Connect

Close
Skip to eBook contentSkip to Chapter linksSkip to Content links for this ChapterSkip to eBook links

Chapter19: Share-Based Compensation and Earnings Per Share

Exercises

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/820130/Connect_Accounting_CMYK.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (38.0K)</a>

An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

E 19-1

 

Restricted stock award plan

 

  LO1

Allied Paper Products, Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2011, the company granted 16 million of its $1 par common shares, subject to forfeiture if employment is terminated within two years. The common shares have a market price of $5 per share on the grant date.

p. 1114

Required:

1.

 

Determine the total compensation cost pertaining to the restricted shares.

2.

 

Prepare the appropriate journal entries related to the restricted stock through December 31, 2012.

E 19-2

 

Restricted stock award plan

 

  LO1

On January 1, 2011, VKI Corporation awarded 12 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within three years. On the grant date, the shares have a market price of $2.50 per share.

Required:

1.

 

Determine the total compensation cost pertaining to the restricted shares.

2.

 

Prepare the appropriate journal entry to record the award of restricted shares on January 1, 2011.

3.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

4.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

5.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2013.

6.

 

Prepare the appropriate journal entry to record the lifting of restrictions on the shares at December 31, 2013.

E 19-3

 

Restricted stock award; Kmart

 

  LO1

Kmart Holding Co. included the following disclosure note in an annual report:

Real World Financials

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/1114_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

Required:

1.

 

Based on the information provided in the disclosure note, determine the weighted average market price of the restricted stock issued.

2.

 

How much compensation expense did Kmart report for the year following the year in which the restricted stock was issued?

E 19-4

 

Restricted stock award plan; forfeitures anticipated

 

  LO1

Magnetic-Optical Corporation offers a variety of share-based compensation plans to employees. Under its restricted stock award plan, the company on January 1, 2011, granted 4 million of its $1 par common shares to various division managers. The shares are subject to forfeiture if employment is terminated within three years. The common shares have a market price of $22.50 per share on the grant date.

Required:

1.

 

Determine the total compensation cost pertaining to the restricted shares.

2.

 

Prepare the appropriate journal entry to record the award of restricted shares on January 1, 2011.

3.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

4.

 

Suppose Magnetic-Optical expected a 10% forfeiture rate on the restricted shares prior to vesting. Determine the total compensation cost.

E 19-5

 

Stock options

 

  LO2

American Optical Corporation provides a variety of share-based compensation plans to its employees. Under its executive stock option plan, the company granted options on January 1, 2011, that permit executives to acquire 4 million of the company's $1 par common shares within the next five years, but not before December 31, 2012 (the vesting date). The exercise price is the market price of the shares on the date of grant, $14 per share. The fair value of the 4 million options, estimated by an appropriate option pricing model, is $3 per option. No forfeitures are anticipated. Ignore taxes.

Required:

1.

 

Determine the total compensation cost pertaining to the options.

2.

 

Prepare the appropriate journal entry to record the award of options on January 1, 2011.

3.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

4.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

E 19-6

 

Stock options; forfeiture of options

 

  LO2

On January 1, 2011, Adams-Meneke Corporation granted 25 million incentive stock options to division managers, each permitting holders to purchase one share of the company's $1 par common shares within the next six years, but not before December 31, 2013 (the vesting date). The exercise price is the market price of the shares on the date of grant, currently $10 per share. The fair value of the options, estimated by an appropriate option pricing model, is $3 per option.

p. 1115

Required:

1.

 

Determine the total compensation cost pertaining to the options on January 1, 2011.

2.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

3.

 

Unexpected turnover during 2012 caused the forfeiture of 6% of the stock options. Determine the adjusted compensation cost, and prepare the appropriate journal entry(s) on December 31, 2012 and 2013.

E 19-7

 

Stock options exercise; forfeitures

 

  LO2

Walters Audio Visual Inc. offers an incentive stock option plan to its regional managers. On January 1, 2011, options were granted for 40 million $1 par common shares. The exercise price is the market price on the grant date—$8 per share. Options cannot be exercised prior to January 1, 2013, and expire December 31, 2017. The fair value of the 40 million options, estimated by an appropriate option pricing model, is $1 per option.

Required:

1.

 

Determine the total compensation cost pertaining to the incentive stock option plan.

2.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2011.

3.

 

Prepare the appropriate journal entry to record compensation expense on December 31, 2012.

4.

 

Prepare the appropriate journal entry to record the exercise of 75% of the options on March 12, 2013, when the market price is $9 per share.

5.

 

Prepare the appropriate journal entry on December 31, 2017, when the remaining options that have vested expire without being exercised.

E 19-8

 

Stock options

 

  LO2

SSG Cycles manufactures and distributes motorcycle parts and supplies. Employees are offered a variety of share-based compensation plans. Under its nonqualified stock option plan, SSG granted options to key officers on January 1, 2011. The options permit holders to acquire 12 million of the company's $1 par common shares for $11 within the next six years, but not before January 1, 2014 (the vesting date). The market price of the shares on the date of grant is $13 per share. The fair value of the 12 million options, estimated by an appropriate option pricing model, is $3 per option.

Required:

1.

 

Determine the total compensation cost pertaining to the incentive stock option plan.

2.

 

Prepare the appropriate journal entries to record compensation expense on December 31, 2011, 2012, and 2013.

3.

 

Record the exercise of the options if all of the options are exercised on May 11, 2015, when the market price is $14 per share.

E 19-9

 

Employee share purchase plan

 

  LO3

In order to encourage employee ownership of the company's $1 par common shares, Washington Distribution permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During March, employees purchased 50,000 shares at a time when the market price of the shares on the New York Stock Exchange was $12 per share.

Required:

Prepare the appropriate journal entry to record the March purchases of shares under the employee share purchase plan.

E 19-10

 

EPS; shares issued; stock dividend

 

  LO5  LO6

For the year ended December 31, 2011, Norstar Industries reported net income of $655,000. At January 1, 2011, the company had 900,000 common shares outstanding. The following changes in the number of shares occurred during 2011:

Apr.30

Sold 60,000 shares in a public offering.

May24

Declared and distributed a 5% stock dividend.

June 1

Issued 72,000 shares as part of the consideration for the purchase of assets from a subsidiary.

Required:

Compute Norstar's earnings per share for the year ended December 31, 2011.

E 19-11

 

EPS; treasury stock; new shares; stock dividends; two years

 

  LO5  LO6

The Alford Group had 202,000 shares of common stock outstanding at January 1, 2011. The following activities affected common shares during the year. There are no potential common shares outstanding.

2011

Feb. 28

Purchased 6,000 shares of treasury stock.

Oct. 31

Sold the treasury shares purchased on February 28.

Nov. 30

Issued 24,000 new shares.

Dec. 31

Net income for 2011 is $400,000.

2012

Jan. 15

Declared and issued a 2-for-1 stock split.

Dec. 31

Net income for 2012 is $400,000.

p. 1116

Required:

1.

 

Determine the 2011 EPS.

2.

 

Determine the 2012 EPS.

3.

 

At what amount will the 2011 EPS be presented in the 2012 comparative financial statements?

E 19-12

 

EPS; stock dividend; nonconvertible preferred stock

 

  LO5  LO6  LO7

Hardaway Fixtures' balance sheet at December 31, 2010, included the following:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/1116_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

On July 21, 2011, Hardaway issued a 25% stock dividend on its common stock. On December 12 it paid $50,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2011, was $2,000,000.

Required:

Compute Hardaway's earnings per share for the year ended December 31, 2011.

E 19-13

 

EPS; net loss; nonconvertible preferred stock; shares sold

 

  LO5  LO6  LO7

At December 31, 2010, Albrecht Corporation had outstanding 373,000 shares of common stock and 8,000 shares of 9.5%, $100 par value cumulative, nonconvertible preferred stock. On May 31, 2011, Albrecht sold for cash 12,000 shares of its common stock. No cash dividends were declared for 2011. For the year ended December 31, 2011, Albrecht reported a net loss of $114,000.

Required:

Calculate Albrecht's net loss per share for the year ended December 31, 2011.

E 19-14

 

EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold

 

  LO5  LO6  LO7

On December 31, 2010, Berclair Inc. had 200 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2011, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2011. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2011, was $150 million.

Required:

Compute Berclair's earnings per share for the year ended December 31, 2011.

E 19-15

 

EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options

 

  LO5 through LO8

(Note: This is a variation of the previous exercise, modified to include stock options.)

   On December 31, 2010, Berclair Inc. had 200 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2011. On March 1, 2011. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2011, was $150 million.

   Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2006. The options are exercisable as of September 13, 2010, for 30 million common shares at an exercise price of $56 per share. During 2011, the market price of the common shares averaged $70 per share.

Required:

Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2011.

E 19-16

 

EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options exercised

 

  LO5 through LO8

(Note: This is a variation of the previous exercise, modified to include the exercise of stock options.)

   On December 31, 2010, Berclair Inc. had 200 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2011. On March 1, 2011. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2011, was $150 million.

   Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2006. The options are exercisable as of September 13, 2010, for 30 million common shares at an exercise price of $56 per share. During 2011, the market price of the common shares averaged $70 per share.

   The options were exercised on September 1, 2011.

Required:

Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2011.

p. 1117

E 19-17

 

EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options; convertible bonds

 

  LO5 through LO9

(Note: This is a variation of E 19-15 modified to include convertible bonds).

   On December 31, 2010, Berclair Inc. had 200 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2011, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2011. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2011, was $150 million. The income tax rate is 40%.

   Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2006. The options are exercisable as of September 13, 2010, for 30 million common shares at an exercise price of $56 per share. During 2011, the market price of the common shares averaged $70 per share.

   $62.5 million of 8% bonds, convertible into 6 million common shares, were issued at face value in 2007.

Required:

Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2011.

E 19-18

 

EPS; shares issued; stock options

 

  LO6 through LO9

Stanley Department Stores reported net income of $720,000 for the year ended December 31, 2011.

Additional Information:

Common shares outstanding at Jan. 1, 2011

80,000

Incentive stock options (vested in 2010) outstanding throughout 2011

24,000

(Each option is exercisable for one common share at an exercise price of $37.50)

During the year, the market price of Stanley's common stock averaged $45 per share.

On Aug. 30 Stanley sold 15,000 common shares.

Stanley's only debt consisted of $50,000 of 10% short term bank notes.

The company's income tax rate is 40%.

Required:

Compute Stanley's basic and diluted earnings per share for the year ended December 31, 2011.

E 19-19

 

EPS; convertible preferred stock; convertible bonds; order of entry

 

  LO7  LO9

Information from the financial statements of Ames Fabricators, Inc., included the following:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/1117_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

   Ames's net income for the year ended December 31, 2011, is $500,000. The income tax rate is 40%. Ames paid dividends of $5 per share on its preferred stock during 2011.

Required:

Compute basic and diluted earnings per share for the year ended December 31, 2011.

   As part of its executive compensation plan, Vertovec Inc. granted 54,000 of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. Vertovec's common shares have a market price of $5 per share on January 1, 2010, the grant date, as well as on December 31, 2011. 800,000 shares were outstanding at January 1, 2011. Net income for 2011 was $120,000.

E 19-20

 

EPS; restricted stock

 

  LO11

Required:

Compute Vertovec's basic and diluted earnings per share for the year ended December 31, 2011.

E 19-21

 

Record restricted stock; effect on EPS

 

  LO1  LO11

PHN Foods granted 18 million of its no par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $5 per share on January 1, 2010, the grant date.

Required:

1.

 

What journal entry will PHN Foods prepare to record executive compensation regarding these shares at December 31, 2010 and December 31, 2011?

2.

 

When calculating diluted EPS at December 31, 2011, what will be the net increase in the denominator of the EPS fraction if the market price of the common shares averages $5 per share during 2011?

p. 1118

E 19-22

 

New shares; contingently issuable shares

 

  LO6  LO12

During its first year of operations, McCollum Tool Works entered into the following transactions relating to shareholders' equity. The corporation was authorized to issue 100 million common shares, $1 par per share.

Jan.2

Issued 35 million common shares for cash.

3

Entered an agreement with the company president to issue up to 2 million additional shares of common stock in 2012 based on the earnings of McCollum in 2012. If net income exceeds $140 million, the president will receive 1 million shares; 2 million shares if net income exceeds $150 million.

Mar.31

Issued 4 million shares in exchange for plant facilities.

   Net income for 2011 was $148 million.

Required:

Compute basic and diluted earnings per share for the year ended December 31, 2011.

E 19-23

 

EPS; new shares; contingent agreements

 

  LO6  LO12

Anderson Steel Company began 2011 with 600,000 shares of common stock outstanding. On March 31, 2011, 100,000 new shares were sold at a price of $45 per share. The market price has risen steadily since that time to a high of $50 per share at December 31. No other changes in shares occurred during 2011, and no securities are outstanding that can become common stock. However, there are two agreements with officers of the company for future issuance of common stock. Both agreements relate to compensation arrangements reached in 2010. The first agreement grants to the company president a right to 10,000 shares of stock each year the closing market price is at least $48. The agreement begins in 2012 and expires in 2015. The second agreement grants to the controller a right to 15,000 shares of stock if she is still with the firm at the end of 2019. Net income for 2011 was $2,000,000.

Required:

Compute Anderson Steel Company's basic and diluted EPS for the year ended December 31, 2011.

E 19-24

 

EPS; concepts; terminology

 

  LO5 through LO13

Listed below are several terms and phrases associated with earnings per share. Pair each item from List A with the item from List B (by letter) that is most appropriately associated with it.

                      List A
List B

_____1.Subtract preferred dividends.
a.Options exercised.
_____2.
Time-weighted by <a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/spi10831_im1921.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>
b.Simple capital structure.
_____3.Time-weighted shares assumed issued plus time-weighted actual shares.
c.Basic EPS.
d.Convertible preferred stock.
_____4.Midyear event treated as if it occurred at the beginning of the reporting period.
e.Earnings available to common shareholders.
f.Antidilutive.
_____5.Preferred dividends do not reduce earnings.
g.Increased marketability.
_____6.Single EPS presentation.
h.Extraordinary items.
_____7.Stock split.
i.Stock dividend.
_____8.Potential common shares.
j.Add after-tax interest to numerator.
_____9.Exercise price exceeds market price.
k.Diluted EPS.
_____10.No dilution assumed.
l.Noncumulative, undeclared preferred dividends.
_____11.Convertible bonds.
m.Common shares retired at the beginning of August.
_____12.Contingently issuable shares.
_____13.Maximum potential dilution.
n.Include in diluted EPS when conditions for issuance are met.
_____14.Shown between per share amounts for net income and for income from continuing operations.

E 19-25

 

FASB codification research

 

  LO2

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles.

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/820130/code.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (14.0K)</a>

Required:

1.

 

Obtain the relevant authoritative literature on stock compensation using the FASB's Codification Research System at the FASB website (www.fasb.org). What is the specific citation that describes the information that companies must disclose about the exercise prices for their stock option plans?

2.

 

List the disclosure requirements.

E 19-26

 

FASB codification research

 

  LO2  LO3  LO7  LO13

Access the FASB's Codification Research System at the FASB website (www.fasb.org). Determine the specific citation for accounting for each of the following items:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/820130/code.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (14.0K)</a>

1.

 

Initial measurement of stock options.

2.

 

The measurement date for share-based payments classified as liabilities.

3.

 

The formula to calculate diluted earnings per share.

4.

 

The way stock dividends or stock splits in the current year affect the presentation of EPS in the income statement.

p. 1119

E 19-27

 

Stock appreciation rights; settlement in shares

 

  (Appendix B)

As part of its stock-based compensation package, International Electronics granted 24 million stock appreciation rights (SARs) to top officers on January 1, 2011. At exercise, holders of the SARs are entitled to receive stock equal in value to the excess of the market price at exercise over the share price at the date of grant. The SARs cannot be exercised until the end of 2014 (vesting date) and expire at the end of 2016. The $1 par common shares have a market price of $46 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $3 per SAR at January 1, 2011. The fair value reestimated at December 31, 2011, 2012, 2013, 2014, and 2015, is $4, $3, $4, $2.50, and $3, respectively. All recipients are expected to remain employed through the vesting date.

Required:

1.

 

Prepare the appropriate journal entry to record the award of SARs on January 1, 2011. Will the SARs be reported as debt or equity?

2.

 

Prepare the appropriate journal entries pertaining to the SARs on December 31, 2011–December 31, 2014.

3.

 

The SARs remain unexercised on December 31, 2015. Prepare the appropriate journal entry on that date.

4.

 

The SARs are exercised on June 6, 2016, when the share price is $50. Prepare the appropriate journal entry(s) on that date.

E 19-28

 

Stock appreciation rights; cash settlement

 

  (Appendix B)

(Note: This is a variation of the previous exercise, modified to allow settlement in cash.)

   As part of its stock-based compensation package, International Electronics granted 24 million stock appreciation rights (SARs) to top officers on January 1, 2011. At exercise, holders of the SARs are entitled to receive cash or stock equal in value to the excess of the market price at exercise over the share price at the date of grant. The SARs cannot be exercised until the end of 2014 (vesting date) and expire at the end of 2016. The $1 par common shares have a market price of $46 per share on the grant date. The fair value of the SARs, estimated by an appropriate option pricing model, is $3 per SAR at January 1, 2011. The fair value re-estimated at December 31, 2011, 2012, 2013, 2014, and 2015, is $4, $3, $4, $2.50, and $3, respectively. All recipients are expected to remain employed through the vesting date.

Required:

1.

 

Prepare the appropriate journal entry to record the award of SARs on January 1, 2011.

2.

 

Prepare the appropriate journal entries pertaining to the SARs on December 31, 2011–December 31, 2014.

3.

 

The SARs remain unexercised on December 31, 2015. Prepare the appropriate journal entry on that date.

4.

 

The SARs are exercised on June 6, 2016, when the share price is $50, and executives choose to receive the market price appreciation in cash. Prepare the appropriate journal entry(s) on that date.

2011 McGraw-Hill Higher Education
Any use is subject to the Terms of Use and Privacy Notice.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.