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Exam 19: Share-Based Compensation and Earnings Per Share

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Question 1

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FX Services granted 15 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

A) $ 0
B) $ 15 million
C) $ 40 million
D) $120 million The $120 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $40 million each year.

E) B) and C)
F) None of the above

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Question 2

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The following information pertains to J Company's outstanding stock for 2009: What is the number of shares J should use to calculate 2009 basic earnings per share?

A) 20,000.
B) 22,500.
C) 25,000.
D) 27,000.

E) B) and C)
F) None of the above

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Question 3

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On January 1, 2009, Jeans-R-Us Company awarded 15 million of its $1 par common shares to key personnel, subject to forfeiture if employment is terminated within 3 years. On the date of the grant, the stock had a market price of $3 per share. Required: (1.) Determine the total compensation cost pertaining to the restricted shares. (2.) Prepare the appropriate journal entry to record the award on January 1, 2009. (3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2009.

On December 31, 2008, Vitners Company had outstanding 400,000 shares of common stock and 40,000 shares of 8% cumulative preferred stock (par $10). February 28, 2009, issued an additional 36,000 shares of common stock September 1, 2009, 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 during the year had averaged $20. Also outstanding were $1,000,000 face amount of 10% convertible bonds issued in 2006 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%. A 10% stock dividend was declared and distributed on July 1, 2009. Required: Compute basis and diluted EPS for the year ended December 31, 2009.

What will Angel report as diluted earnings per share for 2009, rounded to the nearest cent?

Under its executive stock option plan, Q Corporation granted options on January 1, 2009, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2011 (the vesting date) . The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures were anticipated, however unexpected turnover during 2010 caused the forfeiture of 5% of the stock options. Ignoring taxes, what is the effect on earnings in 2011?

All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?

When computing diluted earnings per share, which of the following will be omitted from the calculation?

What is an anti-dilutive security?

What would be the total compensation indicated by these options?

ABC declared and paid cash dividends in January of the current year to its common shareholders. The dividend:

Stock options, rights, and warrants are different from convertible securities in that they:

When we assume conversion of convertible bonds, the numerator is increased by:

At December 31, 2009, Hansen Corporation had 50,000 shares of common stock and 5,000 shares of 6%, $100 par cumulative preferred stock outstanding. No dividends were declared or paid in 2009. Net income was reported as $200,000. What is basic EPS?

What is meant by dilution of earnings per share?

Wilson's compensation expense in 2009 for these stock options was:

Basic earnings per share ignores:

If unexpected turnover in 2010 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2010?

Under its executive stock option plan, W Corporation granted options on January 1, 2009, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2011 (the vesting date) . The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. The options are exercised on April 2, 2012, when the market price is $21 per share. By what amount will W's shareholder's equity be increased?

Which of the following statements is true regarding share appreciation rights (SAR) payable in cash?