash paid for dividends during the year C. present value of stock options D. current year preferred dividends paid and current year preferred dividends in arrears

D. current year preferred dividends paid and current year preferred dividends in arrears

What is the effect of an equity-classified award of stock options on the grant date? A. decrease in total equity and decrease in net income B. increase in total equity and decrease in net income C. increase in total equity and increase in net income D. no change in total equity or net income

D. no change in total equity or net income

When a company has a net loss from continuing operations, it should include ________. A. only convertible issues in diluted EPS B. only in the money warrants and options in diluted EPS C. all potentially dilutive securities in diluted EPS D. no potentially dilutive securities in diluted EPS

D. no potentially dilutive securities in diluted EPS ref page 1191-1192 in textbook

Unrealized gains or losses on fair value hedges are A. ignored because recognizing them would violate the historical-cost principle. B. recorded in equity, as part of other comprehensive income. C. reported directly in retained earnings. D. reported directly in net income.

D. reported directly in net income.

Teague Corporation permits key employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During July, employees purchased 200 $2 par shares of common stock at a time when the established market price was $30 per share. What is the journal entry to record issuance of these shares?

Dr Cash 5400, Dr Salary Expense 600, Cr Common Stock 400, Cr PIC CS 5,600

Any events that would have a material impact on the denominator of the EPS calculation that occur after the close of the period would require disclosure in the notes to the financial statements. True or False

True

The income statement requires presentation of basic and diluted earnings per share for each year presented, plus additional information to be disclosed in the notes to the financial statements for all years presented. True or False

True