Chapter 16 - Exercises and Problems

Chapter 16 - Exercises and Problems - Questions ' 817 Note:...

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Unformatted text preview: Questions ' 817 Note: All asterisked Questions, Brief Exercises, Exercises, and Concepts for Analysis ~ relate to material contained in the appendixes to the chapter. 1. What is meant by a dilutive security? 2. Briefly explain why corporations issue convertible securities. 3. Discuss the similarities and the differences between con- vertible debt and debt issued with stock warrants. It. Plantagenet Corp. offered holders of its 1,000 convertible bonds a premium of $160 per bond to induce conversion into shares of its common stock. Upon conversion of all the bonds, Plantagenet Corp. recorded the $160,000 pre- mium as a reduction of paid-in capital. Comment on Plantagenet’s treatment of the $160,000 "sweetener." 5. Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser. B. What are the arguments for giving separate accounting recognition to the conversion feature of debentures? 7. Four years after issue, debentures with a face value of $1,000,000 and book value of $960,000 are tendered for conversion into 80,000 shares of common stock immedi- ately after an interest payment date. At that time the mar— ket price of the debentures is 104, and the common stock is selling at $14 per share (par value $10). The company " records the conversion as follows. Bonds Payable 1.000.000 Dlscount on Bonds Payable 40,000 Common Stock 800,000 Paid-In Capital in Excess of Par 160.000 M Discuss the propriety of this accounting treatment. B. On July 1, 2007, Roberts Corporation issued $3,000,000 of 9% bonds payable in 20 years. The bonds include detachable warrants giving the bondholder the right to purchase for $30 one share of $1 par value common stock at any time during the next 10 years. The bonds were sold for $3,000,000. The value of the warrants at the time of issuance was $200,000. Prepare the journal entry to record this transaction. 9. What are stock rights? How does the issuing company account for them? 1|]. Briefly explain the accounting requirements for stock compensation plans under Statement of Financial Account- ing Standards No. 123(R). 11. Welland Corporation has an employee stock purchase plan which permits all full-time employees to purchase 10 shares of common stock on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased and no com- mission is charged. Discuss whether this plan would be considered compensatory. - oursnous I 12. What date or event does the profession believe should be used in determining the value of a stock option? What arguments support this position? 13. Over what period of time should compensation cost be allocated? 111. How is compensation expense computed using the fair value approach? 15. At December 31, 2007, Amad Company had 600,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 200,000 of which were issued on October 1, 2007. Net in- come for 2007 was $3,000,000, and dividends declared on preferred stock were $400,000. Compute Amad‘s earnings per common share. (Round to the nearest penny.) 16. What effect do stock dividends or stock splits have on the computation of the weighted-average number of shares outstanding? 1?. Define the following terms. (a) Basic earnings per share. (b) Potentially dilutive security. (c) Diluted earnings per share. (d) Complex capital structure. (e) Potential common stock. 18. What are the computational guidelines for determining whether a convertible security is to be reported as part of diluted earnings per share? 19. Discuss why options and warrants may be considered potentially dilutive common shares for the computation of diluted earnings per share. 2|}. Explain how convertible securities are determined to ' be potentially-dilutive common shares and how those convertible securities that are not considered to be po- tentially dilutive common shares enter into the determi- nation of earnings per share data. 21. Explain the treasury stock method as it applies to op- tions and warrants in computing dilutive earnings per share data. 22. Earnings per share can affect market prices of common stock. Can market prices affect earnings per share? Explain. 23. What is meant by the term antidilution? Give an example. 24. What type of earnings per share presentation is required in a complex capital structure? 1'25. What are the advantages of using restricted stock to com- pensate employees? ‘25. How is antidiiution determined when multiple securi- ties are involved? 818 - Chapter 16 Dilutive Securities and Earnings per Share (L0 1) (L0 1) (Lo 2) (L0 3) (L0 3) (L0 4) (L0 6) (L0 6) (L0 6) (L0 7) .(L0 7) (L0 7} (L0 6) (L0 8) (an. BRIEF EXERCISES BE16-1 Faital Inc. issued $5,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Prepare the journal entry to record the is— suance of the bonds. BRIG-2 Sasha Verbitsky Corporation has outstanding 1,000 $1,000 bonds, each convertible into 50 shares of $10 par value common stock. The bonds are converted on December 31, 2008, when the unamortized discount is $30,000 and the market price of the stock is $21 per share. Record the conversion using the book value approach. BE16-3 Malik Sealy Corporation issued 2,000 shares of $10 par value common stock upon conversion of 1,000 shares of $50 par value preferred stock. The preferred stock was originally issued at $55 per share. The common stock is trading at $26 per share at the time of conversion. Record the conversion of the pre- ferred stock. BE16~4 Divac Corporation issued 1,000 $1,000 bonds at 101. Each bond was issued with one detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the warrants had a market value of $40. Use the proportional method to record the issuance of the bonds and warrants. BE16-5 Ceballos Corporation issued 1,000 $1,000 bonds at 101. Each bond was-issued with one detach- able stock warrant. After issuance, the bonds were selling separately at 98. The market price of the warrants without the bonds cannot be determined. Use the incremental method to record the issuance of the bonds and warrants. ' BE16—6 On January 1, 2008, Johnson Corporation granted 5,000 options to executives. Each option enti- tles the holder to purchase one share of Johnson’s $5 par value common stock at $50 per share at any time during the next 5 years. The market price of the stock is $65 per share on the date of grant. The fair value of the options at the grant date is $140,000. The period of benefit is 2 years. Prepare Johnson’s journal en- tries for January 1, 2008, and December 31, 2008 and 2009. BE16-7 Haley Corporation had 2008 net income of. $1,200,000. During 2008, Haley paid a dividend of $2 per share on 100,000 shares of preferred stock. During 2008, Haley had outstanding 250,000 shares of common stock. Compute Haley‘s 2008 earnings per share. 8816-8 Barkley Corporation had 120,000 shares of stock outstanding on January 1, 2008. On May 1, 2008, Barkley issued 45,000 shares. On July 1, Barkley purchased 10,000 treasury shares, which were reissued on October 1. Compute Barkley’s weighted-average number of shares outstanding for 2008. BE16-9 Green Corporation had 200,000 shares of common stock outstanding on January 1, 2008. On May 1, Green issued 30,000 shares. (a) Compute the weighted average number of shares outstanding if the 30,000 shares were issued for cash. (b) Compute the weighted-average number of shares outstanding if the 30,000 shares were issued in a stock dividend. 131316-10 Strickland Corporation earned net income of $300,000 in 2008 and had 100,000 shares of com— mon stock outstanding throughout the year. Also outstanding all year was $400,000 of 10% bonds, which are convertible into 16,000 shares of common. Strickland’s-tax rate is 40 percent. Compute Strickland’s 2008 diluted earnings per share. 131516—11 SabonisCorporation reported net income of $400,000 in 2008 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative pre- ferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of $5 per share. Sabonis’ tax rate is 40%. Compute Sabonis‘ 2008 diluted earnings per share. BE16-12 Sarunas Corporation reported net income of $300,000 in 2008 and had 200,000 shares of com- mon stock outstanding throughout the year. Also outstanding all year were 30,000 options to purchase common stock at $10 per share. The average market price of the stock during the year was $15. Compute diluted earnings per share. BE16-13 The 2008 income statement of Schrempf Corporation showed net income .of $480,000 and an extraordinary loss of $120,000. Schrempf had 50,000 shares of common stock outstanding all year. Prepare Schrempf's income statement presentation of earnings per share. *BE16-14 On January 1, 2008 (the date of grant), Lee Corporation issues 2,000 shares of restricted stock to its executives. The fair value of these shares is $90,000, and their par value is $10,000. The stock is for- feited if the executives do not complete 3 years of employment with the company. Prepare the journal entry (if any) on January 1, 2008, and on December 31, 2008, assuming the service period is 3 years. Exercises ' 819 (L0 8) *BE16-15 Sam Perkins, Inc. established a stock appreciation rights (SAR) program on January 1, 2007, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the preestablished price of $20 on 5,000 SARs. The required service period tsp-2kyears. The fair value of the SARs are determined to be $2 on December 31, 2007, and $9 on December 31, 2008. Com- pute Perkins‘ compensation expense for 2007 and 2008. EXERCISE 16-1 (Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entryfies) required to record each transaction. 1. Grand Corp. issued $20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company's investment banker estimates they would have been sold at 95. Expenses of issuing the bonds were $70,000. ' 2. Hoosier Company issued $20,000,000 par value 10% bonds at 98.0ne detachable stock purchase warrant was issued with each $100 par value bond. At the time of issuance, the warrants were selling for $4. 3. Sepracor, Inc. called its convertible debt in 2007. Assume the following related to the transaction: ‘_ The 11%, $10,000,000 par value bonds were converted into 1,000,000 shares of $1 par value com- '_. mon stock on July 1, 2007. On July 1, there was $55,000 of unamortized discount applicable to the " bonds, and the company paid an additional $75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method. 1316-2 (Conversion of Bonds) Aubrey Inc. issued $4,000,000 of 10%, 10-year convertible bonds on June 1, 2007, at 98 plus accrued interest. The bonds were dated April 1, 2007, with interest payable April 1 and October 1. Bond discount is amortized semiannually on a straight-line basis. On April 1, 2008, $1,500,000 of these bonds were converted into 30,000 shares of $20 par value com- mon stock. Accrued interest was paid in cash at the time of conversion. r. instructions _ (a) Prepare the entry to record the interest expense at October 1, 2007. Assume that accrued interest payable was credited when the bonds were issued. (Round to nearest dollar.) (b) Prepare -~the entry(ies) to record the conversion on April 1, 2008. (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made. (L0 1) E16-3 (Conversion of Bonds) Vargo Company has bonds payable outstanding in the amount of $500,000, and the Premium on Bonds Payable account has a balance of $7,500. Each $1,000 bond is con- vertible into 20 shares of preferred stock of par value of $50 per share. All bonds are converted into pre~ 'ferred stock. Instructions Assuming that the book value method was used, what entry would be made? (L0 1316-4 (Conversion of Bonds) On January 1, 2006, when its $30 par value common stock was sell- ing for $80 per share, Plato Corp. issued $10,000,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each $1,000 bond to convert the bond into five shares of the corporation‘s common stock. The debentures were issued for $10,800,000. The present value of the bond payments at the time of issuance was $8,500,000, and the corporation believes the difference be tween the present value and the amount paid is attributable to the conversion feature. On January 1, 2007, the corporation's $30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2008, when the corporation's $15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercised their con- version options. The corporation uses the straight—line method for amortizing any bond discounts or premiums. . “ix Instructions “- r (a) Prepare in general journal form the entry to record the original issuance of the convertible debentures. (b) Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method. Show supporting computations in good form. ~ ~ 820 - Chapter .16 Dilutive Securities and Earnings per Share (L0 1} 1316-5 (Conversion of Bonds) The December 31, 2007, balance sheet of Kepler Corp. is as follows. 10% callable, convertible bonds payable (semiannual Interest dates Aprll 30 and October 31'. convertible into 6 shares 01 $25 par value common stock per $1,000 of bond principal; maturity date April 30. 2013) $500,000 Discount on bonds payable 10,240 $489,760 On March 5, 2008, Kepler Corp. called all of the bonds as of April 30 for the principal plus interest through April 30. By April 30 all bondholders had exercised their conversion to common stock as of the- interest payment date. Consequently, on April 30, Kepler Corp. paid the semiannual interest and issued shares of common stock for the bonds. The discount is amortized on a straight-line basis. Kepler uses the book value method. Instructions Prepare the entry(ies) to record the interest expense and conversion on April 30, 2008. Reversing entries were made on January 1, 2008. (Round to the nearest dollar.) (L0 1) 1116-6 (Conversion of Bonds) On January 1, 2007, Gottlieb Corporation issued $4,000,000 of 10-year, 8% convertible debentures at. 102. Interest is to be paid semiannually on June 30 and December 31. Each $1,000 debenture can be converted into eight shares of Gottlieb Corporation $100 par value common stock after December 31, 2008. - On January 1, 2009, $400,000 of de entures are converted into common stock, which is then selling at $110. An additional $400,000 of debentures are converted on March 31, 2009. The market price of the com- mon stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis. Instructions Make the necessary journal entries for: (a) December 31, 2008. to) March 31, 2009. (b) January 1, 2009. (d) June 30, 2009. J Record the conversions using the book value method. " (L0 3) 1316-7 (Issuance of Bonds with Warrants) Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determinedrthat to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant foreach $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000, Instructions .— (a) What entry should'be made at the time of the issuance of the bonds and warrants? I (b) If the warrants were nondetachable, would the entries be different? Discuss. (L0 3) E16-8 (Issuance of Bonds with Detachable Warrants) On September 1, 2007, Sands Company sold at 104, (plus accrued interest) 4,000 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with detach- able stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of com— mon sto'ck'at a specified option price of $15 per share. Shortly after issuance, the warrants were quoted on the market for $3 each. No market value can be determined for the Sands Company bonds. Interest is r? payable on December 1 and June 1. Bond issue costs of $30,000 were incurred. Instructions Prepare in general journal format the entry to record the issuance of the bonds. (AICPA adapted) (L0 3) E1643 (Issuance of Bonds with Stock Warrants) On May 1, 2007, Friendly Company issued 2,000 $1,000 bonds at 102. Each bond was issued with one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the market value of the warrants cannot be determined. Instructions (a) Prepare the entry to record the issuance of the bonds and warrants. (b) Assume the same facts as part (3), except that the warrants had a fair value of $30. Prepare the entry to record the issuance of the bonds and warrants. L0 ) 1316-10 (Issuance and Exercise of Stock Options) On November 1, 2007, Columbo Company adopted a stock option plan that granted options to key executives to purchase 30,000 shares of the company’ 5 $10 par value common stock. The options were granted on January 2, 2008, and were exercisable 2 years after it Exercises 0 821 the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at $40, and the fair value option pricing model determines the total compensation expense to be $450,000. All of the options were exercised during the year 2010: 20,000 on January 3 when the market price was $67, and 10,000 on May 1 when the market price was $77 a share. ' Instructions . Prepare journal entries relating to the stock option plan for the years 2008, 2009, and 2010. Assume that the employee performs services equally in 2008 and 2009. stock options to officers and key employees for the purchase of 20,000 shares of the company’s $10 par common stock at $25 per share. The options were exercisable within a 5-year period beginning January 1, 2010, by grantees still in the employ of the company, and expiring December 31, 2014. The service period if for this award is 2 years. Assume that the fair value option pricing model determines total compensation expense to be $350,000. On April 1, 2009, 2,000 options were terminated when the employees resigned from the company. The market value of the common stock was $35 per share on this date. On March 31, 2010, 12,000 options were exercised when the market value of the common stock was $40 per share. (LC7E16-11 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2008, Titania Inc. granted Instructions Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2008, 2009, and 2010. (L0 4) E16-12 (Issuance, Exercise, and Termination of Stock Options) On January 1, 2006, Nichols Corpo- ration granted 10,000 options to key executives. Each option allows the executive to purchase one share of'Nichols’ $5 par value common stock at a price of $20 per share. The options were exercisable within a 2—year period beginning January 1, 2008, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at $25 per share, and a fair value option-pricing ’ model determines total compensation to be $400,000. On May 1, 2008, 8,000 options were exercisedwhen the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2010 because executives decided not to exercise their options. Instructions Prepare the necessary journal entries related to the stock option plan for the years 2006 through 2010. (L0 6) E16-13 (Weighted-Average Number of Shares) Newton Inc. uses a calendar year for financial reports ing. The company is authorized to issue 9,000,000 shares of $10 per common stock. At no time has Newton issued any potentially dilutive securities. Listed below is a summary of Newton’s common stock activities. 1. Number of common shares Issued and outstanding at December 31. 2005 2,000,000 2. Shares issued as a result of a 10% stock dividend on September 30, 2006 200.000 3. Shares Issued Ior cash on March 31. 2007 2,000,000 Number of common shares issued and outstanding at December 31, 2007 4,200,000 ‘41” .—.—-—.-..—-— 4. A 2-for-1 stock split of Newton's common stock took place on March 31. 2008. Instructions (a) Compute the weighted—average number of common shares used in computing earnings per com- mon share for 2006 on the 2007 comparative income statement. (b) Compute the weighted-average number of common shares used in computing earnings per com- mon share for 2007 on the 2007 comparative income statement. (c) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2007 on the 2008-comparative income statement. (d) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2008 on the 2008 comparative income statement. (CMA adapted) 1316-14 (EPS: Simple Capital Structure) On January 1, 2008, Wilke Corp. had 480,000 shares of common stock outstanding. During 2008, it had the following transactions that affected the common stock account. February 1 issued 120,000 shares March 1 Issued a 10% stock dividend May 1 Acquired 100,000 shares of treasury stock June 1 Issued a 3-for-1 stock spilt October 1 Reissued 60,000 shares of treasury stock 822 - Chapter 16 Dilutive Securities and Earnings per Share Instructions (a) Determine the weighted-average number of shares outstanding as of December 31, 2008. (b) Assume that Wilke Corp. earned net income of $3,456,000 during 2008. In addition, it had 100,000 shares of 9%, $100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare and pay a pre- ferred dividend in 2008. Compute earnings per share for 2008, using the weighted-average num- ber of shares determined in part (a). (c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2008. (d) Assume the same facts as in part (b), except that net income included an extraordinary gain of $864,000 and a loss from discontinued operations of $432,000. Both items are net of applicable income taxes. Compute earnings per share for 2008. (L0 6) E16-15 (EPS: Simple Capital Structure) Ace Company had 200,000 shares of common stock out- standingron December 31, 2008. During the Year 2009 the company issued 8,000 shares on May 1 and retired 14,000 shares on October 31. For the year 2009 Ace Company reported net income of $249,690 after a casualty loss of $40,600 (net of tax). Instructions _ . What earnings per share data should be reported at the bottOm of its income statement, assuming that the casualty loss is extraordinary? (Lo 6) E16-16 (BPS: Simple Capital Structure) Flagstad Inc. presented the following data. Net income $2,500,000 Preferred stock: 50,000 shares outstanding, $100 per, 8% cumulative, not convertible 5,000,000 Common stock: Shares outstanding 1/1 750,000 Issued for cash, 5“ 300,000 Acquired treasury stock for cash, 8/1 150,000 2-for—1 stock split, 10l1 instructions ~« Compute earnings per share. (L0 ) 1316-17 (EPS: Simple Capital Structure) A portion of the combined statement of income and retained earnings {of Seminole Inc. for the current year follows. income before extraordinary item $15,000,000 Extraordinary loss, net of applicable Income tax (Note 1) 1,340,000 Net income I 13,660,000 Retained earnings at the beginning of the year 83,250,000 96,910,000 Dividends declared: On preferred stock—$6.00 per share $ 300.000 On common stock—$1.75 per share 14,875,000 15,175,000 Retained earnings at the end of the year $81,735,000 Note 1. During the year, Seminole Inc. suffered a major casually loss of $1,340,000 after applicable Income tax reduction of $1,200,000. At the end of the current year, Seminole Inc. has outstanding 8,500,000 shares of $10 par common stock _ and 50,000 shares of 6% preferred. On April 1 of the current year, Seminole Inc. issued 1,000,000 shares of common stock for $32 per share to help finance the casualty. Instructions Compute the earnings per share on common stock for the current year as it should be reported to st0c1<~ holders. (LO ) E16-18 (BPS: Simple Capital Structure) On January 1, 2008, Lennon Industries had stock outstanding as follows. _ t 6% Cumulative preferred stock, $100 par vaiue, issued and outstanding 10,000 shares $1,000,000 Common stock, $10 par value, issued and outstanding 200,000 shares 2,000,000 Exercises ' 823 To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 160,000 common shares. The acquisitions took place as shown below. Date of Acqulslllon Shares Issued Company A Aprll 1.2008 50.000 Company B July 1. 2008 80,000 Company C October 1, 2008 30,000 On May 14, 2008, Lennon realized a $90,000 (before taxes) insurance gain on the expropriation of investments originally purchased in 1994. On December 31, 2008, Lennon recorded net income of $300,000 before tax and exclusive of the gain. Instructions Assuming a 50% tax rate, compute the earnings per share data that should appear on the financial state- me ts of Lennon Industries as of December 31, 2008. Assume that the expropriation is extraordinary. (Lo 6) 16-19 (EPS: Simple Capital Structure) At January 1, 2008, Langley Company's outstanding shares ' included the following. 280.000 shares of $50 par value, 7% cumulative preferred stock a}; 900,000 shares of $1 par value common stock Net income for 2008 was $2,530,000. No cash dividends were declared or paid during 2008. On February 15, 2009, hOWever, all preferred dividends in arrears Were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2008. On April 1, 2008, 450,000 shares of common stock were sold for $10 per share, and on October 1, 2008, 110,000 shares of common stock Were purchased for $20 per share and held as treasury stock. instructions Co pute earnings per share for 2008. Assume that financial statements for 2008 were issued in March 2009. (L0 7) 16-20 (EPS with Convertible Bonds, Various Situations) In 2006 Chirac Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2007. (Assume that the tax rate is 40%.) Through- }? out 2007, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed. Instructions (a) Compute diluted earnings per share for 2007. (1:) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2007 (rather than in 2006), and none have been converted or redeemed. c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually con~ verted on July 1, 2007. (L0 7) BIG-21 (EPS with Convertible Bonds) On June 1, 2005, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar~year basis. On April 1, 2007, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares Were outstanding on December 31, 2007. Lancaster Inc, also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2007. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date. Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2007. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.) - Instructions Determine the following for 2007. (a) The number of shares to be used for calculating: (1) Basic earnings per share. (2) Diluted earnings per share. (b) The earnings figures to be used for calculating: (1) Basic earnings per share. (2) Diluted earnings per share. (CMA adapted) (L0 2 E16-22 (EPS with Convertible Bonds and Preferred Stock) The Simon Corporation issued 10-year, ) 7) $5,000,000 par, 7% callable convertible subordinated debentures on January 2, 2007. The bonds have a par 824 - Chapter 16 Dilutive Securities and Earnings per Share value of $1,000, with interest payable annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight- line basis. Simon’s effective tax was 35%. Net income in 2007 was $9,500,000, and the company had 2,000,000 shares outstanding during the entire year. Instructions (a) Prepare a schedule to compute both basic and diluted earnings per share. (b) Discuss how the schedule would differ if the security was convertible preferred stock. (LO 2, 1316-23 (BPS with Convertible Bonds and Preferred Stock) On January 1, 2007, Crocker Company 7 issued 10-year, $2,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crocker common stock. Crocker’s net income in 2007 was $300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2007. None of the bonds were converted in 2007. Instructions } (a) Compute diluted earnings per share for 2007. i (b) Compute diluted earnings per share for 2007, assuming the same facts as above, except that A $1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred , share is convertible into 5 shares of Crocker common stock. 3. 7) 1316-24 (EPS with Options, Various Situations) Venzuela Company’s net income for 2007 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2006, each exercis— (L0 able for one share at $6. None has been exercised, and 10,000 shares of common were outstanding dur- ‘i X ing 2007. The average market price of Venzuela’s stock during 2007 was $20. Instructions (a) Compute diluted earnings per share. (Round to nearest cent.) (b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued ' on October 1, 2007 (rather than in 2006). The average market price during the last 3 months of 2007 was $20. (L0 7} E16-25 (BPS with Contingent Issuance Agreement) Winsor Inc. recently purchased Holiday Corp, a .2 large midwestern home painting corporation. One of the terms of the merger was that if Holiday's income for 2007 was $110,000 or more, 10,000 additional shares would be issued to Holiday's stockholders in 2008. Holiday’s income for 2006 was $120,000. - Instructions (it) Would the contingent shares have to be considered in Winsor’s 2006 earnings per share compu- tations? _ (b) Assume the same facts, except that the 10,000 shares are contingent on Holiday’s achieving a net income of $130,000 in 2007. Would the contingent shares have to be considered in Winsor’s earn- "‘ . ings per share computations for 2006? i \(LO/ 1316-26 (EPS with Warrants) Howat Corporation earned $360,000 during a period when it had an av- erage of 100,000 shares of common stock outstanding. The common stock sold at an average market price of $15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to pur— chase one share of common stock for $10 for each warrant exercised. ' Instructions (a) Are the warrants dilutive? »' (b) Compute basic earnings per share. (c) Compute diluted earnings per share. (LO ) *E16-27 (Accounting for Restricted Stock) 'I‘weedie Company issues 4,000 shares of restricted stock to its CFO, Miles Hobart, on January 1, 2007. The stock has a fair value of $100,000 on this date. The service period related to this restricted stock is 4 years. Vesting occurs if Hobart stays with the company for 4 years. The par value of the stock is $5. At December 31, 2008, the fair value of the stock is $120,000. Instructions (a) Prepare the journal entries to record the restricted stock on January 1, 2007 (the date of grant) and December 31, 2008. (b) On March 4, 2009, Hobart leaves the company. Prepare the journal entry (if any) to account for this forfeiture. . {L0 8} *E16-28 (Stock Appreciation Rights) On December 31, 2003, Beckford Company issues 150,000 stock appreciation rights to its officers entitling them to receive cash for the difference betWeen the market price of its stock and a preestablished price of $10. The fair value of the SARs is estimated to be $4 per SAR on (L0 :23} [ Problems - 825 December 31, 2004; $1 on December 31, 2005,- $10 on December 31, 2006; and $9 on December 31, 2007. The service period is 4 years, and the exercise period is 7 years. Instructions (a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stock appreciation rights plan. (b) Prepare the entry at December 31, 2007, to record compensation expense, if any, in 2007. (c) (L0 8) *E16-29 (Stock Appreciation Rights) Capulet Company establishes a stock appreciation rights program that Prepare the entry on December 31, 2007, assuming that all 150,000 SARs are exercised. entitles its new president Ben Davis to receive cash for the difference-between the market price of the stock and a preestabiished price of $30 (also market price) on December 31, 2004, on 30,000 SARs. The date of grant is December 31, 2004, and the required employment (service) period is 4 years. President Davis exercises all of the SARs in 2010. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2005; $9 on December 31, 2006; $15 on December 31, 2007; $6 on December 31, 2008; and $18 on-December 31, 2009. Instructions Prepare a 5-year (2005—2009) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis. (b) Prepare the journal entry for compensation expense in 2005, 2008, and 2009 relative to the 30,000 SARs. (a) P16-1 (Entries for Various Dilutive Securities) The stockholders' equity section of McLean Inc. at the beginning of the current year appears below. PROBLEMS Common stock, $10 par valuhe, authorized 1,000,000 shares, 300,000 shares issued and outstanding $3,000,000 Paid—In capital in excess of par 600,000 Retained earnings 570,000 During the current year the following transactions occurred. 1. The company issued to the stockholders 100,000 rights. Ten rights are needed to buy one share of stock at $32. The rights were void after 30 days. The market price of the stock at this time was $34 per share. 2. The company sold to the public a $200,000, 10% bond issue at par. The company also issued with each $100 bond one detachable stock purchase warrant, which provided for the purchase of com- mon stock at $30 per share. Shortly after issuance, similar bonds without warrants were selling at 96 and the warrants at $8. 3. All but 10,000 of the rights issued in (1) were exercised in 30 days. 4. At the end of the year, 80% of the warrants in (2) had been exercised, and the remaining were out- standing and in good standing. 5. During the current year, the company granted stock options for 5,000 shares of common stock to company executives. The company using a fair value option pricing model determines that each option is worth $10. The option price is $30. The options were to expire at year-end and were con- sidered compensation for the current year. 6. All but 1,000 shares related to the stock option plan were exercised by year-end. The expiration resulted because one of the executives failed to fulfill an obligation related to the employment contract. Instructions - (a) Prepare general journal entries for the current year to record the transactions listed above. (b) Prepare the stockholders‘ equity section of the balance sheet at the end of the current year. As- J. sume that retained earnings at the end of the current year is $750,000. 16-2 (Entries for Conversion, Amortization, and Interest of Bonds) Counter Inc. issued $1,500,000 of convertible 10-year bonds on July 1, 2007. The bonds provide for 12% interest payable semiannualiy on January 1 and July 1. The discount in connection with the issue was $34,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Counter Inc.’s $100 par value common stock for each $1,000 of bonds. 826 - Chapter 16 Dilutive Securities and Earnings per Share On August 1, 2008, $150,000 of bonds were turned in for conversion into common. Interest has been accrued monthly and paid as due. At the time of conversion any accrued interest on bonds being con— verted is paid in cash. Instructions (Round to nearest dollar) Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following dates. (a) August 1, 2008. (Assume the book value method is used.) (b) August'Bl, 2008. (c) December 31, 2008, including closing entries for end-of-year. (AICPA adapted) (L at P16-3 (Stock Option Plan) ISU Company adopted a stock option plan on November 30, 2005, that pro- vided that 70,000 shares of $5 par value stock be designated as available for the granting of options to officers of the corporation at a price of $8 a share. The market value was $12 a share on November 30, 2005. On January 2, 2006, options to purchase 28,000 shares were granted to president Don Pedro—45,000 for services to be rendered in 2006 and 13,000 for services to be rendered in 2007‘. Also on that date, options to purchase 14,000 shares were granted to vice president Beatrice Leonato—7,000 for services to he ran dered in 2006 and 7,000 for services to be rendered in 2007. The market value of the stock was $14 a share on January 2, 2006. The options were exercisable for a period of one year following the year in which the services were rendered. The fair value of the options on the grant date was $3 per option. In 2007 neither the president nor the vice president exercised their options because the market price of the stock was below the exercise price. The market value of the stock was $7 a share on December 31, 2007, when the options for 2006 services lapsed. On December 31, 2008, both president Pedro and vice president Leonato exercised their options for 13,000 and 7,000 shares, respectively, when the market price was $16 a share. instructions -- Prepare the necessary journal entries in 2005 when the stock option plan was adopted, in 2006 when op- ions were granted, in 2007 when options lapsed, and in 2008 when options were exercised. PIG-4 (BPS with Complex Capital Structure) Diane Leto, controller at Dewey Yaeger Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Yaeger‘s external financial statements. Below is selected financial information for the fiscal year ended June 30, 2008. DEWEV‘YAEGER PHARMACEUTICAL INDUSTRIES , ' SELECTED STATEMENT OF '9“ A FINANCIAL POSITION lNFOFIMATlON all} JUNE 30, 2008 Long-term debt ‘ {D Notes payable, 10% $ 1,000,000 a ’29 a 7% convertible bonds payable 5,000,000 «,5- 10 l 10% bonds payable 6.000.000 V3 “ P p Total long-term debt $12,000,000 "d r l) “I I) j Shareholders’ equii if 3 . 7, . y ‘ Preferred stock, 8.5% cumulative, $50 par value. 9'” Ff 100,000 shares aulhorized. 25,000 shares issued and outstanding $ 1,250,000 Common stock, $1 par, 10,000,000 shares authorized. 1,000,000 shares Issued and outstanding 1,000,000 Additional paid-in capital 4,000,000 Retained earnings 6,000,000 Total shareholders equity $12,250,000 The following transactions have also occurred at Yaeger. 1. Options were granted in 2006 to purchase 100,000 shares at $15 per share. Although no options were exercised during 2008, the average price per common share during fiscal year 2008 was $20 per share. ...
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Chapter 16 - Exercises and Problems - Questions ' 817 Note:...

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