121. At December 31, 2017, Tatum Company had 2,000,000 shares of common stock outstanding. On January 1, 2018, Tatum issued 500,000 shares of preferred stock which were convertible into 1,000,000 shares of common stock. During 2018, Tatum declared and paid $1,200,000 cash dividends on the common stock and $400,000 cash dividends on the preferred stock. Net income for the year ended December 31, 2018, was $5,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per share for the year ended December 31, 2018? (Round to the nearest penny.)
a. $1.50
b. $1.67
c. $2.50
d. $2.07
122. At December 31, 2017, Emley Company had 1,200,000 shares of common stock outstanding. On October 1, 2018, an additional 400,000 shares of common stock were issued. In addition, Emley had $14,000,000 of 6% convertible bonds outstanding at December 31, 2017, which are convertible into 800,000 shares of common stock. No bonds were converted into common stock in 2018. The net income for the year ended December 31, 2018, was $5,250,000. Assuming the income tax rate was 30%, what should be the diluted earnings per share for the year ended December 31, 2018, rounded to the nearest penny?
a. $2.22
b. $2.89
c. $2.78
d. $4.02
123. Grimm Company has 2,900,000 shares of common stock outstanding on December 31, 2017. An additional 150,000 shares of common stock were issued on July 1, 2018, and 300,000 more on October 1, 2018. On April 1, 2018, Grimm issued 6,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 40 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, for the year ended December 31, 2018?
a. 3,050,000 and 3,230,000
b. 3,050,000 and 3,050,000
c. 3,050,000 and 3,290,000
d. 3,350,000 and 3,530,000
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2018 2017
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
6% convertible bonds $2,400,000 $2,400,000
During 2018, Piper paid dividends of $0.80 per share on its common stock and $2.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2018, was $400,000. Assume that the income tax rate was 30%.
124. What should be the basic earnings per share for the year ended December 31, 2018, rounded to the nearest penny?
a. $1.67
b. $1.87
c. $2.47
d. $2.67
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2018 2017
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
6% convertible bonds $2,400,000 $2,400,000
During 2018, Piper paid dividends of $0.80 per share on its common stock and $2.00 per share on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock. The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income for the year ended December 31, 2018, was $400,000. Assume that the income tax rate was 30%.
125. What should be the diluted earnings per share for the year ended December 31, 2018, rounded to the nearest penny?
a. $2.09
b. $1.96
c. $1.78
d. $2.23
126. Warrants exercisable at $20 each to obtain 80,000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. Application of the treasury stock method for the assumed exercise of these warrants in computing diluted earnings per share will increase the weighted average number of outstanding shares by
a. 80,000.
b. 64,000.
c. 16,000.
d. 20,000.
127. Terry Corporation had 800,000 shares of common stock outstanding at December 31, 2018. In addition, it had 150,000 stock options outstanding, which had been granted to certain executives, and which gave them the right to purchase shares of Terry's stock at an option price of $37 per share. The average market price of Terry's common stock for 2018 was $50. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2018?
a. 800,000
b. 852,703
c. 911,000
d. 839,000
MULTIPLE CHOICE—Earnings Per Share—CPA Adapted
128. Didde Co. had 300,000 shares of common stock issued and outstanding at December 31, 2017. No common stock was issued during 2018. On January 1, 2018, Didde issued 200,000 shares of nonconvertible preferred stock. During 2018, Didde declared and paid $100,000 cash dividends on the common stock and $80,000 on the preferred stock. Net income for the year ended December 31, 2018 was $620,000. What should be Didde's 2018 earnings per common share?
a. $2.07
b. $1.80
c. $1.73
d. $1.47
129. At December 31, 2018 and 2017, Miley Corp. had 180,000 shares of common stock and 12,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2018 or 2017. Net income for 2018 was $450,000. For 2018, earnings per common share amounted to
a. $2.49.
b. $2.10.
c. $1.83.
d. $1.70.
130. Marsh Co. had 2,400,000 shares of common stock outstanding on January 1 and December 31, 2018. In connection with the acquisition of a subsidiary company in June 2017, Marsh is required to issue 100,000 additional shares of its common stock on July 1, 2019, to the former owners of the subsidiary. Marsh paid $200,000 in preferred stock dividends in 2018, and reported net income of $3,400,000 for the year. Marsh's diluted earnings per share for 2018 should be
a. $1.42.
b. $1.36.
c. $1.34.
d. $1.28.
131. Foyle, Inc., had 830,000 shares of common stock issued and outstanding at December 31, 2017. On July 1, 2018, an additional 40,000 shares of common stock were issued for cash. Foyle also had unexercised stock options to purchase 32,000 shares of common stock at $15 per share outstanding at the beginning and end of 2018. The average market price of Foyle's common stock was $20 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. 850,000
b. 858,000
c. 878,000
d. 882,000
132. When computing diluted earnings per share, convertible securities are
a. ignored.
b. recognized only if they are dilutive.
c. recognized only if they are antidilutive.
d. recognized whether they are dilutive or antidilutive.
133. In determining diluted earnings per share, dividends on nonconvertible cumulative preferred stock should be
a. disregarded.
b. added back to net income whether declared or not.
c. deducted from net income only if declared.
d. deducted from net income whether declared or not.
134. The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the
a. beginning of the earliest period reported (or at time of issuance, if later).
b. beginning of the earliest period reported (regardless of time of issuance).
c. middle of the earliest period reported (regardless of time of issuance).
d. ending of the earliest period reported (regardless of time of issuance).
BRIEF EXERCISES
BE. 16-135—Convertible Bonds.
Garr Co. issued $6,000,000 of 12%, 5-year convertible bonds on December 1, 2017 for $6,025,480 plus accrued interest. The bonds were dated April 1, 2017 with interest payable
April 1 and October 1. Bond premium is amortized each interest period on a straight-line basis. Garr Co. has a fiscal year end of September 30.
On October 1, 2018, $3,000,000 of these bonds were converted into 42,000 shares of $15 par common stock. Accrued interest was paid in cash at the time of conversion.
Instructions
(a) Prepare the entry to record the interest expense at April 1, 2018. Assume that interest payable was credited when the bonds were issued (round to nearest dollar).
(b) Prepare the entry to record the conversion on October 1, 2018. Assume that the entry to record amortization of the bond premium and interest payment has been made.
BE. 16-136—Convertible Bonds.
Koch Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On May 31, after interest was paid, 100, $1,000 bonds are tendered for conversion into 3,000 shares of $10 par value common stock that had a market price of $40 per share. How should Koch Co. account for the conversion of the bonds into common stock under the book value method? Discuss the rationale for this method.
BE. 16-137—Convertible Debt and Debt with Warrants (Essay).
What accounting treatment is required for convertible debt and why? What accounting treatment is required for debt issued with stock warrants and why?
EXERCISES
Ex. 16-138—Stock options.
Prepare the necessary entries from 1/1/17-2/1/19 for the following events using the fair value method. If no entry is needed, write "No Entry Necessary."
1. On 1/1/17, the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 30,000 shares of common stock at $40 per share. The par value is $10 per share.
2. On 2/1/17, options were granted to each of five executives to purchase 30,000 shares. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 2/1/19. It is assumed that the options were for services performed equally in 2017 and 2018. The Black-Scholes option pricing model determines total compensation expense to be $3,200,000.
3. At 2/1/19, four executives exercised their options. The fifth executive chose not to exercise his options, which therefore were forfeited.
Ex. 16-139—Weighted average shares outstanding.
On January 1, 2018, Warren Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 200,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation purchased on the market 600,000 of its own outstanding shares and retired them.
Instructions
Compute the weighted average number of shares to be used in computing earnings per share for 2018.
Ex. 16-140—Earnings Per Share. (Essay)
Define the following:
(a) The computation of earnings per common share
(b) Complex capital structure
(c) Basic earnings per share
(d) Diluted earnings per share
Ex. 16-141—Earnings per share.
Santana Corporation has 400,000 shares of common stock outstanding throughout 2018. In addition, the corporation has 5,000, 20-year, 9% bonds issued at par in 2016. Each $1,000 bond is convertible into 20 shares of common stock after 9/23/19. During the year 2018, the corporation earned $900,000 after deducting all expenses. The tax rate was 30%.
Instructions
Compute the proper earnings per share for 2018.
Ex. 16-142—Diluted earnings per share.
Dunbar Company had 700,000 shares of common stock outstanding during the year 2018. In addition, at December 31, 2018, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise (options granted in 2018). The average market price during 2018 was $50.
Instructions
Compute the number of shares to be used in determining diluted earnings per share for 2018.
*Ex. 16-143—Stock appreciation rights.
On January 1, 2017, Orr Co. established a stock appreciation rights plan for its executives. They could receive cash at any time during the next four years equal to the difference between the market price of the common stock and a preestablished price of $16 on 600,000 SARs. The market price is as follows: 12/31/17—$21; 12/31/18—$18; 12/31/19—$19; 12/31/20—$20. On December 31, 2019, 95,000 SARs are exercised, and the remaining SARs are exercised on December 31, 2020.
Instructions
(a) Prepare a schedule that shows the amount of compensation expense for each of the four years starting with 2017.
(b) Prepare the journal entry at 12/31/18 to record compensation expense.
(c) Prepare the journal entry at 12/31/20 to record the exercise of the remaining SARs.
PROBLEMS
Pr. 16-144—Convertible bonds and stock warrants.
For each of the unrelated transactions described below, present the entry(ies) required to record the bond transactions.
1. On August 1, 2018, Lane Corporation called its 10% convertible bonds for conversion. The $8,000,000 par bonds were converted into 320,000 shares of $20 par common stock. On August 1, there was $800,000 of unamortized premium applicable to the bonds. The fair value of the common stock was $20 per share. Ignore all interest payments.
2. Packard, Inc. decides to issue convertible bonds instead of common stock. The company issues 10% convertible bonds, par $4,000,000, at 97. The investment banker indicates that if the bonds had not been convertible they would have sold at 94.
3. Gomez Company issues $9,000,000 of bonds with a coupon rate of 8%. To help the sale, detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It is estimated that the value of the bonds without the warrants is $8,883,000 and the value of the warrants is $567,000. The bonds with the warrants sold at 101.
Pr. 16-145—Earnings per share.
Colson Corp. had $800,000 net income in 2018. On January 1, 2018 there were 200,000 shares of common stock outstanding. On April 1, 20,000 shares were issued and on September 1, Colson bought 30,000 shares of treasury stock. There are 30,000 options to buy common stock at $40 a share outstanding. The market price of the common stock averaged $50 during 2018. The tax rate is 40%.
During 2018, there were 40,000 shares of convertible preferred stock outstanding. The preferred is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock.
Colson issued $2,000,000 of 8% convertible bonds at face value during 2017. Each $1,000 bond is convertible into 30 shares of common stock.
Instructions
Compute diluted earnings per share for 2018. Complete the schedule and show all computations.
Net Adjust- Adjusted Adjust- Adjusted
Security Income ment Net Income Shares ment Shares EPS
Pr. 16-146—Basic and diluted EPS.
Assume that the following data relative to Kane Company for 2018 is available:
Net Income $2,100,000
Transactions in Common Shares Change Cumulative
Jan. 1, 2018, Beginning number 700,000
Mar. 1, 2018, Purchase of treasury shares (60,000) 640,000
June 1, 2018, Stock split 2-1 640,000 1,280,000
Nov. 1, 2018, Issuance of shares 240,000 1,520,000
6% Cumulative Convertible Preferred Stock
Sold at par, convertible into 200,000 shares of common
(adjusted for split). $1,000,000
Stock Options
Exercisable at the option price of $25 per share. Average
market price in 2018, $30 (market price and option price
adjusted for split). 90,000 shares
Instructions
(a) Compute the basic earnings per share for 2018. (Round to the nearest penny.)
(b) Compute the diluted earnings per share for 2018. (Round to the nearest penny.)
Pr. 16-147—Basic and diluted EPS.
Presented below is information related to Starr Company.
1. Net Income [including a discontinued operations gain (net of tax) of $70,000] $220,000
2. Capital Structure
a. Cumulative 5% preferred stock, $100 par,
6,000 shares issued and outstanding $600,000
b. $10 par common stock, 74,000 shares outstanding on January 1.
On April 1, 40,000 shares were issued for cash. On October 1,
16,000 shares were purchased and retired. $1,000,000
Pr. 16-147 (Cont.)
c. On January 2 of the current year, Starr purchased Oslo Corporation.
One of the terms of the purchase was that if Oslo net income for the
following year is $2,400,000 or more, 50,000 additional shares would
be issued to Oslo stockholders next year. Oslo’s net income for the current year was $2,600,000.
3. Other Information
a. Average market price per share of common stock during entire year $30
b. Income tax rate 30%
Instructions
Compute earnings per share for the current year.
Pr. 16-148—Basic and diluted EPS.
The following information was taken from the books and records of Ludwick, Inc.:
1. Net income $ 480,000
2. Capital structure:
a. Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible
into 50 shares of common stock at the present date and for the next
10 years. 300,000
b. $10 par common stock, 200,000 shares issued and outstanding
during the entire year. 2,000,000
c. Stock warrants outstanding to buy 16,000 shares of common stock
at $20 per share.
3. Other information:
a. Bonds converted during the year None
b. Income tax rate 30%
c. Convertible debt was outstanding the entire year
d. Average market price per share of common stock during the year $32
e. Warrants were outstanding the entire year
f. Warrants exercised during the year None
Instructions
Compute basic and diluted earnings per share.
IFRS QUESTIONS
True/False
1. IFRS and GAAP have significant differences in the reporting of securities with characteristics of debt and equity, such as convertible debt.
2. Under IFRS, employee share-purchase plans must be recorded as an expense in the year it was issued by a company.
3. Under IFRS, convertible bonds are “bifurcated” —separated into the equity component (the value of the conversion option) of the bond issue and the debt component.
4. Under both GAAP and IFRS, the calculation of basic and diluted earnings per share is identical.
5. IFRS requires that compound instruments be separated into their liability and equity components for purposes of accounting.
Multiple Choice:
6. With regard to recognizing stock-based compensation
a. IFRS and GAAP follow the same model.
b. IFRS and GAAP standards are undergoing major reform on valuation issues.
c. it has been agreed that these standards will not be merged due to the differences in currencies.
d. the reform of GAAP standards will not be addressed until IFRS standards have been finalized.
7. Under IFRS, how are convertible debt recorded?
a. Convertible debt is separated into equity component and debt component.
b. Convertible debt is recorded under stockholders’ equity.
c. Convertible debt is recorded as long-term liability.
d. Convertible debt is added to current liability section, as it will be converted to equity.
8. Convertible bonds are separated into the equity component of the bond issue and the debt component under
a. GAAP and IFRS.
b. Neither GAAP nor IFRS.
c. IFRS only.
d. GAAP only.
9. With regard to contracts that can be settled in either cash or shares
a. IFRS requires that share settlement must be used.
b. IFRS gives companies a choice of either cash or shares.
c. GAAP requires that share settlement must be used.
d. the FASB project proposes that the IASB adopt the GAAP approach, requiring that share settlement must be used.
10. Under IFRS, what is recorded as compensation expense for all employee share-purchase plans?
a. Par value of shares
b. Amount paid by employees
c. Amount of discount
d. Amount transferred to share premium
11. Which of the following differs in GAAP and IFRS?
a. Calculation of EPS
b. Model for recognizing stock-based compensation
c. Accounting for convertible debt
d. Modification of a share option
12. The fair value of the liability component using the “with-and-without” method is
a. $3,848,288
b. $2,483,600
c. $1,365,688
d. $ 151,712
13. Determine the fair value of the equity component using the “with-and-without” method is
a. $3,848,288
b. $2,483,600
c. $1,365,688
d. $ 151,712
14. What is the compensation expense recorded by Swing High Inc.?
a. $ 3,600
b. $32,400
c. $36,000
d. $28,800
15. Swing High Inc. will credit Share Premium―Ordinary for:
a. $32,400
b. $ 3,600
c. $36,000
d. $28,800
