CH 19

Which of the following accounting numbers is reported most frequently by the media?

earnings per share

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

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

graded vesting.

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

incremental

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

market-based plans. performance-based plans.

On January 2, 20X1, 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 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. When the options expire, Utta should credit

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

On January 2, 20X1, 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 20X4, 9,000 stock options were exercised. In 20X5, the remaining stock options expire. Utta should recognize the expiration by debiting

paid-in capital—stock options for $6,000. 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

period that they are not outstanding.

Securities that may become common shares in the future are considered

potential common 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

purchase treasury shares.

For the purpose of deriving EPS, securities are considered dilutive if they are capable of

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

restricted stock plans.

Earnings per share is reported very frequently in the financial press because it

tends to summarize the company's performance.

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

treasury

Which of the following are likely advantages of employee share purchase plans for employees? (Select all that apply.)

A discount on the purchase price of the shares. The absence of brokerage fees to purchase the shares.

Salt Company reports net income of $360 million for 2017; 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

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

Antidilutive securities are excluded from the calculation of EPS because they would

increase EPS.

When restrictions are lifted on restricted stock units for par value stock, paid-in capital restricted stock is replaced by (Select all that apply.)

common stock paid in capital excess of par

Diluted EPS should be calculated using different combinations of potential common shares to find the combination that yields the:

lowest possible EPS.

Which of the following statements regarding the role of antidilutive securities in the calculation of EPS is correct?

They are ignored when calculating both basic and diluted EPS.

Pfeffer Company reports net income of $360 million for 20X1; 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

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

Which of the following plans frequently specify a performance condition or a market condition that must be satisfied before employees are allowed the benefits of the reward? (Select all that apply.)

Other share-based plans Stock option plans

Which of the following statements is correct regarding stock dividends and stock splits?

Stock splits Stock dividends

Which of the following scenarios will increase total assets and equity?

The sale of new shares

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

True

Stock options give employees the choice to purchase ________ during a specific time period.

a specified number of shares of the firm's stock at a specified price

The goal of diluted EPS is to report the _____ potential dilution that might result from the conversion or exercise of securities and equity contracts.

highest

Total compensation associated with restricted stock awards typically is equal to the shares'

market price at grant date of the award.

On January 2, 20X1, 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 20X4, 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 all that apply.)

paid-in capital—stock options for $54,000. cash for $180,000.

Compensation relating to stock option grants should be

recognized over the service period for which employees receive options.

The "if converted method" assumes that convertible securities were converted into common stock at what point?

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

the fair value of the options.

If convertible bonds are assumed to have been converted, the numerator would be assumed to ____ by the ______ effect of the interest saved.

increase; after-tax

Employee share purchase plans typically allow ______ to purchase company shares at favorable terms.

all employees

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.

Warrants, options, and rights are antidilutive if the exercise price is

higher than the stocks' average market price.

On January 2, 20X1, 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 20X4, 9,000 stock options were exercised. Utta Corp. should recognize this event by crediting (Select all that apply.)

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

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

$15,000.

Which of the following will qualify a company for having a simple capital structure for the purpose of earnings per share?

A company that has no outstanding securities that could potentially dilute EPS.

Which of the following statements regarding the prevalence of stock option awards is correct?

Many large and medium-size companies grant stock options.

Cliff vesting

Stock options vest all at once.

Graded vesting

Stock options vest over time.

Which of the following are facts or conditions that are specifically set forth in stock option plans? (Select all that apply.)

The maximum number of shares option holders may purchase The price at which option holders may purchase shares The time period during which option holders may purchase shares

Which of the following represent typical goals of executive compensation plans? (Select all that apply.)

To provide compensation to certain employees. To create performance incentives for certain employees.

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

convertible bonds convertible preferred stocks

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.)

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

Warrants, options, and rights are dilutive if the exercise price is

lower than the stocks' average market price.

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

common shareholders

Which of the following strategies will simplify the determination of whether convertible securities are dilutive or antidilutive to EPS?

Comparing the incremental effect of the conversion.

Which of the following are subtracted when determining earnings available to common shareholders?

preferred stock dividends