Question 1

Woolery, Inc. had 50,000 shares of common stock outstanding at January 1, 2018. On March 31, 2018, an additional 12,000 shares were sold for cash. Woolery also had $4,000,000 of 6% convertible bonds outstanding throughout the year. The bonds are convertible into 40,000 shares of common stock. Net income for the year was $350,000. The tax rate is 35%.
Required:
Compute basic and diluted earnings per share (rounded to 2 decimal places) for the year ended December 31, 2018.

Accepted Answer

The answer of Woolery, Inc. had 50,000 shares of common...

Question 2

XYZ Company had 200,000 shares of common stock outstanding on December 31, 2017. On July 1, 2018, XYZ issued an additional 50,000 shares for cash. On January 1, 2018, XYZ issued 20,000 shares of convertible preferred stock. The preferred stock had a par value of $100 per share and paid a 5% dividend. Each share of preferred stock is convertible into 8 shares of common. During 2018, XYZ paid the regular annual dividend on the preferred and common stock. Net income for the year was $300,000.
Required:
Calculate XYZ's basic and diluted earnings per share (rounded to 2 decimal places) for 2018.

Accepted Answer

The answer of XYZ Company had 200,000 shares of common...

Question 3

On December 31, 2017, Merlin Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). On February 28, 2018, Merlin issued an additional 36,000 shares of common stock. A 10% stock dividend was declared and distributed on July 1, 2018. On September 1, 2018, 9,000 shares were retired. 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 2015 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, 2018.

Accepted Answer

The answer of On December 31, 2017, Merlin Company had...

Question 4

How is a complex capital structure different from a simple capital structure?

Accepted Answer

The answer of How is a complex capital structure different...

Question 5

During 2018, Quattro entered into the following transactions relating to shareholders' equity. The corporation was authorized to issue 20 million common shares, $1 par per share.
Net income for 2018 was $110 million.  Required:
Compute basic and diluted EPS for 2018.

Accepted Answer

The answer of During 2018, Quattro entered into the following...

Question 6

Reacting to opposition to the FASB's "Share-Based Payment" Exposure Draft, Senator Carl Levin stated, "Stock options are the 800-pound gorilla that has yet to be caged by corporate reform." In reference to a bill that would thwart the FASB's position, Senator John McCain said, "This legislation blocking stock option expensing not only undermines FASB's independence, but undermines the effort to restore confidence in our financial markets as well." Discuss what these two senators meant by their statements.

Accepted Answer

The answer of Reacting to opposition to the FASB's "Share-Based...

Question 7

A disclosure note from E Corp.'s 2018 annual report is shown below:
Employee Stock Purchase Plan. We have an employee stock purchase plan for all eligible employees. Compensation expense for the employee stock purchase plan is recognized in accordance with GAAP. Shares of our common stock may be purchased by employees at three-month intervals at 85% of the fair value on the last day of each three-month period. Employees may purchase shares having a value not exceeding 10% of their gross compensation during an offering period. Employees purchased the following shares:  At June 30, 2018, 150 million shares were reserved for future issuance.
Required:
Describe the way "Compensation expense for the employee stock purchase plan" is recognized in accordance with GAAP by E Corp. Include in your explanation the journal entry that summarizes employee share purchases during 2018.

Accepted Answer

The answer of A disclosure note from E Corp.'s 2018...

Question 8

On January 1, 2018, M.T. Toombe Mausoleum granted restricted stock units (RSUs) representing 60 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $15 per share on the grant date. At the date of grant, Toombe anticipated that 5% of the recipients would leave the firm prior to vesting. In 2019, 3% of the options are forfeited due to executive turnover. Toombe chooses the option not to estimate forfeitures.
Required:
1. Prepare the appropriate journal entry to record compensation expense on December 31, 2018. Ignore taxes.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2019. Ignore taxes.

Accepted Answer

The answer of On January 1, 2018, M.T. Toombe Mausoleum...

Question 9

On December 31, 2017, Witherspoon Services had 800,000 shares of common stock and 200,000 shares of 5.5%, noncumulative, nonconvertible $10 par preferred stock issued and outstanding. On March 2, 2018, Witherspoon sold 120,000 common shares. In keeping with its long-term share repurchase plan, 30,000 shares were retired on August 31. Witherspoon distributed a 10% common stock dividend on June 3. Witherspoon's net income for the year ended December 31, 2016, was $600,000. The company paid cash dividends of $110,000 to preferred shareholders on December 20, 2018. The income tax rate is 40%.
Required:
Compute Witherspoon's earnings per share for the year ended December 31, 2018.

Accepted Answer

The answer of On December 31, 2017, Witherspoon Services had...

Question 10

The tax code differentiates between qualified and nonqualified incentive plans. What are the major differences in tax treatment between the two?

Accepted Answer

The answer of The tax code differentiates between qualified and...

Question 11

Stock option plans give employees the option to purchase (a) a specified number of shares of the firm's stock, (b) at a specified price, (c) during a specified period of time. One of the most heated controversies in standard-setting history has been the debate over the amount of compensation to be recognized as expense for stock options. At issue is how the value of stock options is measured, which for most options determines whether any expense at all is recognized. The opposition included corporate executives, auditors, members of Congress, and the SEC.
Required:
Describe the primary objections of critics of the FASB's eventually successful attempt to require expensing of the fair value of the options.

Accepted Answer

The answer of Stock option plans give employees the option...

Question 12

Rice Inc. had 420 million shares of common stock and 1 million shares of 6%, $200 par, cumulative preferred stock outstanding at the end of 2017 and 2018. No dividends were declared or paid on either class of stock in either year. Net income for 2018 was $398.4 million. The company's tax rate is 30%.
Required:
Compute basic earnings per share for the year ended December 31, 2018.

Accepted Answer

The answer of Rice Inc. had 420 million shares of...

Question 13

On December 31, 2017, Vitners Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10).
February 28, 2018, issued an additional 36,000 shares of common stock
September 1, 2018, 9,000 shares were retired.
A 10% stock dividend was declared and distributed on July 1, 2018.
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 2015 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, 2018.

Accepted Answer

The answer of On December 31, 2017, Vitners Company had...

Question 14

At December 31, 2018, MedX Corporation had outstanding 200,000 shares of common stock. Also outstanding were 120,000 shares of preferred stock convertible into 64,000 common shares and $1,800,000 of 10% bonds convertible into 27,000 common shares. MedX's net income for the year ended December 31, 2018, is $1,040,000. The income tax rate is 40%. MedX paid dividends of $2 per share on its preferred stock during 2018.
Required:
Compute basic and diluted earnings per share for the year ended December 31, 2018, considering possible antidilutive effects.

Accepted Answer

The answer of At December 31, 2018, MedX Corporation had...

Question 15

On January 1, 2018, Lawson Brothers Enterprises (LBE) granted restricted stock units (RSUs) representing 40 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within four years. After the recipients of the RSUs satisfy the vesting requirement, the company will distribute the shares. The common shares had a market price of $10 per share on the grant date. At the date of grant, LBE anticipated that 5% of the recipients would leave the firm prior to vesting. Ignore taxes.
Required:
1. Prepare the appropriate journal entry to record compensation expense on December 31, 2018. Show calculations.
2. Prepare the appropriate journal entry to record compensation expense on December 31, 2019. Show calculations.
3. During 2020 third year, LBE revised its estimate of forfeitures from 5% to 10%. Prepare the appropriate journal entry to record compensation expense on December 31, 2020. Show calculations.
4. Prepare the appropriate journal entry to record compensation expense on December 31, 2021. Show calculations.

Accepted Answer

The answer of On January 1, 2018, Lawson Brothers Enterprises...

Question 16

Blair Systems offers its employees a variety of share-based compensation plans including stock options, stock appreciation rights, and restricted stock. The following is an excerpt from a disclosure note from Blair's 2018 financial statements:
Note 11 Employee Benefit Plans (in part)
The Company adopted accounting guidelines under ASC Topic 718 which require the measurement and recognition of compensation expense for all share-based payment awards made to the Company's employees and directors including employee stock options and employee stock purchase rights, based on estimated fair values. Employee share-based compensation expense under ASC Topic 718 was as follows (in millions): $\begin{array}{|l|l|l|l|}
\hline\text { Years Ended } & 2018 & 2017 & 2016 \
\hline \text { Total employee share-based compensation expense } & \$ 455 & \$ 870 & \$ 760 \
\hline
\end{array}$ Required:
1. Blair's share-based compensation includes stock options, stock appreciation rights, and restricted stock awards. What is the general financial reporting objective when recording compensation expense for these forms of compensation?
2. Blair reported share-based expense of $455 million in 2018. Without referring to specific numbers and ignoring other forms of share-based compensation, describe how this amount reflects the value of stock options.

Accepted Answer

The answer of Blair Systems offers its employees a variety...

Question 17

At the end of 2018, what is the maximum number of shares that could possibly be issued if all stock options and awards are exercised? Explain why V Co. used only 3.3 million in its computation for 2018.

Accepted Answer

The answer of At the end of 2018, what is...

Question 18

Paul Company had 100,000 shares of common stock outstanding on January 1, 2018. On September 30, 2018, Paul sold 48,000 shares of common stock for cash. Paul also had 10,000 shares of convertible preferred stock outstanding throughout 2018. The preferred stock is $100 par, 6%, and is convertible into 3 shares of common for each share of preferred. Paul also had 500, 8%, convertible bonds outstanding throughout 2018. Each $1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2018 was $300,000 with a 40% tax rate. Common shareholders received $2 per share dividends after preferred dividends were paid in 2018.
Required:
Compute basic and diluted earnings per share (rounded to 2 decimal places) for 2018.

Accepted Answer

The answer of Paul Company had 100,000 shares of common...

Question 19

What is the treasury stock method of accounting for stock options, warrants, and rights?

Accepted Answer

The answer of What is the treasury stock method of...

Question 20

What is restricted stock? Describe how compensation expense is determined and recorded for a restricted stock plan.

Accepted Answer

The answer of What is restricted stock? Describe how compensation...

Quiz 19: Share-Based Compensation and Earnings Per Share

How is a complex capital structure different from a simple capital structure?

During 2018, Quattro entered into the following transactions relating to shareholders' equity. The corporation was authorized to issue 20 million common shares, $1 par per share. Net income for 2018 was $110 million. Required: Compute basic and diluted EPS for 2018.

The tax code differentiates between qualified and nonqualified incentive plans. What are the major differences in tax treatment between the two?

At the end of 2018, what is the maximum number of shares that could possibly be issued if all stock options and awards are exercised? Explain why V Co. used only 3.3 million in its computation for 2018.

What is the treasury stock method of accounting for stock options, warrants, and rights?

What is restricted stock? Describe how compensation expense is determined and recorded for a restricted stock plan.