71. On December 31, 2017, Houser Company granted some of its executives options to purchase 150,000 shares of the company's $50 par common stock at an option price of $60 per share. The Black-Scholes option pricing model determines total compensation expense to be $3,000,000. The options become exercisable on January 1, 2018, and represent compensation for executives' past and future services over a three-year period beginning January 1, 2018. What is the impact on Houser's total stockholders' equity for the year ended December 31, 2017, as a result of this transaction under the fair value method?
a. $3,000,000 decrease
b. $1,000,000 decrease
c. $0
d. $1,000,000 increase
72. On June 30, 2015, Norman Corporation granted compensatory stock options for 75,000
shares of its $20 par value common stock to certain of its key employees. The market price of the common stock on that date was $36 per share and the option price was $30. The Black-Scholes option pricing model determines total compensation expense to be $900,000. The options are exercisable beginning January 1, 2018, provided those key employees are still in Norman’s employ at the time the options are exercised. The options expire on June 30, 2019.
On January 4, 2018, when the market price of the stock was $42 per share, all 75,000 options were exercised. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2017 using the fair value method?
a. $0.
b. $360,000.
c. $450,000.
d. $900,000.
73. In order to retain certain key executives, Jensen Corporation granted them incentive stock options on December 31, 2017. 100,000 options were granted at an option price of $35 per share. Market prices of the stock were as follows:
December 31, 2018 $46 per share
December 31, 2019 51 per share
The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1, 2018. The Black-Scholes option pricing model determines total compensation expense to be $1,000,000. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended December 31, 2018 under the fair value method?
a. $500,000.
b. $1,000,000.
c. $1,100,000.
d. $3,500,000.
74. Grant, Inc. had 80,000 shares of treasury stock ($10 par value) at December 31, 2017, which it acquired at $11 per share. On June 4, 2018, Grant issued 40,000 treasury shares to employees who exercised options under Grant's employee stock option plan. The market value per share was $13 at December 31, 2017, $15 at June 4, 2018, and $18 at December 31, 2018. The stock options had been granted for $12 per share. The cost method is used. What is the balance of the treasury stock on Grant's balance sheet at December 31, 2018?
a. $280,000.
b. $360,000.
c. $440,000.
d. $480,000.
On January 1, 2017, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current market prices of the stock are as follows:
January 1, 2017 $35 per share
December 31, 2017 38 per share
December 31, 2018 30 per share
December 31, 2019 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2017.
*75. What amount of compensation expense should Korsak recognize for the year ended December 31, 2017?
a. $ 360,000
b. $ 540,000
c. $ 450,000
d. $2,160,000
On January 1, 2017, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current market prices of the stock are as follows:
January 1, 2017 $35 per share
December 31, 2017 38 per share
December 31, 2018 30 per share
December 31, 2019 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2017.
*76. What amount of compensation expense should Korsak recognize for the year ended December 31, 2018?
a. $0
b. $60,000
c. $600,000
d. $300,000
On January 1, 2017, Korsak, Inc. established a stock appreciation rights plan for its executives. It entitled them to receive cash at any time during the next four years for the difference between the market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current market prices of the stock are as follows:
January 1, 2017 $35 per share
December 31, 2017 38 per share
December 31, 2018 30 per share
December 31, 2019 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1, 2017.
*77. On December 31, 2019, 25,000 SARs are exercised by executives. What amount of compensation expense should Korsak recognize for the year ended December 31, 2019?
a. $570,000
b. $390,000
c. $1,170,000
d. $156,000
MULTIPLE CHOICE—Dilutive Securities, CPA Adapted
78. On January 2, 2018, Farr Co. issued 10-year convertible bonds at 105. During 2018, these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion, the market price of Farr’s common stock was 50 percent above its par value. On January 2, 2018, cash proceeds from the issuance of the convertible bonds should be reported as
a. paid-in capital for the entire proceeds.
b. paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance.
c. a liability for the face amount of the bonds and paid-in capital for the premium over the face amount.
d. a liability for the entire proceeds.
79. Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a known market value. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. This excess is reported as
a. Discount on Bonds Payable.
b. Premium on Bonds Payable.
c. Common Stock Subscribed.
d. Paid-in Capital in Excess of Par—Stock Warrants.
80. On January 1, 2017, Sharp Corp. granted an employee an option to purchase 15,000 shares of Sharp's $5 par value common stock at $20 per share. The Black-Scholes option pricing model determines total compensation expense to be $350,000. The option became exercisable on December 31, 2018, after the employee completed two years of service. The market prices of Sharp's stock were as follows:
January 1, 2017 $30
December 31, 2018 50
For 2018, should recognize compensation expense under the fair value method of
a. $225,000.
b. $75,000.
c. $175,000.
d. $0.
*81. On January 2, 2018, for past services, Rosen Corp. granted Nenn Pine, its president, 30,000 stock appreciation rights that are exercisable immediately and expire on
January 2, 2019. On exercise, Nenn is entitled to receive cash for the excess of the market price of the stock on the exercise date over the market price on the grant date. Nenn did not exercise any of the rights during 2018. The market price of Rosen's stock was $30 on January 2, 2018, and $45 on December 31, 2018. As a result of the stock appreciation rights, Rosen should recognize compensation expense for 2018 of
a. $0.
b. $180,000.
c. $450,000.
d. $900,000.
MULTIPLE CHOICE—Earnings Per Share—Conceptual
82. With respect to the computation of earnings per share, which of the following would be most indicative of a simple capital structure?
a. Common stock, preferred stock, and convertible securities outstanding in lots of even thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of common stock
d. Ownership interest not consisting solely of common stock
83. In computing earnings per share for a simple capital structure, if the preferred stock is cumulative, the amount that should be deducted as an adjustment to the numerator (earnings) is the
a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. annual preferred dividend
84. In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.
85. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share, respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease
S86. Due to the importance of earnings per share information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes
P87. A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No
88. When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.
89. Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. diluted nor basic earnings per share
90. In computing earnings per share, the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). If the preferred stock is cumulative, which amount should then be added as an adjustment to the numerator (net earnings)?
a. Annual preferred dividend
b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate
91. In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.
92. In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants
a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c. are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock.
d. are not used to calculate the number of common shared repurchased at the average market price, when computing diluted earnings per share
93. Antidilutive securities
a. should be included in the computation of diluted earnings per share but not basic earnings per share.
b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share.
c. include stock options and warrants whose exercise price is less than the average market price of common stock.
d. should be ignored in all earnings per share calculations.
*94. A company uses income from continuing operations to determine whether potential common stock is dilutive or antidilutive, and this is referred to as
a. the control number.
b. the potential number.
c. dilutive information.
d. impact information.
*95. Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the
a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.
MULTIPLE CHOICE—Earnings Per Share—Computational
96. Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000 shares on July 1, and had income applicable to common stock of $2,940,000 for the year ending December 31, 2018. Earnings per share of common stock for 2018 would be
a. $4.90.
b. $2.32.
c. $2.80.
d. $3.28.
97. At December 31, 2018, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2018. Net income for the year ended December 31, 2018, was $1,700,000. What should be Hancock's 2018 earnings per common share, rounded to the nearest penny?
a. $36
b. $4.25
c. $4.00
d. $3.78
98. Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000 shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued 54,000 shares on November 1. The weighted average shares outstanding for the year is
a. 851,000.
b. 872,000.
c. 893,000.
d. 914,000.
99. On January 1, 2018, Gridley Corporation had 375,000 shares of its $2 par value common stock outstanding. On March 1, Gridley sold an additional 750,000 shares on the open market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1, Gridley purchased 420,000 shares and immediately retired the stock. On November 1, 600,000 shares were sold for $25 per share. What is the weighted-average number of shares outstanding for 2018?
a. 1,530,000
b. 1,125,000
c. 716,665
d. 516,666
100. The following information is available for Barone Corporation:
January 1, 2018 Shares outstanding 4,000,000
April 1, 2018 Shares issued 640,000
July 1, 2018 Treasury shares purchased 240,000
October 1, 2018 Shares issued in a 100% stock dividend 4,400,000
The number of shares to be used in computing earnings per common share for 2018 is
a. 9,041,600.
b. 8,760,000.
c. 8,720,000.
d. 5,460,000.
101. At December 31, 2017 Rice Company had 300,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2017 or 2018. On January 30, 2019, prior to the issuance of its financial statements for the year ended December 31, 2018, Rice declared a 100% stock dividend on its common stock. Net income for 2018 was $1,140,000. In its 2018 financial statements, Rice's 2018 earnings per common share should be
a. $1.80.
b. $1.89.
c. $3.60.
d. $3.80.
102. Fultz Company had 300,000 shares of common stock issued and outstanding at December 31, 2017. During 2018, no additional common stock was issued. On January 1, 2018, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2018, Fultz declared and paid $180,000 cash dividends on the common stock and $150,000 on the nonconvertible preferred stock. Net income for the year ended December 31, 2018, was $960,000. What should be Fultz's 2018 earnings per common share, rounded to the nearest penny?
a. $1.15
b. $2.10
c. $2.70
d. $3.20
103. At December 31, 2017 Pine Company had 200,000 shares of common stock and 10,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2017 or 2018. On February 10, 2019, prior to the issuance of its financial statements for the year ended December 31, 2018, Pine declared a 100% stock dividend on its common stock. Net income for 2018 was $960,000. In its 2018 financial statements, Pine’s 2018 earnings per common share should be
a. $4.54.
b. $4.27.
c. $2.25.
d. $1.33.
104. Stine Inc. had 1,000,000 shares of common stock issued and outstanding at December 31, 2017. On July 1, 2018 an additional 1,000,000 shares were issued for cash. Stine also had stock options outstanding at the beginning and end of 2018 which allow the holders to purchase 300,000 shares of common stock at $28 per share. The average market price of Stine’s common stock was $35 during 2018. The number of shares to be used in computing diluted earnings per share for 2018 is
a. 2,240,000
b. 2,060,000
c. 1,740,000
d. 1,560,000
105. Kasravi Co. had net income for 2018 of $600,000. The average number of shares outstanding for the period was 200,000 shares. The average number of shares under outstanding options, at an option price of $30 per share is 12,000 shares. The average market price of the common stock during the year was $36. What should Kasravi Co. report for diluted earnings per share for the year ended 2018?
a. $3.00
b. $2.97
c. $2.86
d. $2.83
106. On January 2, 2018, Worth Co. issued at par $2,000,000 of 7% convertible bonds. Each $1,000 bond is convertible into 10 shares of common stock. No bonds were converted during 2018. Worth had 200,000 shares of common stock outstanding during 2018. Worth’s 2018 net income was $900,000 and the income tax rate was 30%. Worth’s diluted earnings per share for 2018 would be (rounded to the nearest penny):
a. $5.00.
b. $4.54.
c. $4.50.
d. $4.72.
107. Beaty Inc. purchased Dunbar Co. and agreed to give stockholders of Dunbar Co. 10,000 additional shares in 2020 if Dunbar Co.’s net income in 2019 is $500,000; in 2018 Dunbar Co.’s net income is $520,000. Beaty Inc. has net income for 2018 of $450,000 and has an average number of common shares outstanding for 2018 of 100,000 shares. What should Beaty report as diluted earnings per share for 2018?
a. $5.00
b. $4.50
c. $4.09
d. $3.76
Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2018 was $600,000 and the income tax rate was 30%.
108. Basic earnings per share for 2018 is (rounded to the nearest penny)
a. $2.20.
b. $2.42.
c. $2.50.
d. $2.70.
Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,500,000 of 5% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2015, Hanson paid dividends of $.90 per share on the common stock and $3 per share on the preferred stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income for 2018 was $600,000 and the income tax rate was 30%.
109. Diluted earnings per share for 2018 is (rounded to the nearest penny)
a. $2.08.
b. $2.12.
c. $2.29.
d. $2.50.
110. Fugate Company had 1,500,000 shares of common stock issued and outstanding at December 31, 2017. On July 1, 2018 an additional 1,250,000 shares were issued for cash. Fugate also had stock options outstanding at the beginning and end of 2018 which allow the holders to purchase 375,000 shares of common stock at $20 per share. The average market price of Fugate's common stock was $25 during 2018. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2018?
a. 2,825,000
b. 2,425,000
c. 2,218,750
d. 2,200,000
111. Shipley Corporation had net income for the year of $720,000 and a weighted average number of common shares outstanding during the period of 250,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par ($3,000,000), carry a 7% interest rate, and are convertible into 50,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are
a. $1.98
b. $2.68.
c. $2.82.
d. $3.10.
112. Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey Inc. 50,000 additional shares in 2020 if Massey Inc.’s net income in 2019 is $600,000 or more; in 2018 Massey Inc.’s net income is $615,000. Colt has net income for 2018 of $1,500,000 and has an average number of common shares outstanding for 2018 of 500,000 shares. What should Colt report as earnings per share for 2018?
Basic Earnings Diluted Earnings
Per Share Per Share
a. $3.00 $3.00
b. $2.73 $3.00
c. $3.00 $2.73
d. $2.73 $2.73
113. On January 2, 2018, Perez Co. issued at par $10,000 of 6% bonds convertible in total into 1,000 shares of Perez's common stock. No bonds were converted during 2018. Throughout 2018, Perez had 1,000 shares of common stock outstanding. Perez's 2018 net income was $4,500, and its income tax rate is 30%. No potentially dilutive securities other than the convertible bonds were outstanding during 2018. Perez's diluted earnings per share for 2018 would be (rounded to the nearest penny)
a. $2.25.
b. $2.46.
c. $2.55.
d. $4.92.
114. At December 31, 2017, Kifer Company had 800,000 shares of common stock outstanding. On October 1, 2018, an additional 160,000 shares of common stock were issued. In addition, Kifer had $10,000,000 of 5% convertible bonds outstanding at December 31, 2017, which are convertible into 360,000 shares of common stock. No bonds were converted into common stock in 2018. The net income for the year ended December 31, 2018, was $2,500,000. Assuming the income tax rate was 30%, the diluted earnings per share for the year ended December 31, 2018, should be (rounded to the nearest penny)
a. $3.39.
b. $2.50.
c. $2.38.
d. $2.08.
115. On January 2, 2018, Mize Co. issued at par $300,000 of 6% convertible bonds. Each $1,000 bond is convertible into 60 shares. No bonds were converted during 2018. Mize had 100,000 shares of common stock outstanding during 2018. Mize 's 2018 net income was $160,000 and the income tax rate was 30%. Mize's diluted earnings per share for 2018 would be (rounded to the nearest penny)
a. $1.35.
b. $1.46.
c. $1.51.
d. $1.60.
116. At December 31, 2017, Sager Co. had 1,200,000 shares of common stock outstanding. In addition, Sager had 450,000 shares of preferred stock which were convertible into 750,000 shares of common stock. During 2018, Sager paid $1,200,000 cash dividends on the common stock and $800,000 cash dividends on the preferred stock. Net income for 2018 was $6,800,000 and the income tax rate was 40%. The diluted earnings per share for 2018 is (rounded to the nearest penny)
a. $2.48.
b. $3.49.
c. $5.00.
d. $5.66.
Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $600,000 of 10% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2018, Lerner paid dividends of $.55 per share on the common stock and $1.80 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2018 was $360,000 and the income tax rate was 30%.
117. Basic earnings per share for 2018 is (rounded to the nearest penny)
a. $1.25.
b. $145.
c. $1.50.
d. $1.62.
Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $600,000 of 10% convertible bonds outstanding during 2018. The preferred stock is convertible into 40,000 shares of common stock. During 2018, Lerner paid dividends of $.55 per share on the common stock and $1.80 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2018 was $360,000 and the income tax rate was 30%.
118. Diluted earnings per share for 2018 is (rounded to the nearest penny)
a. $1.35.
b. $1.39.
c. $1.51.
d. $1.57.
119. Yoder, Incorporated, has 4,200,000 shares of common stock outstanding on
December 31, 2017. An additional 800,000 shares of common stock were issued on
April 1, 2018, and 400,000 more on July 1, 2018. On October 1, 2018, Yoder issued 20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in 2018. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively?
a. 5,000,000 and 5,000,000
b. 5,000,000 and 5,100,000
c. 5,000,000 and 5,400,000
d. 5,400,000 and 6,200,000
120. Nolte Co. has 4,800,000 shares of common stock outstanding on December 31, 2017. An additional 200,000 shares are issued on April 1, 2018, and 480,000 more on September 1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2018 is
a. 5,110,000 and 5,110,000.
b. 5,110,000 and 5,170,000.
c. 5,110,000 and 3,050,000.
d. 5,880,000 and 5,320,000.
