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16 - Dilutive Securities and Earnings per Share 16 7...

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Dilutive Securities and Earnings per Share TRUE-FALSE —Conceptual 1. The recording of convertible bonds at the date of issue is the same as the recording of straight debt issues. 2. Companies recognize the gain or loss on retiring convertible debt as an extraordinary item. 3. The FASB states that when an issuer makes an additional payment to encourage conversion, the payment should be reported as an expense. 4. The market value method is used to account for the exercise of convertible preferred stock. 5. Companies recognize a gain or loss when stockholders exercise convertible preferred stock. 6. A company should allocate the proceeds from the sale of debt with detachable stock warrants between the two securities based on their market values. 7. Nondetachable warrants, as with detachable warrants, require an allocation of the proceeds between the bonds and the warrants. 8. The intrinsic value of a stock option is the difference between the market price of the stock and the exercise price of the options at the grant date. 9. Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise. 10. The service period in stock option plans is the time between the grant date and the vesting date. 11. If an employee fails to exercise a stock option before its expiration date, the company should decrease compensation expense. 12. If an employee forfeits a stock option because of failure to satisfy a service requirement, the company should record paid-in capital from expired options. 13. If preferred stock is cumulative and no dividends are declared, the company subtracts the current year preferred dividend in computing earnings per share. 14. When stock dividends or stock splits occur, companies must restate the shares outstand- ing after the stock dividend or split, in order to compute the weighted-average number of shares. 15. If a stock dividend occurs after year-end, but before issuing the financial statements, a company must restate the weighted-average number of shares outstanding for the year. 16. Preferred dividends are subtracted from net income but not income before extraordinary items in computing earnings per share. 16 - 7
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Test Bank for Intermediate Accounting, Thirteenth Edition 17. When a company has a complex capital structure, it must report both basic and diluted earnings per share. 18. In computing diluted earnings per share, stock options are considered dilutive when their option price is greater than the market price. 19. In a contingent issue agreement, the contingent shares are considered outstanding for computing diluted EPS when the earnings or market price level is met by the end of the year. 20. A company should report per share amounts for income before extraordinary items, but not for income from continuing operations.
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