Ch. 16 Problems

Mayfield Corporation has net income of $210,000 for the year and a weighted-average number of common shares outstanding during the period of 100,000 shares. The company has two convertible debenture bond issues outstanding. One is a 6% issue sold at 100 (total $1,000,000) in a prior year and convertible into 30,000 common shares. The other is a 10% issue sold at 100 (total $1,000,000) on April 1 of the current year and convertible into 36,000 commons hares. The tax rate is 20%. 1. Calculate the basic earnings per share. 2. Mayfield calculates the weighted-average number of shares outstanding, as follows:

1. $210,000 (Net Income) / 100,000 (Weighted-average shares) = $2.10 2. WA # of shares outstanding 100,000 Add: Shares assumed to be issued: 6% debentures (as of beg. of year) 30,000 10% debentures (as of date of issue, 4/1 27,000 9/12 * 36,000) WA # of Shares outstanding adjusted for =157,000 dilutive securities

8. Schieble Corporation offered detachable 5-year warrants to buy one share of common stock (par value $2) at $30 (at a time when a share was selling for approximately $45). The price paid for 2,000, $1,000 bonds with the warrants attached was par, or $200,000. Assuming the fair value of the Schieble bonds was known to be $180,000, but the fair value of the warrants without the bonds cannot be determined, what are the amounts that should be allocated to the warrants and the bonds? Warrants Bonds A. $20,000 $180,000 B. $0 $200,000 C. $20,000 $200,000 D. $0 $180,000

A - In instances where the fair value of either the warrants or the bonds is not determinable, the incremental method used in lump sum security purchases may be used. That is, the security for which the fair value is determinable is used and the remainder of the purchase price is allocated to the security for which the fair value is not known. Therefore, the amount allocated to the warrants and the bonds would be as follows: Lump sum receipt $200,000 Allocated to the bonds 180,000 Balance allocated to warrants = $ 20,000

23. Wiebe Inc. purchased Mobley Co. and agreed to give stockholders of Mobley Co. 10,000 additional shares in 2021 if Mobley Co.'s net income in 2020 is $300,000; in 2019 Mobley Co.'s net income is $290,000. Wiebe Inc. has net income for 2019 of $100,000 and has an average number of common shares outstanding for 2019 of 100,000 shares. What should Wiebe report as earnings per share for 2019? Basic Earnings Diluted Earnings Per Share Per Share A. $1.00 $1.00 B. $ .91 $1.00 C. $1.00 $ .91 D. $ .91 $ .91

A - In a business combination, when the acquirer promises to issue additional shares (contingent shares), only upon the attainment of increased earnings above the present level should the additional shares be considered as outstanding for the purpose of computing diluted earnings per share. Therefore, both basic earnings per share and diluted earnings per share would be reported at $1.00 ($100,000/100,000).

4. When convertible debt is retired by the issuer, any material difference between the cash acquisition price and the carrying amount of the debt should be: A. reflected currently in income, but not as a net-of-tax amount. B. reflected currently in income as a net-of-tax amount. C. treated as a prior period adjustment. D. treated as an adjustment of additional paid-in capital

A - The method used to record the issuance of convertible debt follows that used in recording straight debt issues. Although theoretical objections can be raised to using straight debt accounting when convertible debt is retired, to be consistent, a gain or loss on retiring convertible debt needs to be recognized in the same way as a gain or loss on retiring debt that is not convertible.

17. Kasravi Co. had net income for 2020 of $200,000. The average number of shares outstanding for the period was 100,000 shares. The average number of shares under outstanding options (although not exercisable at this time), at an option price of $30 per share is 6,000 shares. The average market price of the common stock during the year was $36. What should Kasravi Co. report for earnings per share for the year ended 2020? Basic Earnings Diluted Earnings Per Share Per Share A. $2.00 $1.98 B. $2.00 $1.88 C. $1.90 $1.88 D. $1.92 $1.90

A - look at notes

11. On December 31, 2020, the Granados Company granted some of its executives options to purchase 100,000 shares of the company's $10 par common stock at an option price of $50 per share. The Black-Scholes option pricing model determines total compensation expense to be $400,000. The options become exercisable on January 1, 2021, and represent compensation for executives' services over a two-year period beginning January 1, 2021. At December 31, 2021 none of the executives had exercised their options. What is the impact on Granados' net income for the year ended December 31, 2021 as a result of this transaction under the fair value method? A. $400,000 decrease. B. $200,000 decrease. C. $0. D. $200,000 increase.

B - Granados will make the following journal entry: Compensation Expense 200,000 Paid-in Capital—Stock Options ($400,000/2) 200,000 Therefore, because of the debit to compensation expense, there is a $200,000 decrease in net income.

15. Due to the importance of earnings per share information, it is required to be reported by all: Public Nonpublic Companies Companies A. Yes Yes B. Yes No C. No No D. No Yes

B - Companies whose debt and equity securities are traded in a public market are required to report earnings per share information on the face of the income statement. Nonpublic companies are not required to report earnings per share information because of cost/benefit considerations. In most instances, nonpublic companies do not have a large enough number of shares outstanding to make the computation and reporting of earnings per share data meaningful.

14. Which of the following is not an advantage of restricted stock plans? A. Restricted stock better aligns the employee incentives with the companies' incentives. B. Restricted stock can be sold before vesting occurs. C. Restricted stock never becomes completely worthless. D. Restricted stock generally results in less dilution to existing stockholders.

B - Restricted stock cannot be sold before vesting occurs. All the other items are advantages of a restricted-stock plan.

10. On January 1, 2020, Perry Company granted Bill Thompson, an employee, an option to buy 100 shares of Perry Co. stock for $20 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 $600. Thompson exercised his option on September 1, 2020, and sold his 100 shares on December 1, 2020. Quoted market prices of Perry Co. stock during 2020 were: July 1 $20 per share September 1 $24 per share December 1 $27 per share The service period is for two years beginning January 1, 2020. As a result of the option granted to Thompson, using the fair value method, Perry should recognize compensation expense for 2020 on its books in the amount of: A. $ 0. B. $300. C. $600. D. $700

B - Under the fair value method, total compensation expense is computed based on the fair value of the option expected to vest on the date the options are granted to the employees. Once the total compensation cost is determined, it must be allocated to the periods in which the employee performs the service. Perry should recognize $300 ($600/2) as the compensation expense for the year ended 2020.

7. The major difference between convertible debt and detachable stock warrants is that upon exercise of the warrants: A. the stock is held by the company for a defined period of time before they are issued to the warrant holder. B. the holder has to pay a certain amount of cash to obtain the shares. C. the stock involved is restricted and can only be sold by the recipient after a set period of time. D. no paid-in capital in excess of par can be a part of the transaction.

B - Warrants are certificates entitling the holder to acquire shares of stock at a certain price within a stated period. Warrants are similar to convertible securities because, if exercised, they become common stock. The major difference is the fact that warrants require the holder to pay a certain amount of cash to obtain the shares.

22. Mohamed Corporation has net income for the year of $360,000 and a weighted average number of common shares outstanding during the period of 125,000 shares. The company has a convertible debenture bond issue outstanding. The bonds were issued two years ago at par ($1,500,000), carry a 7% interest rate, and are convertible into 25,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are: A. $3.10. B. $2.82. C. $2.68. D. $2.42.

B - look at notes

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 * 1,000) 2,000,000 Discount on Bonds Payable 30,000 Common Stock (2,000 * 50 * 10) 1,000,000 PIC in Excess of Par - CS 970,000

5. Tierra Linda Co. issued 5,000 shares of common stock (par value $2) upon conversion of 5,000 shares of preferred stock (par value $1) that was originally issued for a $400 premium. The entry would include a debit to retained earnings for: A. $5,400. B. $5,000. C. $4,600. D. -0-

C - The entry to record the conversion would be: Convertible Preferred Stock 5,000 Paid-In Capital in Excess of Par-Preferred 400 Retained Earnings 4,600 Common Stock 10,000

1. Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is: A. the ease with which convertible debt is sold even if the company has a poor credit rating. B. the fact that equity capital has issue costs that convertible debt does not. C. that many corporations can obtain financing at lower rates. D. that convertible bonds will always sell at a premium.

C - The conversion privilege entices the investor to accept a lower interest rate then would normally be the case on a straight debt issue. A conversion feature will not normally override a poor credit rating and the issue costs of convertible debt and equity capital. Also, it is not an assurance that convertible debt will sell at a premium.

18. On January 2, 2020, Terry Co. issued at par $500,000 of 7% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2020. Terry had 50,000 shares of common stock outstanding during 2020. Terry's 2020 net income was $600,000 and the income tax rate was 30%. Terry's diluted earnings per share for 2020 would be (rounded to the nearest penny): A. $12.49. B. $12.00. C. $11.35. D. $10.46.

C - The if-converted method for a convertible bond assumes (1) the conversion of the convertible securities at the beginning of the period (or at the time of issuance of the security, if issued during the period), and (2) the elimination of related interest, net of tax or preferred dividend. The conversion of the bonds will increase common stock by 5,000 shares [($500,000/$1,000) × 10]. The elimination of the related interest will increase net income by $24,500 [($500,000 × .07) × (1 − .30)]. Therefore, diluted earnings per share is $11.35 ($624,500/55,000).

12. Which of the following is not a characteristic of a noncompensatory stock option plan? A. Substantially all full-time employees may participate on an equitable basis. B. The plan offers no substantive option feature. C. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. D. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others

C - The time permitted for exercise must be limited to a reasonable period of time. The other three alternatives represent appropriate characteristics that the options must possess. If the options do not possess these characteristics they are classified as compensatory.

19. Warrants exercisable at $25 each to obtain 30,000 shares of common stock were outstanding during a period when the average market price of the common stock was $30. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by: A. 30,000. B. 25,000. C. 5,000. D. 0.

C - The treasury stock method assumes that the options or warrants are exercised at the beginning of the year (or date of issue if later) and the proceeds from the exercise of options and warrants are used to purchase common stock for the treasury. Therefore, exercise of the warrants would receive $750,000 ($25 × 30,000), which could then be used to purchase 25,000 treasury shares ($750,000/$30). The difference between 30,000 and 25,000 is an increase in 5,000 shares.

13. On June 30, 2020, Vila Corporation granted compensatory stock options for 10,000 shares of its $24 par value common stock to certain of its key employees. The market price of the common stock on that date was $31 per share and the option price was $28. Using a fair value option pricing model, total compensation expense is determined to be $32,000. The options are exercisable beginning January 1, 2022, providing those key employees are still in the employ of the company at the time the options are exercised. The options expire on June 30, 2023. On January 4, 2022, when the market price of the stock was $36 per share, all options for the 10,000 shares were exercised. The service period is for two years beginning January 1, 2020. Using the fair value method, what should be the amount of compensation expense recorded by Vila Corporation for these options on December 31, 2020? A. $ 0. B. $ 7,500. C. $16,000. D. $32,000.

C - Total compensation cost must be allocated to the periods in which the employees perform the service. Compensation expense should be recognized for $16,000 ($32,000/2) for the year ended December 31, 2020.

9. On July 1, 2020, Dombrink Company granted Gil Geis, an employee, an option to buy 400 shares of Dombrink Co. stock for $20 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 $1,200. Geis exercised his option on October 1, 2020 and sold his 400 shares on December 1, 2020. Quoted market prices of Dombrink Co. stock during 2020 were: July 1 $20 per share October 1 $24 per share December 1 $27 per share The service period is for three years beginning January 1, 2020. As a result of the option granted to Geis, using the fair value method, Dombrink should recognize compensation expense for 2020 on its books in the amount of: A. $ 0. B. $300. C. $400. D. $1,200.

C - Under the fair value method, total compensation expense is computed based on the fair value of the option expected to vest on the date the options are granted to the employees. Once total compensation cost is determined, it must be allocated to the periods in which the employee performs the service. Dombrink should recognize $400 ($1,200/3) is the compensation expense for the year ended 2020.

16. On January 1, 2020, Kihnley Corporation had 25,000 shares of its $5 par value common stock outstanding. On March 1, the Corporation sold an additional 50,000 shares on the open market at $25 per share. The Corporation issued a 20% stock dividend on May 1. On August 1, the Corporation purchased 28,000 shares and immediately retired the stock. On November 1, 40,000 shares were sold for $30 per share. What is the weighted average number of shares outstanding for 2020? A. 51,667 B. 71,667 C. 75,000 D. 102,000

C - look at notes

20. Warrants exercisable at $20 each to obtain 10,000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding common shares by: A. 10,000. B. 1,667. C. 2,000. D. 8,000.

C - look at notes

21. During 2020 Clark Company had a net income of $50,000 and 50,000 shares of common stock and 10,000 shares of preferred stock outstanding. Clark declared and paid dividends of $.50 per share to common and $6.00 per share to preferred. For 2020 Clark Company should report diluted earnings (loss) per share of: A. $.83-1/3. B. $1.00. C. ($.20). D. $.50.

C - look at notes

Miller Corporation issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Record the entry at date of issuance.

Cash (0.99 * 4,000,000) 3,960,000 Discount on Bonds Payable. 40,000 Bonds Payable 4,000,000

On January 1, 2020, Ogden Company issues 1,000 shares of restricted stock to its CEO, Christie DeGeorge. Ogden's stock has a fair value of $20 per share on January 1, 2020. Addition information is as follows: - The service period related to the restricted stock is five years. - Vesting occurs if DeGeorge stays with the company for a five-year period. - The par value of the stock is $1 per share. Assumes that DeGeorge leaves on February 3, 2022 (before any expense has been recorded during 2022). The entry to record this forfeiture is as follows:

Common Stock (1,000 * 1) 1,000 PIC in Excess of Par - CS 19,000 Compensation Expense (4,000 x 2) 8,000 Unearned Compensation 12,000

On January 1, 2020, Ogden Company issues 1,000 shares of restricted stock to its CEO, Christie DeGeorge. Ogden's stock has a fair value of $20 per share on January 1, 2020. Addition information is as follows: - The service period related to the restricted stock is five years. - Vesting occurs if DeGeorge stays with the company for a five-year period. - The par value of the stock is $1 per share. At December 31, 2020, Ogden records the compensation expense.

Compensation Expense (1,000 * 20 * 0.20) 4,000 Unearned Compensation 4,000

Host Enterprises issued 1,000 shares of common stock (par value $2) upon conversion of 1,000 shares of preferred stock (par value $1) that was originally issued for a $200 premium. What would the entry be?

Convertible Preferred Stock (1,00 * 1) 1,000 PIC in Excess of Par - PS 200 Retained Earnings 800 Common Stock (1,000 * 2) 2,000

2. Binder Corporation issued at a premium of $50 a $1,000 bond convertible into 200 shares of common stock (par value $3). At the time of the conversion the unamortized premium is $40, the market value of the bond is $1,200, and the stock is quoted on the market at $6. If the bond is converted into common, what is the amount of the gain or loss to be recorded on redemption of the bonds payable? A. $240 B. $200 C. $160 D. $0

D - The entry to record the conversion of the bond into common stock would be as follows: Bonds Payable 1,000 Premium on Bonds Payable 40 Common Stock ($3 × 200) 600 Paid-in Capital in Excess of Par-Common 440 And no gain or loss is recorded.

6. 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: A. reflected currently in income, but not as a net-of-tax amount. B. reflected currently in income as a net-of-tax amount. C. treated as a prior period adjustment. D. treated as a direct reduction of retained earnings.

D - Convertible preferred stock is considered to be a part of stockholders' equity prior to the time it is converted. Thus, when convertible preferred stocks are exercised, there is no theoretical justification for recognition of a gain or loss. Therefore, any excess of the par value of common shares issued over the carrying amount of the preferred being converted is treated as a direct reduction of retained earnings. The rationale for this treatment is that the preferred shareholders are offered an additional return to facilitate the conversion of their shares to common stock.

3. Calavita Company has outstanding $500,000 par value convertible bonds convertible into 50,000 shares of $1 par value common stock. Calavita wishes to reduce its annual interest cost. To do so, the company agrees to pay the holders of its convertible bonds an additional $45,000 if they will convert. Assuming conversion occurs, which of the following journal entries would be correct? A. Bonds Payable 500,000 Loss on Redemption of Bonds Payable 45,000 Common Stock 50,000 Paid-in Capital in Excess of Par-Common 450,000 Cash 45,000 B. Bonds Payable 500,000 Common Stock 50,000 Paid-in Capital in Excess of Par-Common 405,000 Cash 45,000 C. Bonds Payable 500,000 Premium on Bonds 45,000 Common Stock 50,000 Paid-in Capital in Excess of Par-Common 450,000 Cash 45,000 D. Bonds Payable 500,000 Debt Conversion Expense 45,000 Common Stock 50,000 Paid-in Capital in Excess of Par-Common 450,000 Cash 45,000

D - The additional $45,000 is recorded as an expense of the period in which the conversion takes place and not as a reduction in equity. The $45,000 is not a loss because the company voluntarily offered the inducement to cause conversion. Alternative C which includes a debit to Premium on Bonds is incorrect as no premium was involved in this bond issue

24. With respect to stock appreciation rights, the measurement date for measuring compensation is the date: A. of grant. B. the stock appreciates above a predetermined amount. C. the rights mature. D. of exercise

D - With stock appreciation rights, the final amount of cash or shares (or a combination of the two) to be distributed is not known until the date of exercise—the measurement date—and therefore total compensation cannot be measured until this date.

Helloid, Inc. has outstanding $1,000,000 par value convertible debentures convertible into 100,000 shares of $1 par value common stock. Helloid wishes to reduce its annual interest cost. To do so, Helloid agrees to pay the holders of its convertible an additional $80,000 if they will convert. Assuming conversion occurs, Helloid makes the following entry.

Debt Conversion Expense 80,000 Bonds Payable 1,000,000 Common Stock (100,000 * 1) 100,000 PIC in Excess of Par - CS 900,000 Cash 80,000

On November 1, 2019, the stockholders of Chen Company approve a plan that grants the company's five executives options to purchase 2,00 shares each of the company's $1 par value common stock. The company grants the options on January 1, 2020. 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 stock 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. We assume that the fair value option-pricing model determines Chen's total compensation expense to be 220,000. Assume that the expected period of benefit is two years, stating with the grant date. Chen would record the transactions related to this option contract as follows.

Dec. 31, 2020 Compensation Expense (220,000/2) 110,000 PIC-Stock Options 110,000 Dec. 31, 2021 Compensation Expense (220,000/2) 110,000 PIC-Stock Options 110,000

(T/F) A corporation's capital structure is simple if it includes securities that could have a dilutive effect on earnings per common share.

F - A corporation's capital structure is simple if it consists only of common stock or includes no potentially dilutive convertible securities, options, warrants, or other rights that upon conversion or exercise could in the aggregate dilute earnings per common share.

(T/F) Antidilutive securities are securities, which upon their conversion or exercise decrease earnings per share (or increase the loss per share).

F - Antidilutive securities are securities, which upon their conversion or exercise increase earnings per share (or decrease the loss per share).

(T/F) Current authoritative pronouncements require that a portion of the proceeds received from the issuance of convertible debt be accounted for as being attributable to the conversion feature

F - At the time of issuance, convertible debt is recorded like a straight debt issue. Any discount or premium that results from the issuance of convertible debt is amortized assuming the bonds will be held to maturity date because it is difficult to predict when, if at all, conversion will occur.

(T/F) Under the fair value method, compensation expense for stock options is recognized as of the measurement date.

F - In general, under the fair value method, compensation expense is recognized in the periods in which the employee performs the service—the service period.

(T/F) The proceeds from the sale of debt with nondetachable stock warrants should be allocated between the two securities

F - Nondetachable warrants must be sold with the security as a complete package; thus, no allocation is permitted.

(T/F) The measurement date for stock options granted to employees is the first date on which are known both (a) the number of shares that an individual employee is entitled to receive and (b) the market value of the stock.

F - The measurement date is the first date on which are known both (1) the number of shares that an individual employee is entitled to receive and (2) the option or purchase price, if any.

(T/F) The treasury stock method assumes that the options or warrants are exercised at the grant date and the proceeds from the exercise of options and warrants are used to sell treasury stock.

F - The treasury stock method assumes that the options or warrants are exercised at the beginning of the year (or date of issue if later) and the proceeds from the exercise of options and warrants are used to purchase common stock for the treasury.

(T/F) Under the fair value method, total compensation cost is computed as the excess of the market price of the stock over the option price on the measurement date.

F - Under the fair value method, total compensation cost is computed based on the fair value of the options expected to vest on the date the options are granted to the employees.

(T/F) In accounting for stock appreciation rights granted to key executives, compensation is measured at the date of grant as the difference between the market price and book value of the stock involved.

F - With respect to stock appreciation rights, compensation is measured at the date of exercise rather than the date of grant. Also, the compensation is defined as the excess of the market price of the stock at the date of exercise over a preestablished price.

Zambrano Company's net income for 2020 is $40,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2019, each exercisable for one share at $8. None have been exercised, and 10,000 shares of common were outstanding during 2020. The average market price of the stock during 2020 was $20. 1. Computed diluted earnings per share. Assume the 1,000 options were issued on Oct. 1, 2020 (rather than in 2019). The average market price during the last 3 months of 2020 was $20. (Incremental share increase)

Incremental Share Calculation Proceeds if shares issued (1,000*8) 8,000 Purchase price for treasury shares / 20 Shares assumed purchased = 400 Shares assumed issued 1,000 Incremental share increase = 600 (40,000) / (10,000 + 600) = 40,000 / 10,600 = $3.77

On January 1, 2020, Ogden Company issues 1,000 shares of restricted stock to its CEO, Christie DeGeorge. Ogden's stock has a fair value of $20 per share on January 1, 2020. Addition information is as follows: - The service period related to the restricted stock is five years. - Vesting occurs if DeGeorge stays with the company for a five-year period. - The par value of the stock is $1 per share. Ogden makes the following entry on the grant date

January 1, 2020 Unearned Compensation 20,000 Common Stock (1,000 * 1) 1,000 PIC in Excess of Par - CS 19,000

On November 1, 2019, the stockholders of Chen Company approve a plan that grants the company's five executives options to purchase 2,00 shares each of the company's $1 par value common stock. The company grants the options on January 1, 2020. 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 stock 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. We assume that the fair value option-pricing model determines Chen's total compensation expense to be 220,000. If Chen's executives fail to exercise the remaining stock options before their expiration date, the company transfers the balance in the PIC-Stock Options account to a more properly titled paid-in capital account, such as Paid-in Capital - Expired Stock Options. Chen records this transaction at the date of expiration as follows.

January 1, 2030 PIC - Stock Options (220,000 * 80%) 176,000 PIC - Expired Stock Options 176,000

On November 1, 2019, the stockholders of Chen Company approve a plan that grants the company's five executives options to purchase 2,00 shares each of the company's $1 par value common stock. The company grants the options on January 1, 2020. 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 stock 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. We assume that the fair value option-pricing model determines Chen's total compensation expense to be 220,000. If Chen's executives exercise 2,000 of the 10,000 options (20% of the options) on June 1, 2023 (3 years and 5 months after date of grant), the company records the following entry.

June 1, 2023 Cash (2,000 * 60) 120,000 PIC-Stock Options (20%*220,000) 44,000 Common Stock (2,000 * 1) 2,000 PIC in Excess of Par - CS 162,000

(T/F) ) Diluted earnings per share indicates the dilution of earnings per share that would have occurred if all contingent issuances of common stock that would have reduced earnings per share had taken place.

T

(T/F) ) In computing earnings per share, if a stock dividend occurs after the end of the year, but before the financial statements are issued, the weighted-average number of shares outstanding for the prior year (and any other years presented in comparative form) must be restated.

T

(T/F) A major advantage of a restricted-stock plan is that restricted stock never becomes completely worthless

T

(T/F) Antidilutive securities should be ignored in all calculations and should not be considered in computing diluted earnings per share.

T

(T/F) Earnings per share data are required for each of the following: (a) income from continuing operations and (b) net income.

T

(T/F) Nondetachable warrants do not require an allocation of the proceeds between the bonds and the warrants.

T

(T/F) One of the primary reasons for issuing convertible debt is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted.

T

(T/F) The FASB requires recognition of compensation cost for stock options using the fair value method.

T

(T/F) The if-converted method for a convertible bond assumes (1) the conversion of the convertible securities at the beginning of the period (or at the time of issuance of the security, if issued during the period), and (2) the elimination of related interest, net of tax or preferred dividend.

T

(T/F) The treasury stock method will increase the number of shares outstanding whenever the exercise price of an option or warrant is below the market price of the common stock.

T

(T/F) Using the fair value method, total compensation expense is computed based on the fair value of the options expected to vest on the date the options are granted to the employees.

T

(T/F) When accounting for restricted stock, Unearned Compensation represents the cost of services yet to be performed, which is not an asset.

T

(T/F) When accounting for restricted stock, a company determines the fair value of the restricted stock at the date of grant and then expenses that amount over the service period.

T

(T/F) When convertible preferred stock is converted into common stock and the par value of the common stock issued exceeds the book value of the preferred stock, then retained earnings is usually debited for the difference.

T

(T/F) When stock dividends or stock splits occur, computation of the weighted average number of shares requires restatement of the shares outstanding before the stock dividend or split.

T

Zambrano Company's net income for 2020 is $40,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2019, each exercisable for one share at $8. None have been exercised, and 10,000 shares of common were outstanding during 2020. The average market price of the stock during 2020 was $20. 1. Computed diluted earnings per share. Assume the 1,000 options were issued on Oct. 1, 2020 (rather than in 2019). The average market price during the last 3 months of 2020 was $20. (Weighted incremental share increase)

Weighted Incremental Share Calculation Proceeds if shares issued (1,000*8) 8,000 Purchase price for treasury shares / 20 Shares assumed purchased = 400 Shares assumed issued 1,000 Incremental share increase = 600 Weighted for 3 months assumed outstanding x 3/12 Weighted incremental share increase = 150 (40,000) / (10,000 + 150) = 40,000 / 10,150 = $3.94