Chapter 19

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 Multiple choice question. $15,000. $0. $7,500.

$15,000.

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? Multiple choice question. $60,000 $21,000 $30,000

$21,000 correct Reason: $1,000 x 500 x 6% x (1 - 0.3)

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? Multiple choice question. $60,000 $30,000 $21,000

$21,000 correct Reason: $1,000 x 500 x 6% x (1 - 0.3)

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 Multiple choice question. $10 per share. $4 per share. $14 per share.

$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 Multiple choice question. 145,000 shares. 180,000 shares. 160,000 shares.

145,000 shares. correct Reason: 100,000 + (60,000 x 9/12)

Pfeffer Company reports net income of $360 million for the year; 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 Multiple choice question. 240,000. 320,000. 250,000.

250,000. correct Reason: [200,000 + (120,000 x 5/12)]

Salt Company reports net income of $360 million for the year; 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 Multiple choice question. 308 million. 256 million. 262 million.

262 million. correct Reason: [(200 + [80 x 6/12]) x 1.1] - 24/12

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 Multiple choice question. 62,300 shares. 57,300 shares. 52,300 shares.

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? Multiple choice question. 4,900 shares would be subtracted. 7,000 shares would be added. 4,900 shares would be added. 7,000 shares would be subtracted.

7,000 shares would be added. Reason: 500 x 14

A strategy that simplifies the determination of whether convertible securities are dilutive is to compare ________ their effect on earnings per share.

: incremental

Stock appreciation rights may be payable in ___________ or___________ .

Blank 1: cash Blank 2: shares or stock

In calculating EPS, preferred stock dividends are subtracted from the numerator because EPS represents earnings available to _________ shareholders

Blank 1: common

The benefit the holder of an option would realize by exercising the options rather than buying the underlying stock directly is referred to as _______ value.

Blank 1: intrinsic

Option values include the following essential components: a(n) _______value and a(n)________ value.

Blank 1: intrinsic Blank 2: time

Because options are not exercised immediately, their valuation includes a(n)_______ ________- component.

Blank 1: time Blank 2: value

Select all that apply Which of the following can be used to satisfy SARs awards? (Select all that apply.) Multiple select question. Cash Inventory Receivables Shares

Cash Shares

Which of the following strategies will simplify the determination of whether convertible securities are dilutive or antidilutive to EPS? Multiple choice question. Assume all convertible securities are dilutive. Comparing the incremental effect of the conversion. Calculating EPS, including each possible combination of convertible securities.

Comparing the incremental effect of the conversion.

Select all that apply Which of the following potential common shares may be included in the calculation of diluted EPS, but not basic EPS? Multiple select question. Convertible securities Outstanding common shares Stock options Contingent issuable shares Restricted stock

Convertible securities Stock options Contingent issuable shares Restricted stock

Click and drag on elements in order Place the presentation of earnings per share in the correct order. Instructions Choice 1 of 3. EPS—income from continuing operations toggle button EPS—income from continuing operations Choice 2 of 3. EPS—discontinued operations toggle button EPS—discontinued operations Choice 3 of 3. EPS—net income toggle button EPS—net income

EPS- income from continuing operations EPS-discontinued operations EPS- net income

Select all that apply 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.) Multiple select question. EPS—operating income EPS—discontinued operations EPS—net income EPS—income from continuing operations

EPS—discontinued operations EPS—net income EPS—income from continuing operations

Select all that apply 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.) Multiple select question. EPS—net income EPS—operating income EPS—income from continuing operations EPS—discontinued operations

EPS—net income EPS—income from continuing operations EPS—discontinued operations

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 compensation plan

True or false: In calculating diluted EPS, convertible preferred stock is assumed converted only if the stock was issued during an earlier period. True false question. True False

False Reason: It is assumed converted if its conversion were to result in a dilution of EPS.

Correctly match the type of vesting of stock options with the correct description. Instructions Graded vesting Cliff vesting Cliff vesting drop zone empty. Stock options vest over time. Stock options vest all at once.

Graded vesting-Stock options vest over time. Cliff vesting-Stock options vest all at once.

Which of the following is a likely advantage of employee share purchase plans for employers? Multiple choice question. Increased employee loyalty to the company. Higher stock prices immediately after the purchase. Enhanced earning per share for the purchase year.

Increased employee loyalty to the company.

Which of the following statements regarding the prevalence of stock option awards is correct? Multiple choice question. Many large and medium-size companies grant stock options. Stock options are unique to large multinational companies. All large companies grant stock options. All public companies grant stock options.

Many large and medium-size companies grant stock options.

Which of the following shares may be included in the calculation of basic EPS? Multiple choice question. Contingent issuable shares Restricted stock Stock options Outstanding common shares Convertible securities

Outstanding common shares

Correctly match the cause of issued shares with their effect on assets and shareholders' equity. Instructions Sale of new shares Sale of new shares drop zone empty. Stock splits and stock dividends Stock splits and stock dividends drop zone empty. Assets and shareholders' equity increase. Total assets and shareholders' equity are unaffected.

Sale of new shares matches Choice Assets and shareholders' equity increase. Stock splits and stock dividends matches Choice Total assets and shareholders' equity are unaffected.

Select all that apply Which of the following will result in the distribution of additional shares? (Select all that apply.) Multiple select question. Stock splits Cash dividend Stock dividends

Stock splits Stock dividends

What condition must be met to include contingent issuable shares in the calculation of diluted EPS? Multiple choice question. Meeting the required condition is estimated to be probable. Meeting the required condition is at least possible. The required condition already is being met.

The required condition already is being met.

Which of the following is correct regarding the nature of restricted stock? Multiple choice question. The shares can only be traded during certain time periods. The shares typically are contingent on the continued employment of the awardee. The shares can only be sold back to the issuing company and not outside investors.

The shares typically are contingent on the continued employment of the awardee. The restricted shares are subject to forfeiture if the employee doesn't remain with the company.

Which of the following statements regarding the role of antidilutive securities in the calculation of EPS is correct? Multiple choice question. They are included in the calculation of basic EPS only. They are ignored when calculating both basic and diluted EPS. They are included in the calculation of both basic and diluted EPS. They are included in the calculation of diluted EPS only.

They are ignored when calculating both basic and diluted EPS.

Which of the following is correct regarding stock options and other share-based plans? Multiple choice question. They frequently specify a performance or market condition. They typically are awarded based on age at retirement. They typically are awarded based on the age of the company's employees.

They frequently specify a performance or market condition.

Select all that apply Which of the following represent typical goals of executive compensation plans? (Select all that apply.) Multiple select question. To provide compensation to certain employees. To reduce reported net income. To significantly reduce corporate tax obligations. To create performance incentives for certain employees.

To provide compensation to certain employees. To create performance incentives for certain employees. Share based awards are forms of payment whose value is dependent on the value of the company's stock. CEO'S often get mor than half their total compensation from share-based compensation plans. The executive compensation plan is tied to performance in a strategy that uses compensation to motivate its recipients. Some firms pay their directors entirely in shares. Actual compensation depends on the market value of the shares. That's quite an incentive to act in the best interest of shareholders.

The way we take into account the dilutive effect of stock options is referred to as the_________- stock method

Treasury

True or false: Stock options have become an integral part of most medium and large companies. True false question. True False

True As with any compensation plan, thee accounting objective for stock options is to report compensation expense during the period of service for which the compensation is given.

Select all that apply Proceeds under the treasury stock method may include (Select all that apply.) Multiple select question. amounts received under the hypothetical exercising of the options. total compensation from nonvested awards. the current market value of the stocks assumed to have been acquired with the options. tax benefits derived from nonqualified stock options.

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 securities

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 Multiple choice question. neither dilutive nor antidilutive. antidilutive. dilutive.

antidilutive.

For the purpose of calculating diluted EPS, convertible preferred stock is Multiple choice question. assumed to be converted in the following year. assumed to have already been converted. ignored.

assumed to have already been converted.

Select all that apply On January 1, Year 1, 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 Year 4, 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

cash for $180,000. paid-in capital—stock options for $54,000. Reason: 9,000 x $6

In calculating diluted EPS under the treasury stock method, one component of the proceeds from the exercise of options include Multiple choice question. total compensation expense from the stock option award cash received at exercise par value of the common shares issued

cash received at exercise

Select all that apply When restrictions are lifted on restricted stock units for par value stock, paid-in capital restricted stock is replaced by (Select all that apply.) Multiple select question. common stock compensation expense paid-in capital - excess of par

common stock paid-in capital - excess of par

Which of the following would prevent Norbert Company from having a simple capital structure for the purpose of reporting EPS? Multiple choice question. convertible preferred stocks stock dividends cash dividends nonconvertible preferred stocks nonconvertible bonds

convertible preferred stocks

Select all that apply Which of the following may result in potential common shares? Multiple select question. common stocks authorized nonconvertible bonds nonconvertible preferred stocks convertible preferred stocks convertible bonds

convertible preferred stocks convertible bonds

The effect of changes in estimated option forfeitures must be recognized Multiple choice question. cumulatively in the year the estimate changes. equally over the remaining vesting period. retroactively by restating financial statements.

cumulatively in the year the estimate changes.

Select all that apply 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.) Multiple select question. debit paid-in capital—restricted stock. credit common stock. credit paid-in capital—restricted stock. credit paid-in capital in excess of par. debit paid-in capital in excess of par.

debit paid-in capital—restricted stock. credit paid-in capital in excess of par. credit common stock.

Select all that apply An actual conversion of dilutive convertible securities will (Select all that apply.) Multiple select question. decrease the reported amount of diluted EPS. decrease the reported amount of basic EPS. increase the reported amount of diluted EPS. not affect the reported amount of diluted EPS.

decrease the reported amount of basic EPS. not affect the reported amount of diluted EPS.

Contingent issuable shares may be included in the calculation of Multiple choice question. basic EPS. both basic and diluted EPS. diluted EPS.

diluted EPS.

Contingent issuable shares may be included in the calculation of Multiple choice question. basic EPS. diluted EPS. both basic and diluted EPS.

diluted EPS.

Investors' desire to focus on one number that may summarize a company's performance may explain the importance of Multiple choice question. earnings per share. dividends. retained earnings. the income statement.

earnings per share.

Plans that permit all employees to buy shares directly from their company at favorable prices are referred to as Multiple choice question. employee stock options. employee share purchase plans. employee bonus share plans.

employee share purchase plans.

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 Multiple choice question. cliff vesting. step vesting. graded vesting.

graded vesting - over time (cliff vesting is when they come exercisable all at once).

Select all that apply Which of the following factors (each considered independently) will tend to lower the value of stock options? (Select all that apply.) Multiple select question. higher dividends increases in the market price of the underlying stock a longer option term a higher exercise price volatility of the stock price

higher dividends a higher exercise price

Select all that apply Which of the following factors (each considered independently) will tend to lower the value of stock options? (Select all that apply.) Multiple select question. increases in the market price of the underlying stock higher dividends a longer option term a higher exercise price volatility of the stock price

higher dividends a higher exercise price

The goal of diluted EPS is to report the Blank______ potential dilution that might result from the conversion or exercise of securities and equity contracts. Multiple choice question. highest lowest average

highest

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 Blank______ method. Multiple choice question. conversion dilution multiple conversion if converted

if converted

When estimates of options forfeitures change, the cumulative effect on compensation is recognized Multiple choice question. in current earnings. over the remaining vesting period. in retained earnings

in current earnings.

Restricted stock awards are Multiple choice question. included in the calculation of EPS if unvested. excluded from the calculation of EPS. included in the calculation of EPS if vested.

included in the calculation of EPS if unvested.

Select all that apply Vested restricted stock awards are (Select all that apply.) Multiple select question. included in the denominator of basic EPS. already outstanding. added in the denominator for the purpose of calculating diluted EPS only.

included in the denominator of basic EPS. already outstanding.

Antidilutive securities are excluded from the calculation of EPS because they would Multiple choice question. increase EPS. not effect EPS. decrease EPS.

increase EPS.

Warrants, options, and rights are dilutive if the exercise price is Multiple choice question. higher than the stocks' average market price. lower than the stocks' average market price. higher than the stocks' end-of-year market price. lower than the stocks' end-of-year market price.

lower than the stocks' average market price.

Warrants, options, and rights are dilutive if the exercise price is Multiple choice question. higher than the stocks' end-of-year market price. higher than the stocks' average market price. lower than the stocks' average market price. lower than the stocks' end-of-year market price.

lower than the stocks' average market price.

Diluted EPS should be the Multiple choice question. lowest possible EPS. average EPS. highest possible EPS.

lowest possible EPS.

Total compensation associated with restricted stock awards typically is equal to the shares' Multiple choice question. market value at time of the removal of the restriction. par value. market price at grant date of the award.

market price at grant date of the award.

Select all that apply 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 Multiple select question. executive plans. market-based plans. managerial plans. performance-based plans.

market-based plans. performance-based plans.

Select all that apply The value of stock options has a time value component because (Select all that apply.) Multiple select question. the options will accrue interest between the date of grant and the time the options are exercised. options do not have to be exercised immediately. 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 value of the options may change between the date of grant and the time the options are exercised.

Select all that apply When restrictions are lifted on restricted stock units for par value stock, paid-in capital restricted stock is replaced by (Select all that apply.) Multiple select question. paid-in capital - excess of par common stock compensation expense

paid-in capital - excess of par common stock

Select all that apply On January 1, Year 1, 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 Year 4, 9,000 stock options were exercised. Utta Corp. should recognize this event by crediting (Select all that apply.) Multiple select question. paid-in

paid-in capital in excess of par for $225,000. Reason: $180,000 + $54,000 - $9,000 common stock for $9,000. Reason: $1 x 9,000 shares

On January 1, Year 1, 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 Year 4, 9,000 stock options were exercised. In Year 5, the remaining stock options expire. When the options expire, Utta should credit Multiple choice question. cash for $6,000. common stock for $1,0

paid-in capital—expired stock options for $6,000. correct Reason: 1,000 x $6

On January 1, Year 1, 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 Year 4, 9,000 stock options were exercised. In Year 5, the remaining stock options expire. Utta should recognize the expiration by debiting Multiple choice question. paid-in capital—stock options f

paid-in capital—stock options for $6,000. correct Reason: 1,000 x $6

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 Multiple choice question. entire fiscal period. period that they are not outstanding. period that they are outstanding.

period that they are not outstanding.

Securities that may become common shares in the future are considered Multiple choice question. outstanding shares. treasury shares. potential common shares.

potential common shares.

Which of the following are subtracted when determining earnings available to common shareholders? Multiple choice question. preferred stock dividends common stock dividends interest expense

preferred stock dividends

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 Multiple choice question. retire treasury shares. issue treasury shares. sell treasury shares. purchase treasury shares.

purchase treasury shares.

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 Multiple choice question. retire treasury shares. sell treasury shares. purchase treasury shares. issue treasury shares.

purchase treasury shares.

Compensation relating to stock option grants should be Multiple choice question. ignored until the grants are exercised. ignored permanently if the current market price of the stock does not exceed the exercise price. recognized over the service period for which employees receive options.

recognized over the service period for which employees receive options.

For the purpose of deriving EPS, securities are considered dilutive if they are capable of Multiple choice question. reducing earnings per share. reducing the amount of dividends per share. increasing the company's debt to equity ratio. reducing the number of outstanding shares.

reducing earnings per share.

Share-based plans that requires that the awardee continue to be employed by the granting company are typically referred to as Multiple choice question. defined benefit pension plans. restricted stock plans. stock appreciation rights. stock options.

restricted stock plans. It's tied to the continued of employment. There're two primary types of restricted stock plans are restricted stock awards and restricted stock units. It's in the name of the employee, although the company might retain physical possession of the shares. The employee has rights of a shareholder, subject to certain restrictions or forfeiture.

Earnings per share is reported very frequently in the financial press because it Multiple choice question. tends to fluctuate more than net income. tends to summarize the company's performance. tends to fluctuate less than net income. is easy to calculate.

tends to summarize the company's performance.

The "if converted method" assumes that convertible securities were converted into common stock at what point? Multiple choice question. the beginning of the current period never the end of the current period

the beginning of the current period

Donald Company grants stock options to certain employees. On the date of grant, Donald should measure total compensation based on Multiple choice question. the difference between the option exercise price and the current market price. the fair value of the options. par value of the stocks to be issued under the grant.

the fair value of the options. We measure compensation as the fair value of the stock options at the grant date and then record that amount as compensation expense over the service period for which employee receive the options. Estimating the fair value requires the use of one of several option pricing models.

Select all that apply Which of the following are the essential components of option values? (Select all that apply.) Multiple select question. time value market value net realizable value intrinsic value

time value intrinsic value

In calculating diluted EPS, which of the following restricted stock awards is included in the calculation? Multiple choice question. vested restricted stock awards only unvested restricted stock awards only all restricted stock awards

unvested restricted stock awards only

Select all that apply Which of the following factors (each considered independently) will tend to increase the value of stock options? (Select all that apply.) Multiple select question. volatility of the stock price increases in the market price of the underlying stock a longer option term a higher exercise price higher dividends

volatility of the stock price increases in the market price of the underlying stock a longer option term