ACCT 2102 Ch 19 SB

Munch has $500,000 of convertible 6% preferred stock outstanding. The shares can be converted to 40,000 common shares. Munch's tax rate is 40%. For purposes of determining whether the preferred shares are dilutive, the incremental effect of the preferred shares is:

($500,000 x 0.06) = $30,000; $30,000/40,000 shares = $0.75

Under its restricted stock award plan, Kilian Corp. grants 100,000 of its $1 par value common shares to certain executives on January 1, Year 1. The award is contingent on continued employment for 4 years. Shares have a current market value of $10 per share. On December 31, Year 2, 15% of the share awards were forfeited. Kilian should credit

((100,000 x 10)/4) x 2 years x 15%

Restricted stock units

Issued after a vesting period

Kilian Company issued stock options on August 1, Year 1. For the purpose of calculating dilutive EPS for the year ended December 31, Year 2, the options should be assumed to have been exercised on

January 1, Year 2.

Nonqualified stock option plan

The employer granting the stock options can deduct the difference between the exercise and the market price at the exercise date for tax purposes.

Incentive stock option plan

The employer granting the stock options cannot deduct stock option-related values for tax purposes.

Bonnie Inc. has 500, 6%, $1,000 face amount bonds outstanding during the entire year. The bonds were issued at 102 and the premium is amortized straight-line over 10 years. 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?

[(1,000 x 500 x 6%) - (10,000/10)](1 - 0.3)

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

In calculating diluted EPS under the treasury stock method, one component of the proceeds from the exercise of options include

cash received at exercise

Under U.S. GAAP, a deferred tax asset relating to stock option plans is recognized when

compensation expense for granted stock options is recognized.

Which of the following may result in potential common shares? (Select all that apply.)

convertible preferred stocks convertible bonds

Basic EPS is determined by dividing

earnings available to common shareholders by weighted-average common shares outstanding.

Under - vesting, companies can choose to estimate a single fair value for the options, even though they vest over different time periods, and then allocate the total compensation cost equally over the entire vesting period.

graded

Vested restricted stock awards are (Select all that apply.)

included in the denominator of basic EPS. already outstanding.

If convertible bonds are assumed to have been converted, the numerator would be assumed to

increase; after-tax

When the tax benefit derived from nonqualified stock options is less than the amount recognized as a deferred tax asset, the company should recognize the difference by

increasing income tax expense.

When the tax benefit derived from nonqualifying stock options exceeds the amount recognized as a deferred tax asset, the company should recognize the difference by

increasing paid-in capital.

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.

If share-based awards are contingent on the achievement of specific market conditions, compensation expense is

recognized regardless of whether the conditions are met.

If a company issues non-qualifying stock options to employees, it

recognizes a deferred tax asset related to compensation expense recorded in current period accounting income that is not yet deductible

Klein Corp. includes outstanding stock options in the calculation of current year diluted EPS. The proceeds from this presumed stock issuance are assumed to be utilized to

repurchase as many shares as possible.

If an employee share purchase plan (ESPP) is considered noncompensatory, how does the company recognize compensation expense for the purchase of the related shares?

the company does not recognize compensation expense

True or false: The incremental effect of conversion of preferred stock is calculated as the preferred dividends that would not be paid divided by additional common shares from conversion.

true

The time between the date that options are granted and the first date they can be exercised is referred to as the

vesting period

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 company estimates that 7% of the options will be forfeited. The estimated value of the options is $6 per option. During Year 2, Utta increases its estimate of stock option forfeitures to 10%. For the year ended December 31, Year 3, Utta should

(10,000 x $6 x 90%) - $18,600 - $17,400

During the current year, Corner Inc. has 10,000 stock options outstanding. The option exercise price is $10 per share. The average market price of the stock is $20. How many incremental shares should Corner Inc. include in the weighted-average shares relating to its stock options?

10,000 - ($100,000/$20)

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?

500 x 14

On January 1, Year 1, 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 Year 4, 8,800 stock options were exercised. In Year 5, 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.

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.

Restricted stock

Issued at time of grant

Compensation plans that are tied to the achievement of certain targets and are used to motivate key employees are referred to as

Performance compensation plans

Gruen Inc. has 1,000, $100 par, 6% preferred stocks outstanding during the entire year. Each preferred stock can be converted into 2 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 assuming the preferred stocks were dilutive?

The numerator would be $6,000 greater.

Holger Company reported a net loss for the year ended. The company has 40,000 stock options with a $20 exercise outstanding. The average market price of the stock is $25. If Holger were to include the dilutive stock options in calculating dilutive EPS, its net loss per share would

decrease