Intermediate Accounting 2 Ch. 19 Assistance
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 sells an additional 80 million shares. On October 1, the company distributed a 10% stock dividend. Rounding to the nearest cent, the company's basic EPS will be
$1.36. Reason: $360/[(200 + [80 x 6/12]) x 1.1]
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.
Under its restricted stock award plan, Katrin Corp. grants 100,000 of its $1 par value common shares to certain executives on January 1, Year 1. The awards are contingent on continued employment for 4 years. Shares have a current market value of $10 per share. For the year ended December 31, Year 4, Katrin should recognize compensation expense of
$250,000. Reason: (100,000 x 10)/4
Assume that the stock price rises from $50 to $55. An employee with stock appreciation rights (SAR) would earn cash or shares equal to
$5
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
145,000 shares. 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
250,000. 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 sells an additional 80 million shares. On October 1, the company distributed a 10% stock dividend. The company's weighted-average shares for the purpose of calculating basic EPS will be
264 million. Reason: [200 + (80 x 6/12)] x 1.1
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 about disclosures relating to EPS are true?
A reconciliation is required of the numerator and denominator used in the basic EPS computations to the numerator and the denominator used in the diluted EPS computations. Any adjustments to the numerator for preferred dividends must be disclosed.
Time Value
Benefit that accrues due to the passage of time
Intrinsic Value
Benefit the holder would realize by exercising the option rather than buying the stock directly
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 statements about contingently issuable shares are true?
Contingently issuable shares are shares of common stock to be issued, contingent on the occurrence of some future circumstance. If contingently issuable shares will be issued at a future date if a certain level of income is achieved and that level of income or more was already reported this year, those additional shares are added to the denominator of the diluted EPS fraction.
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.
Stock appreciation rights may be payable in ____ or _____
Field 1: cash Field 2: shares or stock
Option values include the following essential components: a(n) _____ value and a(n) _____ value.
Field 1: intrinsic Field 2: time
Which of the following is true with respect to the accounting profession's response to the demand for comparable EPS numbers?
Inconsistencies in calculating EPS have been minimized.
Which of the following is a likely advantage of employee share purchase plans for employers?
Increased employee loyalty to the company.
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
Intrinsic
Which of the following statements about antidilutive securities and their effect on EPS are true?
It is not immediately obvious whether the effect of the conversion of a particular convertible security would be dilutive or antidilutive. If the effect of the conversion or exercise of potential common shares would be to increase EPS, the related securities are referred to as antidilutive securities. To determine whether convertible securities are dilutive, we can compare the "incremental effect" of the conversion (expressed as a fraction) with the EPS fraction before the effect of any convertible security is considered.
Volatility Value
Likelihood that the option holder might benefit from price appreciation
Which of the following statements regarding the prevalence of stock option awards is correct?
Many large and medium-size companies grant stock options.
Which of the following can be used to satisfy SARs awards? (Select all that apply.)
Shares Cash
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.)
Stock option plans Other share-based plans
Cliff vesting
Stock options vest all at once.
Graded vesting
Stock options vest over time.
Which of the following statements about the reporting of earnings per share are true?
The differences between the earnings per share requirements under U.S. GAAP and IFRS result, in part, from differences in the application of the treasury stock method.
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.
Nonqualified stock option plan
The recipient must pay taxes on the difference between the exercise price and the market price of the stock at the exercise date.
Incentive stock option plan
The recipient pays taxes only when the shares acquired under the plan are sold.
Which of the following is correct regarding the nature of restricted stock?
The shares typically are contingent on the continued employment of the awardee.
What factor typically determines the accounting treatment for share-based plans?
The type of condition that must be fulfilled by employees of the sponsoring company.
Which of the following statements regarding stock appreciation rights (SARs) is correct?
They enable employees to benefit from increases in the company's stock without having to purchase shares.
Which of the following is correct regarding stock options and other share-based plans?
They frequently specify a performance or market condition.
Which of the following statements is correct regarding stock dividends and stock splits?
They represent distributions of additional shares to existing shareholders.
Because options are not exercised immediately, their valuation includes a(n) _____ _____ component
Time Value
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.
True or false: Stock options have become an integral part of most medium and large companies.
True Reason: they represent a common form of compensation.
True or false: Accounting for share-based plans depends on the type of condition that must be fulfilled by the employee to achieve the share-based award.
True Reason: The accounting will depend on whether the condition is performance-based or market-based.
Which of the following statements about the accounting for a deferred tax asset for stock options are true?
Under IFRS, when this deferred tax asset is "in the money," the addition to the DTA is the portion of the intrinsic value earned to date times the tax rate. Under U.S. GAAP, this deferred tax asset equals the tax rate times the amount of compensation.
Which of the following statements about the accounting for options with graded vesting are true?
Under U.S. GAAP, the company must recognize at least the amount of the award that has vested by that date.
Under its restricted stock award plan, Katrin Corp. grants 100,000 of its $1 par value common shares to certain executives on January 1, Year 1. The awards are contingent on continued employment for 4 years. Shares have a current market value of $10 per share. On December 31, Year 4, Katrin's journal entry should include
a credit to common stock for $100,000.
If an employee is entitled to receive cash under a restricted stock units award plan, the sponsoring company should recognize:
a liability
Frohe Inc. sponsors a restricted stock units award plan under which employees can choose to receive either company stock or cash. During the vesting period, the company should recognize the award as a credit to:
a liability account
Starfish Company has a SAR plan, in which it awards employees share appreciation on each stock appreciation right held. It allows its employees to choose whether these amounts are received in cash or shares. How should Starfish classify the SAR?
as a liability
Restricted stock units are classified as a liability if they are payable in
cash
Basic EPS represents the income earned by one share of
common stock.
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
compensation expense for $75,000. Reason: ((100,000 x 10)/4) x 2 years x 15%
Under its restricted stock award plan, Katrin 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 3, 10% of the share awards were forfeited. Katrin should credit
compensation expense for $75,000. Reason: ((100,000 x 10)/4) x 3 years x 10%
Munster Company issued options to a key executive that are contingent on the company achieving a 10% increase in sales revenue within the next 12 months. The company believes that it is likely that this target will be achieved and accrues $5 million in related compensation expense. After 9 months, the company estimates that it is possible, but not likely that the target will be achieved. Based on this new estimate, the company must
credit compensation expense for $5 million.
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 paid-in capital in excess of par. debit paid-in capital—restricted stock. credit common stock.
The journal entry to record unexercised stock options that have been allowed to lapse includes (select all that apply)
credit to paid-in-capital-expiration of stock options debit to paid-in-capital-stock options
The effect of changes in estimated option forfeitures must be recognized
cumulatively in the year the estimate changes.
Maggie Company issued options valued at $1 million to one of its executives that are contingent on the company achieving a 10% increase in sales revenue within the next 12 months. The company believes that it is possible that this target will be achieved. After 6 months, the company estimates that it is probable that the target will be achieved. Based on this new estimate, the company must
debit compensation expense for $1 million.
On January 1, Year 1, Utta Corp. (a calendar-year company) grants 15,000 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 market value of each option is $5. The company's average tax rate is 30%. To reflect the tax effect of these nonqualifying stock options, Utta Corp. should (Select all that apply.)
debit deferred tax asset for $7,500. credit income tax expense for $7,500.
Basic EPS is determined by dividing
earnings available to common shareholders by weighted-average common shares outstanding.
Investors' desire to focus on one number that may summarize a company's performance may explain the importance of
earnings per share.
Plans that permit all employees to buy shares directly from their company at favorable prices are referred to as
employee share purchase plans.
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, management, manager, or performance
Which of the following are among the factors that must be considered in order to estimate the total compensation associated with stock options? (Select all that apply.)
exercise price of the options expected term of the option current market price of the stock
Which of the following are among the factors that must be considered in order to estimate the total compensation associated with stock options? (Select all that apply.)
expected dividends on the underlying stock expected volatility of the stock price expected risk-free rate of return during the option term
Under current GAAP, stock options must be reported in the income statement at
fair value.
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.
When estimates of options forfeitures change, the cumulative effect on compensation is recognized
in current earnings.
Which of the following are valid categories of stock option plans for tax purposes? (Select all that apply.)
incentive stock option plans nonqualified stock option plans
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 stock options expire, compensation expense
is not affected.
If employees can elect to receive cash, SAR awards are classified as
liabilities
Selina Inc. sponsors a restricted stock units awards plan under which employees may elect to receive cash. When Selina debits "compensation expense," it should credit:
liability - restricted stock
Total compensation associated with restricted stock awards typically is equal to the shares'
market price at grant date of the award.
The value of stock options
must be recognized as an expense.
Accounting for employee share purchase plans is simplified if the plan meets three conditions. One of these conditions requires that the discount on the share purchase price is:
no greater than 5%
Frohe Inc. sponsors a restricted stock units award plan under which employees can choose to receive either company stock or cash. Frohe should determine the fair value of the award:
on the date of grant
Compensation expense related to share-based awards is recognized regardless of whether the market-related conditions are met because
option-pricing models already implicitly reflect market conditions.
Frohe Inc. sponsors a restricted stock units award plan under which employees can choose to receive either company stock or cash. Frohe should recognize compensation expense:
over the service period
From an accounting perspective, the significance of the stock option vesting period is that it is the time period
over which compensation expense is allocated.
When restrictions are lifted on restricted stock units for par value stock, paid-in capital restricted stock is replaced by (Select all that apply.)
paid-in capital - excess of par common stock
When stock options are allowed to lapse, paid-in capital from stock options should be reclassified as:
paid-in capital from expired stock options
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.)
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
paid-in capital—expired stock options for $6,000. 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. 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 all that apply.)
paid-in capital—stock options for $54,000. cash for $180,000.
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
paid-in capital—stock options for $6,000.
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
performance-based plans. market-based plans.
Muller Company sponsors a performance-based stock option plan. When the options are granted, Muller should recognize related compensation expense if it is _______ that the performance target will be met.
probable or likely
Initially, recognition of compensation expense for performance-based plans requires that the achievement of the target is
probable.
Under a ______ stock option incentive plan, the exercise price of stock options must be ______ the market price at the grant date.
qualified; equal to
Compensation relating to stock option grants should be
recognized over the service period for which employees receive options.
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
Share-based plans that requires that the awardee continue to be employed by the granting company are typically referred to as
restricted stock plans.
Mueller Company estimates that it is unlikely that a particular executive will achieve a specific performance target. Mueller already recognized compensation expense related to this performance plan. Mueller must ______ the related expense
reverse or credit
When it becomes probable that a performance target will not be met, previously recognized compensation expense must be:
reversed
Typically stock options are exercisable
several years after the grant date.
Stock options are often used as employee incentives; therefore, stock options are typically exercisable
several years after they were granted.
Stock options are said to be "in the money" if
the current market price of the stock exceeds the option exercise price.
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.
The time between the date that options are granted and the first date they can be exercised is referred to as the ____ period
vesting
Which of the following factors (each considered independently) will tend to increase the value of stock options? (Select all that apply.)
volatility of the stock price increases in the market price of the underlying stock a longer option term
