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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 81

Multiple Choice

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When calculating diluted earnings per share, stock options:

A) Are included if they are antidilutive.
B) Should be ignored.
C) Are included if they are dilutive.
D) Increase the numerator while not affecting the denominator.

E) A) and C)
F) B) and C)

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Question 82

Multiple Choice

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The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except:

A) The shares are deducted rather than added.
B) The shares are added rather than deducted.
C) The shares are treated as being acquired at the end of the year.
D) The shares are treated as being acquired at the beginning of the year.

E) C) and D)
F) A) and B)

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Question 83

Multiple Choice

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Preferred dividends would not be subtracted from earnings when computing basic earnings per share in a year when the dividends are not declared if the preferred stock is:

Under its executive stock option plan, M Corporation granted options on January 1, 2013, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2015 (the vesting date) . The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures were anticipated; however, unexpected turnover during 2014 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2014?

What amount should M recognize as compensation expense for 2013?

Compare the concepts of basic and diluted earnings per share with respect to their calculation.

What is the advantage of stock appreciation rights over stock options?

Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2013, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market value of $6 per share on the date the award is granted. Required: (1.) Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares. (2.) Prepare the appropriate journal entries related to the restricted stock through December 31, 2014.

What is meant by dilution of earnings per share?

What is the total compensation cost for this plan?

If executive stock options or restricted stock are outstanding when calculating diluted EPS, what are the components of the "proceeds" assumed available for the repurchase of shares under the treasury stock method?

Dulce Corporation had 200,000 shares of common stock outstanding during the current year. There were also fully vested options for 10,000 shares of common stock were granted with an exercise price of $20. The market price of the common stock averaged $25 for the year. Net income was $4 million. What is diluted EPS (rounded) ?

FX Services granted 15 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

Under IFRS, a deferred tax asset for stock options:

Assume that all compensation expense from the stock options granted by Wilson already has been recorded. Further assume that 200,000 options expire in 2018 without being exercised. The journal entry to record this would include:

Compensation expense must be adjusted during the service period to reflect changes in the fair value of options caused by changes in the market price of the underlying shares.

On December 31, 2012, Vitners Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). February 28, 2013, issued an additional 36,000 shares of common stock September 1, 2013, 9,000 shares were retired. A 10% stock dividend was declared and distributed on July 1, 2013. At year-end, there were fully vested incentive stock options outstanding for 30,000 shares of common stock (adjusted for the stock dividend). The exercise price was $18. The market price of the common stock averaged $20 during the year. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2010 and convertible into 50,000 common shares (adjusted for the stock dividend). Net income was $900,000. The tax rate for the year was 40%. Required: Compute basic and diluted EPS (rounded to 2 decimal places) for the year ended December 31, 2013.

All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?

What would be the total compensation indicated by these options?

Jet Corporation had 8 million shares of common stock outstanding during the current calendar year. On July 1, Jet issued ten thousand $1,000 face value, convertible bonds. Each bond is convertible into 50 shares of common stock. The bonds were issued at face amount and pay interest quarterly for 20 years. They have a stated rate of 12%. Jet had income before tax of $30 million and a net income of $18 million. Jet would report the following EPS data (rounded) :