CHAPTER 16

DILUTIVE SECURITIES AND EARNINGS PER SHARE
IFRS questions are available at the end of this chapter.

TRUE-FALSE—Dilutive Securities—Conceptual
Answer
T F T F F T F T F T F F T F T F T. F. T F

No.
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20.

Description
Accounting for convertible bond issue. Reporting gain/loss on convertible debt retirement. Reporting additional payment to encourage conversion. Exercise of convertible preferred stock. Convertible preferred stock exercise. Allocating proceeds between debt and detachable warrants. Allocating proceeds from nondetachable warrants. Intrinsic value of a stock option. Compensation expense in fair value method. Service period in stock option plans. Accounting for nonexercise of stock options. Accounting for stock option forfeiture. Cumulative preferred stock and EPS. Restating shares for stock dividends and stock splits. Stock dividend and weighted-average shares outstanding. Preferred dividends and income before extraordinary items. Reporting EPS in complex capital structure. Dilutive stock options. Contingent issue shares. Reporting EPS for income from continuing operations.

MULTIPLE CHOICE—Dilutive Securities, Conceptual
Answer
d d b c a d b d d d d c b c a c a d a

No.
21. 22. 23. S 24. S 25. S 26. 27. 28. 29. 30. P 31. P 32. S 33. S 34. 35. 36. 37. 38. *39.

Description
Nature of convertible bonds. Recording conversion of bonds. Classification of early extinguishment of convertible bonds. Reasons for issuing convertible debt. Reporting gain/loss on conversion of bonds. Accounting for conversion of preferred stock. Recording conversion of preferred stock. Bonds issued with detachable stock warrants. Debt equity features of debt issued with stock warrants. Classification of stock warrants outstanding. Bonds issued with detachable stock warrants. Distribution of stock rights. Difference between convertible debt and stock warrants. Characteristics of noncompensatory stock option plan. Measurement of compensation in stock option. Recognition of compensation expense in a stock option plan. Compensation expense in a stock option plan. Characteristics of noncompensatory stock purchase plan. Compensation expense in an incentive stock option plan.

16 - 2

Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Dilutive Securities, Conceptual (cont.)
Answer
d b b

No.
*40. *41. *42.

Description
Stock appreciation rights plan. Incentive stock option plan. Share-based liability awards.

MULTIPLE CHOICE—Dilutive Securities, Computational
Answer
a b a c b b b d b c c c c b b b c b b c c b b d d c c c c b a c b b a
P S

No.
43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. *75. *76. *77.

Description
Conversion of convertible bonds. Conversion of convertible bonds. Exercise of stock purchase rights. Conversion of convertible bonds. Amortization of bond discount. Unamortized bond discount related to converted bonds. Conversion of convertible bonds. Conversion of convertible preferred stock. Bonds issued with detachable stock warrants. Bonds issued with detachable stock warrants. Bonds issued with detachable stock warrants. Bonds issued with detachable stock warrants. Recording paid-in capital from stock warrants. Bonds issued with detachable stock warrants. Exercise of stock purchase rights. Bonds issued with detachable stock warrants. Bonds issued with detachable stock warrants. Recording paid-in capital from stock warrants. Determine compensation expense in a stock option plan. Determine compensation expense in a stock option plan. Impact of stock options on net income. Determine compensation expense in a stock option plan. Determine compensation expense in a stock option plan. Determine compensation expense in a stock option plan. Determine paid-in capital amount in a stock option plan. Determine compensation expense in a stock option plan. Net income effect in a stock option plan. Determine compensation expense in a stock option plan. Impact of stock options on stockholders’ equity. Determine compensation expense in a stock option plan. Determine compensation expense in a stock option plan. Issuance of treasury stock in a stock option plan. Compensation expense recognized in first year in an SAR plan. Compensation expense recognized in second year in an SAR plan. Compensation expense recognized in third year in an SAR plan.

These questions also appear in the Problem-Solving Survival Guide. These questions also appear in the Study Guide. *This topic is dealt with in an Appendix to the chapter.

Dilutive Securities and Earnings per Share

16 - 3

MULTIPLE CHOICE—Dilutive Securities, CPA Adapted
Answer
d a c c

No.
78. 79. 80. *81.

Description
Cash proceeds from issuance of convertible bonds. Bond issue with detachable stock warrants. Compensation expense in a stock option plan. Compensation expense recognized in an SAR plan.

MULTIPLE CHOICE—Earnings Per Share, Conceptual
Answer
c d d c b b d b a d a b d d

No.
82. 83. 84. 85. S 86. P 87. 88. 89. 90. 91. 92. 93. 94. *95.

Description
Simple capital structure. Computing EPS for a simple capital structure. Computation of weighted-average shares outstanding. Effect of treasury stock on EPS. Reporting EPS by companies. Diluted EPS and conversion of bonds. Diluted EPS. Dilutive convertible securities. Cumulative convertible preferred stock income adjustment. Treasury stock method. Treasury stock method. Treasury stock method. Antidilutive securities. EPS calculation with two dilutive convertible securities.

MULTIPLE CHOICE—Earnings Per Share, Computational
Answer
c c b b c a c c d b b c d c d c c b c b b d

No.
96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. 111. 112. 113. 114. 115. 116. 117.

Description
Weighted average number of common shares outstanding. Weighted average number of common shares outstanding. Weighted average number of common shares outstanding. Weighted average number of shares outstanding. Determination of shares used in computing EPS. Computation of earnings per share. Basic EPS with convertible preferred stock. EPS and a stock split. Weighted average number of common shares outstanding. Diluted EPS and the treasury stock method. Diluted EPS with convertible bonds. Diluted EPS and contingent issuances. Basic EPS. Diluted EPS with convertible bonds and preferred stock. Number of shares in computing diluted EPS. Diluted EPS. EPS and contingent issuances. Diluted EPS with convertible bonds. Diluted EPS with convertible bonds. Diluted EPS with convertible bonds. Diluted EPS. Basic EPS with convertible bonds and convertible preferred stock.

16 - 4

Test Bank for Intermediate Accounting, Fourteenth Edition

MULTIPLE CHOICE—Earnings Per Share, Computational (cont.)
Answer
c b b b c a c b c d

No.
118. 119. 120. 121. 122. 123. 124. 125. 126. 127.

Description
Diluted EPS. Denominator in computing basic EPS and DEPS with convertible bonds. Shares outstanding for basic EPS and DEPS. Basic EPS with convertible preferred stock. Diluted EPS with convertible bonds. Basic EPS and DEPS with convertible bonds issued during year. Basic EPS with convertible preferred stock and convertible bonds. DEPS with convertible preferred stock and convertible bonds. DEPS and the treasury stock method. DEPS using the treasury stock method.

MULTIPLE CHOICE—Earnings Per Share, CPA Adapted
Answer
b b d b b d a

No.
128. 129. 130. 131. 132. 133. 134.

Description
Determine earnings per common share. Determine earnings per common share. Determine diluted EPS. Number of shares to calculate diluted EPS. DEPS with convertible securities. Effect of dividends on nonconvertible preferred stock. "If converted" method.

EXERCISES
Item
E16-135 E16-136 E16-137 E16-138 E16-139 E16-140 E16-141 E16-142 *E16-143

Description
Convertible bonds. Convertible bonds (essay). Convertible debt and debt with warrants (essay). Stock options. Weighted average shares outstanding. Earnings per share (essay). Earnings per share. Diluted earnings per share. Stock appreciation rights.

PROBLEMS
Item
P16-144 P16-145 P16-146 P16-147 P16-148

Description
Convertible bonds and stock warrants. Earnings per share. Basic and diluted earnings per share. Basic and diluted earnings per share. Basic and diluted earnings per share.

Dilutive Securities and Earnings per Share

16 - 5

CHAPTER LEARNING OBJECTIVES
1. 2. 3. 4. 5. 6. 7. *8. *9. Describe the accounting for the issuance, conversion, and retirement of convertible securities. Explain the accounting for convertible preferred stock. Contrast the accounting for stock warrants and stock warrants issued with other securities. Describe the accounting for stock compensation plans under generally accepted accounting principles. Discuss the controversy involving stock compensation plans. Compute earnings per share in a simple capital structure. Compute earnings per share in a complex capital structure. Explain the accounting for stock-appreciation rights plans. Compute earnings per share in a complex situation.

93. 135. 2. MC 57. P 32. Learning Objective 2 MC 27. 3. 140. 104. MC 143. P 87.6 Test Bank for Intermediate Accounting. MC 116. 94. 16. 52. MC 55. 12. MC 118. 43. MC 121. MC MC MC MC E E P P MC MC MC MC MC E E 138. 85. 39. 146. 110. P 31. 136. 145. 10. 53. 127. 62. 146.16 . 132. 13. 134. 97. MC 79. S MC MC MC TF MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC S S 24. MC 126. MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC MC E 78. MC 125. Fourteenth Edition SUMMARY OF LEARNING OBJECTIVES BY QUESTIONS Ite Typ Ite Typ Ite Typ Ite Typ Ite Ty Ite Typ Ite Typ Learning Objective 1 MC 44. 75. 14. MC 100. 18. MC E E 144. 41. 107. 25. MC 50. MC 81. MC 70. 80. 20. MC 45. 89. 42. 63. 40. 11. 7. MC 46. MC 123. 37. MC 102. Learning Objective 6 MC 99. 15. 22. 106. MC 56. P S S 137. 91. 84. MC 114. E P P P P Note: TF = True-False MC = Multiple Choice E = Exercise P = Problem . MC 101. 28. 92. 76. MC 130. 139. 148. 90. MC 115. 131. 111. 8. MC 59. 142. 105. 141. MC 69. MC 66. MC 128. Learning Objective 3 MC 54. MC 122. 147. 96. 6. MC 47. 33. MC 120. E P 34. 5. MC 49. 83. MC 119. MC Learning Objective 9* 1. 73. 144. 133. 4. 29. 26. MC 65. 9. 108. 98. 109. E S 86. 35. MC 71. MC 103. Learning Objective 7 MC 113. 30. TF TF TF TF TF TF TF MC TF TF TF TF TF TF TF TF TF TF TF TF MC MC MC MC MC MC 21. Learning Objective 4 MC 64. MC 68. MC 67. 17. 95. 140. 38. 51. 36. MC 124. MC 60. MC 48. MC 58. 19. 88. Learning Objective 8* MC 77. 74. 112. MC 129. MC 117. 72. 61. 23. 147. 82.

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

none of these. 17. 23. 15. will arise when the original debt is converted. that convertible bonds will always sell at a premium. 18. F T F T F MULTIPLE CHOICE—Dilutive Securities. 3. Convertible bonds a. b. The conversion of bonds is most commonly recorded by the a. c. expense. S 24. One is the desire to raise equity capital that. A company should report per share amounts for income before extraordinary items. but not for income from continuing operations. market value method. stock options are considered dilutive when their option price is greater than the market price. 12. 5. 22. b. the fact that equity capital has issue costs that convertible debt does not. c. it must report both basic and diluted earnings per share. c. are usually secured by a first or second mortgage. 8. Ans. b. Test Bank for Intermediate Accounting. d. Corporations issue convertible debt for two main reasons. In computing diluted earnings per share. d. 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. assuming conversion. 20. that many corporations can obtain financing at lower rates. the ease with which convertible debt is sold even if the company has a poor credit rating. . Fourteenth Edition When a company has a complex capital structure. the sweetener is accounted for as a(n) a. 14. have priority over other indebtedness. T F T F T Item 11. d. loss. Ans. book value method. When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion. pay interest only in the event earnings are sufficient to cover the interest. In a contingent issue agreement. 2. Conceptual 21. proportional method. 18. The other is a. Ans. 19. b. may be exchanged for equity securities. True-False Answers—Conceptual Item 1. 20. incremental method.8 17. Ans. 9.16 . 10. 19. 4. F F T F T Item 16. c. 13. T F T F F Item 6. 7. extraordinary item. d.

b. 27. the excess should be credited to a. d. d. The conversion of preferred stock may be recorded by the a. incremental method. c. treated as a direct reduction of retained earnings. The amount to be recorded as paidin capital is preferably a. When the cash proceeds from a bond issued with detachable stock warrants exceed the sum of the par value of the bonds and the fair market value of the warrants. retained earnings. 28. reflected currently in income. book value method. a liability account. reductions of capital contributed in excess of par value. exercise of the warrants within the next few fiscal periods seems remote. S 26. reflected currently in income as an extraordinary item. P 31. c. assets. treated as a prior period adjustment. zero. the warrants issued with the debt securities are nondetachable. Proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when a. c. When convertible debt is retired by the issuer. none of these. b. premium on bonds payable. reflected currently in income. any material difference between the cash acquisition price and the carrying amount of the debt should be a. but not as an extraordinary item. A corporation issues bonds with detachable warrants. treated as an adjustment of additional paid-in capital. d. calculated by the excess of the proceeds over the face amount of the bonds. d. b. b. c. c. market value method. but not as an extraordinary item. d. the market value of the warrants is not readily available. c. based on the relative market values of the two securities involved. 29. . additional paid-in capital from stock warrants. Stock warrants outstanding should be classified as a. c. d. b. the allocation would result in a discount on the debt security. treated as a prior period adjustment.9 25. b. equal to the market value of the warrants. The conversion of preferred stock into common requires that any excess of the par value of the common shares issued over the carrying amount of the preferred being converted should be a. liabilities.Dilutive Securities and Earnings per Share S 16 . reflected currently in income as an extraordinary item. d. 30. b. par value method.

The plan offers no substantive option feature. b. allocated over the periods of the employee's service life to retirement. The date on which to measure the compensation element in a stock option granted to a corporate employee ordinarily is the date on which the employee a. recognized in the period of exercise. 38. d. recognized in the period of the grant. 35. b. b. c. b. c. allocated to the periods benefited by the employee's required service. d. The plan offers no substantive option feature. b. of grant. Fourteenth Edition P 32. c. The date on which total compensation expense is computed in a stock option plan is the date a. The major difference between convertible debt and stock warrants is that upon exercise of the warrants a. It is open to almost all full-time employees. The discount from market price is small. All of these are characteristics. Substantially all full-time employees may participate on an equitable basis. c. c. 36. the holder has to pay a certain amount of cash to obtain the shares. has performed all conditions precedent to exercising the option. b.16 . d. the stock involved is restricted and can only be sold by the recipient after a set period of time. Which of the following is not a characteristic of a noncompensatory stock purchase plan? a. is granted the option. b. S 34. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others. d. the stock is held by the company for a defined period of time before they are issued to the warrant holder.10 Test Bank for Intermediate Accounting. d. c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. that the market price coincides with the option price. Compensation expense resulting from a compensatory stock option plan is generally a. c. no paid-in capital in excess of par can be a part of the transaction. . S 33. that the market price exceeds the option price. Which of the following is not a characteristic of a noncompensatory stock option plan? a. 37. The distribution of stock rights to existing common stockholders will increase paid-in capital at the Date of Issuance of the Rights Yes Yes No No Date of Exercise of the Rights Yes No Yes No a. c. exercises the option. of exercise. may first exercise the option. d.

24. credit of $240.11 Under the intrinsic value method. the stock’s price reaches a predetermined amount. *42.000 to Paid-in Capital in Excess of Par. b. c. Item Ans. loss of $16. c. d. 28.000. Each $1.000 to Paid-in Capital in Excess of Par. share-based liability awards. d d d c 33. incentive stock option plan. the holders of $1.” 30. Conceptual Item Ans. b b Solutions to those Multiple Choice questions for which the answer is “none of these. Item Ans. b c a c 37.Dilutive Securities and Earnings per Share *39. *40. d d b c 25. 31. compensation expense resulting from an incentive stock option is generally a. 26.000 of 8% convertible bonds outstanding. 36. a d b d 29. 27. 16 .000 bonds exercised the conversion privilege. For stock appreciation rights. Item Ans. the rights mature. b. using an option-pricing model. of exercise. MULTIPLE CHOICE—Dilutive Securities. d. of grant. *41. d. *40. credit of $272. a d c d *41. 32. for a. neither equity awards or liability awards. On that date the market price of the bonds was 105 and the market price of the common stock was $36. d.600. Computational 43. the measurement date for computing compensation is the date a. additions to contributed capital. c. A company estimates the fair value of SARs. both equity awards and liability awards. not recognized because no excess of market price over the option price exists at the date of grant. c. Multiple Choice Answers—Dilutive Securities. *42. share-based equity awards. *39. credit of $112. b. . 22. stock appreciation rights plan. c.000 to Premium on Bonds Payable. 23. 35. 30. Item Ans. Item Ans. recognized in the period of the grant. Fogel should record. b. Fogel Co. The bonds pay interest on January 31 and July 31. nonqualified stock option plan. 38. 21. Taxes would be paid in all of these.000. as a result of this conversion. b. a a. The total unamortized bond premium at the date of conversion was $350. d. An executive pays no taxes at time of exercise in a(an) a. On July 31. 34. allocated to the periods benefited by the employee's required service.000 bond is convertible into 30 shares of $30 par value common stock. has $5. 2012.000. recognized in the period of exercise.

Above 9% c. What was the effective interest rate on the bonds when they were issued? a.000. $900. b. $141.000. $135. 9% b. b. c.200 unamortized discount on the bonds. $80. 2012 at 96. On April 1. 45.000. c. Accrued interest was paid in cash at the time of conversion. $129. On June 30. c. d.000. If "interest payable" were credited when the bonds were issued. There is $3. 48. 2013. $46. c. $43.800 increase in paid-in capital in excess of par. Using the book value method. a $4. 2013 relating to the bonds converted? a. ten-year convertible bonds on July 1. On July 1.400 increase in paid-in capital in excess of par. Bond discount is amortized semiannually on a straight-line basis.000. the holders of $3. 47. Cannot determine from the information given. The total unamortized bond discount at the date of conversion was $1.200. The bonds were dated April 1.000.200.800.1 plus accrued interest. The market price of the bonds on that date was $1.000. a $9. b. no change in paid-in capital in excess of par.100 per bond and the market price of the common stock was $35.000. What should be the amount of the unamortized bond discount on April 1.500. . 2012? a.200. a $6.000 bond. what should be the amount of the debit to "interest expense" on October 1. 46. bonds were converted into 1. what amount should Morgan credit to the account "paid-in capital in excess of par. 2012.800. $200.000 of Parks Co. Parks would record a.000.600 increase in paid-in capital in excess of par.000. 2012.000 of these bonds were converted into 500 shares of $20 par value common stock.000 face value bonds exercised the conversion privilege. d. Morgan Corporation had two issues of securities outstanding: common stock and an 8% convertible bond issue in the face amount of $20. Use the following information for questions 46 through 48. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value common stock in exchange for each $1. $270. $23. In applying the book value method. $44. b. $1. $412.250. $1.400. Below 9% d.16 . an interest payment date. Interest payment dates of the bond issue are June 30th and December 31st. common stock each having a par value of $45 and a market value of $54. d.600 shares of Parks Co.000 of 9%.400. Fourteenth Edition 44.000.12 Test Bank for Intermediate Accounting. Chang Corporation issued $6." as a result of this conversion? a. 2010 with interest payable April 1 and October 1. d.

The bonds without the warrants would normally sell at 95. What amount should Ruiz record on March 1. In August 2013. 2012.000. . the fair value of Ruiz’s common stock was $40 per share and the fair value of the warrants was $2. Lester Company issued at 103.360.600 d. On March 1. c. $2. four hundred of its 9%. 2010 as paid-in capital from stock warrants? a.000. At the time of the conversion.280.000. d.13 Litke Corporation issued at a premium of $5.00.800 b.000 50..000 In 2012. $50. $42. The market value of the common stock at the date of the conversion was $30 per share. 52.000. $391. Eklund. The amount of the proceeds from the issuance that should be accounted for as the initial carrying value of the bonds payable would be a. $1. which are due on February 28. On March 1. c.000. $52. 2012.600 c. $1. and the market value of each stock purchase warrant was $50. 80. each $1. On December 1. $2. 51. $52. $55.000. $62.000. without the stock warrants. and the stock is quoted on the market at $60 per share. Attached to each bond was one detachable stock warrant entitling the holder to purchase 10 shares of Lester's common stock. 2032.Dilutive Securities and Earnings per Share 49. issued for $103 per share.000 a $100.000.240. 2012. 2012. all of the preferred stock was converted into common stock.000 of 8% nonconvertible bonds at 104. the market value of the bonds is $110. $70.000. $412.000 bond issue convertible into 2.000. par value $25. b. Ruiz Corporation issued $1.040.000 bonds. If the bonds are converted into common. 16 .000 shares of $100 par value convertible preferred stock. One share of preferred stock can be converted into three shares of Eklund's $25 par value common stock at the option of the preferred stockholder. b.000 b. the unamortized premium is $2. what is the amount of paid-in capital in excess of par to be recorded on the conversion of the bonds? a. In addition. Inc. $1.000 bond was issued with 25 detachable stock warrants.000 d. $36. What total amount should be credited to additional paid-in capital from common stock as a result of the conversion of the preferred stock into common stock? a.000 c. each of which entitled the bondholder to purchase for $50 one share of Ruiz common stock. $400. $387.400. On December 1.000 shares of common stock (par value $25). was 95. d. the market value of the bonds.

$1. $20. if any.000. discount of $5.200. 2012. Fourteenth Edition 53.000 c. What amount. $0 b. $20.000 Premium on Bonds Payable 116. 2012. twenty-year. Payne should credit Paid-in Capital from Stock Warrants for a.800 Paid-in Capital—Stock Warrants 127.000 bonds due in ten years.000 c. $20.000 Premiums on Bonds Payable 180. discount of $5. One detachable stock warrant entitling the holder to purchase 15 shares of Gordon’s common stock was attached to each bond. 55.000 Paid-in Capital—Stock Warrants 126. b. What accounts should Kegin credit to record the sale of the bonds? a.008 21 28 54. Payne Co.000 Premium on Bonds Payable 52.200 d. the market value of the bonds. the corporation's securities had the following market values: 8% bond without warrants Warrants Common stock $1. d.000 Use the following information for questions 55 and 56. Payne should record the bonds with a a. without the stock warrants. c.16 . c.000 Premium on Bonds Payable 24. Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Payne’s common stock. Bonds Payable $3.000.180. 2012.000. which are due on April 30. $19.000.14 Test Bank for Intermediate Accounting.000.760 On April 7. 56.000. Immediately after the sale of the bonds. $15 par value. Kegin Corporation sold a $3. .600. d. the fair value of Payne’s common stock was $35 per share and of the warrants was $2.400 Paid-in Capital—Stock Warrants 63. was quoted at 96.600. Bonds Payable $3.000. issued $500.000 bond. At the date of issuance. $35. On May 1.000 of 7% bonds at 103. Bonds Payable $3. Bonds Payable $3. 2012. b.800 d. Each $1. 8 percent bond issue for $3. discount of $20. On May 1. were attached to each $1. During 2012. The stock has a par value of $25 per share. premium of $15.000. each of which permits the purchase of one share of the corporation's common stock for $30. $19. On May 1.000.000 bond has two detachable warrants.000. 2022.600 b. of the proceeds from the issuance should be accounted for as part of Gordon’s stockholders' equity? a. On May 1. $20. 2012. Gordon Company issued at 104 five hundred. The market value of each detachable warrant was quoted at $40.000.000. The bonds without the warrants would sell at 96.

........ 2012. c...... 180.200.......... discount of $11.......000 Paid-in Capital—Stock Warrants ......15 On July 4..........000 rights were exercised........000 shares of $100 par value.......000... 7% noncumulative preferred stock along with one detachable warrant for each share issued. Cash.... discount of $10.............................. Each warrant contains a right to purchase one share of Chen $10 par value common stock for $15 per share.... Use the following information for questions 59 and 60.................000..... Cash..... 2012..... Twenty detachable stock warrants entitling the holder to purchase for $40 one share of Marly’s common stock. 240... 270................................ The bonds without the warrants would sell at 96........ On May 1......000 Paid-in Capital in Excess of Par ......... discount of $40.........000 Paid-in Capital in Excess of Par ........... Marly Co.......000 bonds with the warrants attached was $410.......................... Cash...............000 Vernon Corporation offered detachable 5-year warrants to buy one share of common stock (par value $5) at $20 (at a time when the stock was selling for $32)......000. which are due on April 30........ 2022...... 2012.. What amount should be allocated to the warrants? a....... when the market price of the common stock was $19 per share and the market value of the rights was $3............ issued $1.... 2012.00 per right...................................... 90..........000 d.................... ............. 210.............. 240.000 b.............. As a result of the exercise of the 24........300.. $40.... On May 1.000 Common Stock ........... The market price of the rights on July 1.....000 Common Stock .. 150..000 a total of 60........000 d.............. The market price of the Vernon bonds without the warrants was $360.............000 bond..............000 rights and the issuance of the related common stock... 240..150......... 2012.. $50..........000 b..........50 per right..............000......... 59....000..000.. 360............ $48......................... 360.......... what journal entry would Chen make? a.............000 58......... $41..000 c...000 Paid-in Capital in Excess of Par ... The price paid for 4...... On October 31.000 Paid-in Capital in Excess of Par .Dilutive Securities and Earnings per Share 57..000...... d.... On May 1................. 120........... Cash............ Chen Company issued for $6.. and the market price of the warrants without the bonds was $40................ Marly should record the bonds with a a...... 240... 60.......000 Paid-in Capital—Stock Warrants .. premium of $30........ was $2.000 Common Stock .... 360............................000.... 2012................000 c...... $15 par value........000 of 7% bonds at 103........ b..... 360.............................. The stock without the warrants would normally sell for $6..000. the fair value of Marly’s common stock was $35 per share and of the warrants was $2...........000 Common Stock ..... were attached to each $1...000 Paid-in Capital—Stock Warrants .................. 16 ........ 24......... $1.

Ellison should recognize compensation expense on its books in the amount of a. the option exercisable for 5 years from date of grant. b. 2012. an option to buy 600 shares of Ellison Co. $0. c. Using a fair value option pricing model. On January 1. $1. stock in 2012 were: July 1 $30 per share October 1 $36 per share December 1 $40 per share The service period is for three years beginning January 1. stock for $30 per share. and represent compensation for executives’ services over a three-year period beginning January 1. 2012.350. $900.000. As a result of the option granted to Williams.200 c. $70. What is the impact on Gonzalez’s net income for the year ended December 31. At December 31.700. an employee. $900. 2013. 2012. Williams exercised his option on September 1.2012. Marly should credit Paid-in Capital from Stock Warrants for a. 2012 and sold his 600 shares on December 1. Trent Company granted Dick Williams.700.000.000 decrease. 2013 as a result of this transaction under the fair value method? a. total compensation expense is determined to be $2. Quoted market prices of Ellison Co. and sold his 300 shares on December 1. Wine exercised his option on October 1. 2012. 2012.000 shares of the company’s $10 par common stock at an option price of $50 per share. Using a fair value option pricing model.700. b. d. c. b. Ellison Company granted Sam Wine. Quoted market prices of Trent Co. $675. $300. The Black-Scholes option pricing model determines total compensation expense to be $900. $0. the option exercisable for 5 years from date of grant.000 d.000 b. On December 31. As a result of the option granted to Wine. 61. stock during 2012 were: January 1 $30 per share September 1 $36 per share December 1 $40 per share The service period is for two years beginning January 1. $2.000 decrease. $0. . $2. $40.400 On July 1. 2013. $300. stock for $30 per share.700. $3. total compensation expense is determined to be $2. using the fair value method. an option to buy 300 shares of Trent Co. On May 1.000 increase. Gonzalez Company granted some of its executives options to purchase 120.16 Test Bank for Intermediate Accounting. c. d. 2013 none of the executives had exercised their options. 2012. using the fair value method. 2012. The options become exercisable on January 1. $41. $38. d. 62. Trent should recognize compensation expense for 2012 on its books in the amount of a. Fourteenth Edition 60. 63. 2012. an employee.16 .

000 shares were exercised. all options for the 30. 2013.200.000 b. On June 30. what should be the amount of compensation expense recorded by Yang Corporation for these options on December 31. c. Using a fair value option pricing model.Dilutive Securities and Earnings per Share 64.000.000 c. 2012.000 options were granted at an option price of $35 per share. The options expire on June 30. when the market price of the stock was $36 per share. The market price of the common stock on that date was $31 per share and the option price was $28.17 On January 1. 2013 51 per share The options were granted as compensation for executives’ services to be rendered over a two-year period beginning January 1.800 65. What amount of compensation expense should Smiley recognize as a result of this plan for the year ended December 31. Using the fair value method.750. using the fair value method. total compensation expense is determined to be $96. Quoted market prices of Reese Co. $2. 2012? a. the option exercisable for 5 years from date of grant. and sold his 100 shares on December 1. The service period is for two years beginning January 1. 2012. $500.000.400. The Black-Scholes option pricing model determines total compensation expense to be $1. stock during 2013 were: January 1 $40 per share September 1 $48 per share December 1 $54 per share The service period is for two years beginning January 1. $1.000. c. 2014. 2012. Market prices of the stock were as follows: December 31. stock for $40 per share. 100. Buchanan exercised his option on September 1. As a result of the option granted to Buchanan. 2013. $0. . an option to buy 200 shares of Reese Co. Smiley Corporation granted them incentive stock options on December 31. $0 66. $1. $48. The options are exercisable beginning January 1. 2014. Yang Corporation granted compensatory stock options for 30.000.000. $1. 2015.500 d. an employee. In order to retain certain key executives. $1. providing those key employees are still in the employ of the company at the time the options are exercised. d. 2013 Reese Company granted Jack Buchanan. $2. $96. b. On January 4. 2012 under the fair value method? a. $22. b.400 d. Using a fair value option pricing model. 2013.000.000. total compensation expense is determined to be $2. 2012 $46 per share December 31.000. 16 .100.000 shares of its $24 par value common stock to certain of its key employees. Reese should recognize compensation expense for 2013 on its books in the amount of a. 2011.

000. The Black-Scholes option pricing model determines total compensation expense to be $180. the option exercisable for 5 years from date of grant. As a result of the option granted to Telfer. none of the executives had exercised their options. On December 31. an option to buy 2. c. 2013.16 . $15.000 shares of the company's $10 par common stock at an option price of $50 per share. and sold his 1. Fourteenth Edition 67. $3.000. The market price of common stock was $26 per share at the date of grant. 2013 as a result of this transaction under the fair value method? a. The Black-Scholes option pricing model determines total compensation expense to be $450.000 decrease 68.000.000. . d. $18. On January 1. 2016 by grantees still employed by Ritter.000.000. The journal entry to record the compensation expense related to these options for 2013 would include a credit to the Paid-in Capital—Stock Options account for a. Ritter Company granted stock options to officers and key employees for the purchase of 20. Quoted market prices of Evans Co. and represent compensation for executives' services over a three-year period beginning January 1. $5. What is the impact on Kessler's net income for the year ended December 31.000. total compensation expense is determined to be $15.000. 2013. 2013. stock during 2013 were January 1 $25 per share September 1 $30 per share December 1 $34 per share The service period is for three years beginning January 1. stock for $25 per share. Evans Company granted Tim Telfer. $36.000 shares on December 1. Using a fair value option pricing model. At December 31. b.000 shares of Evans Co.000. 2013. 69. 2013. $0 c. b. using the fair value method. c.000. $150. $40. d. 2012. an employee. On January 1. 2013.000 increase b.000 shares of the company's $1 par common stock at $20 per share as additional compensation for services to be rendered over the next three years. 2013. Kessler Company granted some of its executives options to purchase 75. $0.000 decrease d. The options become exercisable on January 1. $150. The options are exercisable during a five-year period beginning January 1. 2013. $450. Telfer exercised his option on September 1. $60. Evans should recognize compensation expense for 2013 on its books in the amount of a.18 Test Bank for Intermediate Accounting.

000 options were exercised. The Black-Scholes option pricing model determines total compensation expense to be $480.Dilutive Securities and Earnings per Share 70. $60.500.000. 2012. b. $1. 2013. The options are exercisable beginning January 1. $480. The market price of the common stock on that date was $23 per share and the option price was $20. all 40. On December 31. 2013. The options expire on January 1. c. 2012.000. provided those key employees are still in Weiser’s employ at the time the options are exercised. b. The options become exercisable on January 1. $180. when the market price of the stock was $42 per share.000. provided those key employees are still in Norman’s employ at the time the options are exercised. $500. granted stock options for 40. The options are exercisable beginning January 1.000. 2012.000 decrease c. $192. on January 1. What should be the amount of compensation expense recorded by Norman Corporation for the calendar year 2012 using the fair value method? a.19 Weiser Corp. 16 . The Black-Scholes option pricing model determines total compensation expense to be $360. $0. On January 1. 2012. . $120. and represent compensation for executives' past and future services over a three-year period beginning January 1. Norman Corporation granted compensatory stock options for 40.000.000. The options expire on June 30. 2013.000 options were exercised. 72. $0. 2013. The market price of the common stock on that date was $36 per share and the option price was $30.000. 2009. c. $500. 2012. What is the impact on Houser's total stockholders' equity for the year ended December 31. $0 d.000 increase On June 30. d.000. 71. $240.000 shares of its $20 par value common stock to certain of its key employees. d. Houser Company granted some of its executives options to purchase 75. 2013. 2014.500. On January 4. as a result of this transaction under the fair value method? a. all 40. when the market price of the stock was $29 per share. The amount of compensation expense Weiser should record for 2009 under the fair value method is a.000.000 decrease b.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 $1.000 shares of its $10 par value common stock to its key employees.

2014 $35 per share 38 per share 30 per share 33 per share Compensation expense relating to the plan is to be recorded over a four-year period beginning January 1. 2013? a.000.000 options were granted at an option price of $35 per share. The market value per share was $13 at December 31. What amount of compensation expense should Korsak recognize for the year ended December 31.000. 2012 December 31. Fourteenth Edition 73. $275. c. $15 at June 4.000.000 .000. Korsak. 2012 December 31. Grant issued 25. $1. established a stock appreciation rights plan for its executives.000 shares of treasury stock ($10 par value) at December 31.000 SARs. What amount of compensation expense should Jensen recognize as a result of this plan for the year ended December 31. 2012. Inc. $300. 74. 2012.440.000. Current market prices of the stock are as follows: January 1.000. which it acquired at $11 per share. Inc.000 b. The stock options had been granted for $12 per share. *75. d. In order to retain certain key executives. $700.000 d. c. 2012. $175. 2013 $46 per share 51 per share The options were granted as compensation for executives' services to be rendered over a two-year period beginning January 1. On January 1. b.000. Market prices of the stock were as follows: December 31. 2012? a. The cost method is used. $300. Use the following information for questions 75 through 77. 2012. $240. had 50. 2011. 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 80. 2012. 2013.000. b. Grant. 2013. Jensen Corporation granted them incentive stock options on December 31. On June 4.000 c. d. $1.16 .20 Test Bank for Intermediate Accounting. 2012 under the fair value method? a.750. 2012 December 31.000 treasury shares to employees who exercised options under Grant's employee stock option plan. What is the balance of the treasury stock on Grant's balance sheet at December 31. $550. 2013 December 31. $360. $350. 70. 2013. and $18 at December 31. $225.000. The Black-Scholes option pricing model determines total compensation expense to be $700.

$40.000 SARs are exercised by executives. 50. 64. Item Ans. Discount on Bonds Payable. a b a c b 48. b.000 b. 45. The sum of the fair value of the warrants and the face amount of the bonds exceeds the cash proceeds. c c c c b 73. 49. Item Ans. a liability for the entire proceeds. a liability for the face amount of the bonds and paid-in capital for the premium over the face amount. d. Common Stock Subscribed.000 d. 2012. 70. 72. 60. Premium on Bonds Payable. 52. the market price of Farr’s common stock was 50 percent above its par value. $780. c c c b b 58. CPA Adapted 78. 79. This excess is reported as a. b c b b c 63. *75. 66. $380. cash proceeds from the issuance of the convertible bonds should be reported as a. 65. issued bonds with detachable common stock warrants. *77. d. 59.000 d. 16. 47. During 2012. paid-in capital for the entire proceeds. c. 16 .000 On December 31. *76.000 c. What amount of compensation expense should Korsak recognize for the year ended December 31.000 c. 2013? a. $200.000 *77. b. c b b d d 68. $260. 57. these bonds were converted into common stock having an aggregate par value equal to the total face amount of the bonds. At conversion. Item Ans. $0 b. 55. 2012. Item Ans. 69. Paid-in Capital in Excess of Par—Stock Warrants. Item Ans. 46. 2014. On January 2. b b d b c 53. Item Ans. 71. $400. 54. paid-in capital for the portion of the proceeds attributable to the conversion feature and as a liability for the balance. issued 10-year convertible bonds at 105.21 What amount of compensation expense should Korsak recognize for the year ended December 31. 74. $104. 67. Multiple Choice Answers—Dilutive Securities. a c b b a MULTIPLE CHOICE—Dilutive Securities. 43. 61. Farr Co. 51. . Computational Item Ans. On January 2. c. 56. Only the warrants had a known market value. 44. 62. Lang Co.Dilutive Securities and Earnings per Share *76. 2014? a.

$120. 2012. c *81. preferred dividends in arrears times (one minus the income tax rate). On January 1. granted Nenn Pine.000 shares of Sharp's $5 par value common stock at $20 per share. The option became exercisable on December 31. annual preferred dividend times (one minus the income tax rate). preferred stock.000. Ownership interest consisting solely of common stock d. b. d. *81. 2012. Nenn did not exercise any of the rights during 2012. a 80.000. d. None of these In computing earnings per share for a simple capital structure. $135. Fourteenth Edition 80. granted an employee an option to purchase 9. c. Common stock. if the preferred stock is cumulative. and $45 on December 31.000. 83.000. none of these. Rosen Corp. after the employee completed two years of service. The market prices of Sharp's stock were as follows: January 1. On exercise.22 Test Bank for Intermediate Accounting. $105. The market price of Rosen's stock was $30 on January 2. 2013. and convertible securities outstanding in lots of even thousands b. its president. c. 20.16 . With respect to the computation of earnings per share.000. 2012 December 31. 78.000. 2013. Multiple Choice Answers—Dilutive Securities. b. for past services. $0. 2012. $45. b. Item Ans. $0. As a result of the stock appreciation rights. . Sharp Corp. On January 2. the amount that should be deducted as an adjustment to the numerator (earnings) is the a. d. c MULTIPLE CHOICE—Earnings Per Share—Conceptual 82. Item Ans. $300. 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. d 79. Rosen should recognize compensation expense for 2012 of a.000 stock appreciation rights that are exercisable immediately and expire on January 2. 2013 $30 50 For 2011. should recognize compensation expense under the fair value method of a. c. Item Ans. preferred dividends in arrears. Earnings derived from one primary line of business c. 2012. The Black-Scholes option pricing model determines total compensation expense to be $210.000. $600. which of the following would be most indicative of a simple capital structure? a. CPA Adapted Item Ans.

c. none of these. Increase and decrease Due to the importance of earnings per share information. Yes Yes b. assumed converted only if they are antidilutive. which amount should then be added as an adjustment to the numerator (net earnings)? a. assumed converted only if they are dilutive. if the effect of its inclusion is a. Dilutive convertible securities must be used in the computation of a. Annual preferred dividend b. When computing diluted earnings per share. respectively? a. b. when a stock dividend or stock split occurs. d. convertible bonds are a. weighted by the number of days outstanding. considered outstanding at the beginning of the earliest year reported. diluted earnings per share only. d. c. weighted by the number of months outstanding. the additional shares are a. Annual preferred dividend times (one minus the income tax rate) c. considered outstanding at the beginning of the year. ignored. No Yes A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock.23 In computations of weighted average of shares outstanding. b. b. 90. the equivalent number of shares of convertible preferred stock are added as an adjustment to the denominator (number of shares outstanding). S 86. d. 16 . If the preferred stock is cumulative. P 87. What effect will the acquisition of treasury stock have on stockholders' equity and earnings per share. it is required to be reported by all Public Companies Nonpublic Companies a. d. Annual preferred dividend times the income tax rate d. c. . assumed converted whether they are dilutive or antidilutive.Dilutive Securities and Earnings per Share 84. In computing earnings per share. b. Annual preferred dividend divided by the income tax rate 89. Decrease and no effect b. No No d. basic earnings per share only. c. 88. Decrease and increase d. Yes No c. diluted and basic earnings per share. Dilutive Yes Yes No No Antidilutive Yes No Yes No 85. Increase and no effect c.

d b 90.” 83. d d Solution to Multiple Choice question for which the answer is “none of these. Item Ans. 91. b. 92. d. c d 84. Multiple Choice Answers—Earnings Per Share—Conceptual Item Ans. 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. the market price of the common stock used for the repurchase is the a. The one that should be used first to recalculate earnings per share is the security with the a. include stock options and warrants whose exercise price is less than the average market price of common stock. b. are those whose inclusion in earnings per share computations would cause basic earnings per share to exceed diluted earnings per share. . c. when computing diluted earnings per share. In applying the treasury stock method to determine the dilutive effect of stock options and warrants. 94. b. the computation would a. 89. d. should be included in the computation of diluted earnings per share but not basic earnings per share. greater earnings adjustment. 87. Antidilutive securities a. Item Ans. price at the end of the year. price at the beginning of the year. 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.16 . smaller earnings adjustment. 83. average market price. d. *95. b. smaller earnings per share adjustment. 93. 85. d c 86. 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. b. d. c. c. Assume there are two dilutive convertible securities. are used to calculate the number of common shares repurchased at the average market price. Item Ans. none of these. a b 94. 82. should be ignored in all earnings per share calculations. Item Ans.24 Test Bank for Intermediate Accounting. to the numerator of the calculation for diluted earnings per share. If the exercise price of the options or warrants exceeds the average market price. annual preferred dividend. *95. none of these. be antidilutive. a d 92. fairly present diluted earnings per share on a prospective basis. b b 88. Fourteenth Edition 91. When applying the treasury stock method for diluted earnings per share. Item Ans. are added. Item Ans. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis. In the diluted earnings per share computation. c. 93. d. c. greater earnings per share adjustment. net of tax. the proceeds assumed to be received upon exercise of the options and warrants a.

Dilutive Securities and Earnings per Share 16 . . 2.000. $3. $3.333 d. 98.87.500 shares of its $2 par value common stock outstanding.82 c.000 shares on July 1.000 shares of common stock outstanding on January 1.000 of which had been issued and outstanding throughout the year and 100. issued 126. b. 851. $3. Hill Corp. On January 1.000.000 97.000 of which were issued on October 1.333 The following information is available for Barone Corporation: January 1.60. $2. had 600. c.33.530. 400. purchased 63. The number of shares to be used in computing earnings per common share for 2013 is a. 2013 October 1. 99. $1. On August 1.000.000.000 shares and immediately retired the stock.000 shares on November 1.000 shares of treasury stock on September 1.000 90.285. 3. rounded to the nearest penny? a. 893.000. 300. On March 1. Gridley purchased 210. 3.680.650. $3.500 c. and issued 54. 2012. b. At December 31. Gridley sold an additional 375.000. 914. Earnings per share of common stock for 2012 would be a.25 MULTIPLE CHOICE—Earnings Per Share—Computational 96. d. 2012. What is the weighted-average number of shares outstanding for 2013? a. 3.000 shares on the open market at $20 per share. $1. 872. and had income applicable to common stock of $1. What should be Hancock's 2012 earnings per common share.000 shares of common stock issued and outstanding. 2013 July 1. Gridley issued a 20% stock dividend on May 1.390.000.500.000 1.500. had 800.000 b.600.03 b. 2012. issued 900. b.60 d. The weighted average shares outstanding for the year is a.000 shares were sold for $25 per share. Hancock Company had 500. 2012.40 Milo Co. 358.000 shares of common stock outstanding on January 1. 258. 562. 765. On November 1.000 for the year ending December 31. d. d. c. 100. 2013.000 240. was $1. 2013 April 1.047. c. 2013 Shares outstanding Shares issued Treasury shares purchased Shares issued in a 100% stock dividend 1.80. Net income for the year ended December 31. $1. Gridley Corporation had 187.270.000 shares on May 1.

On January 30. 103. $3. In its 2013 financial statements. At December 31.80.73 At December 31. What should be Fultz's 2013 earnings per common share.000 c. Fultz declared and paid $210. The number of shares to be used in computing diluted earnings per share for 2013 is a. Stine also had stock options outstanding at the beginning and end of 2013 which allow the holders to purchase 120. In its 2013 financial statements. Net income for the year ended December 31. $3. Fultz Company had 300. On January 1. 2013 an additional 400. $1.26 Test Bank for Intermediate Accounting. $1. Rice declared a 100% stock dividend on its common stock. 896. 824.000 shares of common stock and 10. Fultz issued 400. $100 par value cumulative preferred stock outstanding.60. Net income for 2013 was $1. b.000 shares of 5%.000 shares of common stock issued and outstanding at December 31.000 shares of 6%.00. b. Pine’s 2013 earnings per common share should be a.000 shares were issued for cash. 2013. 2013.45 c. prior to the issuance of its financial statements for the year ended December 31.25.000 102.000 shares of common stock and 10.89. During 2013. Pine declared a 100% stock split on its common stock. On July 1.140. prior to the issuance of its financial statements for the year ended December 31.80. $2. $100 par value cumulative preferred stock outstanding.000 shares of nonconvertible preferred stock. c. 2012.000 cash dividends on the common stock and $175.15 d. d. On February 10. . 624. No dividends were declared on either the preferred or common stock in 2012 or 2013. During 2013. no additional common stock was issued. 2012 Rice Company had 300.000 b. 696.000.120. $4. 2014. $1.35 b. c. The average market price of Stine’s common stock was $35 during 2013.16 . Stine Inc. 104. Net income for 2013 was $900.000.25. Rice's 2013 earnings per common share should be a. had 400. 2013. $3. $4.000 shares of common stock issued and outstanding at December 31.000 on the nonconvertible preferred stock. $3.000 shares of common stock at $28 per share. was $1.000.000 d.13. 2013. 2012 Pine Company had 200. 2014. $2. rounded to the nearest penny? a. No dividends were declared on either the preferred or common stock in 2012 or 2013. Fourteenth Edition 101. 2012. d. $1.

11.000 and the income tax rate was 30%. $2. 109. Basic earnings per share for 2013 is (rounded to the nearest penny) a. The net income for 2013 was $600.000 additional shares in 2014 if Dunbar Co. had 200. Beaty Inc. $1. Hanson Co.000. $1. $2.000 shares of common stock outstanding during 2013.’s net income is $520.000 shares of convertible preferred stock. and $1. b. $2.000. $2.90 d. issued at par $1. What should Kasravi Co.68. Diluted earnings per share for 2013 is (rounded to the nearest penny) a. had net income for 2013 of $400. $2.00 b. 107.59.42. What should Beaty report as diluted earnings per share for 2012? a. The average number of shares under outstanding options. $1. b. During 2013. $2. purchased Dunbar Co.27 Kasravi Co. $2. report for diluted earnings per share for the year ended 2013? a. Use the following information for questions 108 and 109. $3.Dilutive Securities and Earnings per Share 105.51.20.98 c.50. $2. Worth had 200. at an option price of $30 per share is 12.000 of 7. .33 b. c. $3.29.000 shares. has net income for 2012 of $300. c.000 shares. 20.89 On January 2. The average market price of the common stock during the year was $36. Worth’s diluted earnings per share for 2013 would be (rounded to the nearest penny): a. 16 . $2.’s net income in 2013 is $500. $1.51 106. Each $1. d. in 2012 Dunbar Co. Hanson paid dividends of $. 108. c. $2.000 bond is convertible into 45 shares of common stock.74. Beaty Inc.000. and agreed to give stockholders of Dunbar Co.000 of 7% convertible bonds.000.08.000. d. $2. Each $1.00 c. Worth’s 2013 net income was $300.50.70. $1.73 d.5% convertible bonds outstanding during 2013.000 shares of common stock.000 shares of common stock. No bonds were converted during 2013. Worth Co.90 per share on the common stock and $3 per share on the preferred stock. $1.000 bond is convertible into 20 shares of common stock. b. 2013. 10.000 shares. d. The preferred stock is convertible into 40.000 and has an average number of common shares outstanding for 2012 of 100. The average number of shares outstanding for the period was 200. $1.000 and the income tax rate was 30%.

Colt has net income for 2010 of $1. a. 113.000 shares of common stock issued and outstanding at December 31. $2.305.18 Diluted Earnings Per Share $2.94. issued at par $10.000 and has an average number of common shares outstanding for 2012 of 500. in 2012 Massey Inc.250 d. d. 2012. $2.06 b.18 111.000.181. d. The company has a convertible bond issue outstanding. and its income tax rate is 30%.40 $2. Throughout 2012. No potentially dilutive securities other than the convertible bonds were outstanding during 2012.000. 2013 an additional 750. b. Perez's 2012 net income was $4.40 $2.’s net income is $615.000 shares of common stock at $20 per share. The bonds were issued four years ago at par ($2. $2. On July 1. 1. Perez's diluted earnings per share for 2012 would be (rounded to the nearest penny) a.56. $2. 1.000 c.00.000 additional shares in 2014 if Massey Inc. and are convertible into 40.000 shares. Fourteenth Edition 110.000 shares of Perez's common stock.000 and a weighted average number of common shares outstanding during the period of 200. $3. $2.40 $2.18 $2. and agreed to give stockholders of Massey Inc. 1. Fugate also had stock options outstanding at the beginning and end of 2013 which allow the holders to purchase 225. b. 50.000 b.’s net income in 2013 is $600. c. $4. On January 2.000 Shipley Corporation had net income for the year of $600.000 shares of common stock.200. 112.18 $2. Perez Co.28 Test Bank for Intermediate Accounting. No bonds were converted during 2012. c. 1.000 shares.170.000 or more.500. The company has a 40% tax rate. Perez had 1. What should Colt report as earnings per share for 2012? Basic Earnings Per Share $2. $2.000 of 8% bonds convertible in total into 1. Diluted earnings per share are a.545. carry a 7% interest rate. . The average market price of Fugate's common stock was $25 during 2013.28.000 shares of common stock outstanding. 2012.000 shares were issued for cash.79.22. Fugate Company had 750.40. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31. d.40 $2. Colt Corporation purchased Massey Inc.000).16 . c. 2013? a.

37. issued at par $300.63. $1. Each $1. $3. $3. . Use the following information for questions 117 and 118. 2013. which are convertible into 270.53.000 and the income tax rate was 30%. 2012.Dilutive Securities and Earnings per Share 114.000 shares of common stock. 2012. and $1.000 shares of common stock outstanding. In addition. Each $1.000 and the income tax rate was 40%. 20. 2012. Mize Co.000 shares of common stock were issued.000 shares of common stock.21. $3.000 of 6% convertible bonds outstanding at December 31.50 per share on the preferred stock.000 bond is convertible into 45 shares of common stock. c.000 shares of preferred stock which were convertible into 750. b.55.000 shares of common stock.14. Kifer had $10. $1.00. c. $1. 118. $4.05.76.000 shares of convertible preferred stock.000. the diluted earnings per share for the year ended December 31. $3.000 cash dividends on the preferred stock.52.000 of 10% convertible bonds outstanding during 2013. had 200. The net income for 2013 was $900. 16 . Mize had 100. Sager paid $750. In addition. $3. $1.000.000 shares of common stock outstanding. Mize 's 2013 net income was $160. $1.000 shares of common stock. b. $5. The net income for the year ended December 31.80.55. $3. Mize's diluted earnings per share for 2013 would be (rounded to the nearest penny) a.000 cash dividends on the common stock and $500.000 and the income tax rate was 30%. b. d. Diluted earnings per share for 2013 is (rounded to the nearest penny) a. d. d. should be (rounded to the nearest penny) a. $3. Basic earnings per share for 2013 is (rounded to the nearest penny) a. No bonds were converted into common stock in 2013.000 shares of common stock outstanding during 2013. Sager had 450. Net income for 2013 was $4.000 bond is convertible into 60 shares. $2. $4. c.60. d.200. 116. During 2013. c. On October 1.69.36. Lerner Co. Sager Co. The diluted earnings per share for 2013 is (rounded to the nearest penny) a. 2013. 115.79. The preferred stock is convertible into 40. b. At December 31. was $3.000 of 9% convertible bonds. $3. had 1.43. During 2013. On January 2.000.32. No bonds were converted during 2013. 117. $3.250. Lerner paid dividends of $1.29 At December 31. Assuming the income tax rate was 30%.18. b. c.35 per share on the common stock and $4. Kifer Company had 600. an additional 120.33.500. 2013. 2013. $3. $3. d.

80 b. On January 1.000 and 5. 5.000. d. 122. 8% convertible bonds.200.000. 2013. and 480.000.000.000. Assuming the income tax rate was 30%.000 Nolte Co.000. $2.110.000. 2013. $1.000 shares are issued on April 1. has 4.000 face value. 2013.350. $1. In addition.000.) a. Emley Company had 1.110. respectively? a. 2013. On September 1.000. 5.800. has 4.000 of 9% convertible bonds. 2013.000 shares of preferred stock which were convertible into 1.63 120. what should be the diluted earnings per share for the year ended December 31.000 shares of common stock were issued on April 1.880. No bonds were converted into common stock in 2013.800.320. 121.200.000 and 5. 2013. 2012. 2012. $2.00 c.000. 2012. Yoder issued 20.000 and 5.000 shares of common stock.000.50 At December 31.000 shares of common stock outstanding.400. Nolte issued $6.000 and 5. An additional 800. was $3.000 b. which are convertible into 800.200.000 shares of common stock outstanding.400. 5. and 400.25 c. Assuming an income tax rate of 30%. An additional 200.100.000.000 and 5. $3.000. Yoder. . The net income for the year ended December 31.000. Tatum Company had 2.000 and 5.000 more on July 1. 2013.000 and 6. rounded to the nearest penny? a. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31.000 cash dividends on the common stock and $600.000 shares of common stock outstanding on December 31.000 cash dividends on the preferred stock.000 shares of common stock. On October 1.16 .000.000 bond is convertible into 40 shares of common stock. No bonds were converted into common stock in 2013. 2013. what should be diluted earnings per share for the year ended December 31. 5. Each $1.000 shares of common stock were issued. Each bond is convertible into 20 shares of common stock. At December 31. Incorporated.56 d.110. 5.000 d. $1. b. $1. Emley had $8.000 shares of common stock outstanding on December 31. $1. 5.170. 2012.30 Test Bank for Intermediate Accounting. c. Tatum declared and paid $1. 2013 is a.000 c.00 d.000 more on September 1. $2. an additional 400. Tatum issued 500. 5. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share.000.000. 2013. During 2013. 5.41 b. No bonds have been converted. was $6. On October 1.000 of 6% convertible bonds outstanding at December 31. Fourteenth Edition 119. 2012. 2013? (Round to the nearest penny. Net income for the year ended December 31.000 and 5.110.

2013. 12. c.000 $2. 2012. $2.150.390.150.000 During 2013.000 and 2. 2013.000 shares of common stock. 2013. What should be the basic earnings per share for the year ended December 31.000 shares of common stock. The net income for the year ended December 31. $1. $1. and 300. 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.500. b. $2. rounded to the nearest penny? a. 2. d.77 b. 16 .000 Use the following information for questions 124 and 125.450.57 Warrants exercisable at $20 each to obtain 50. respectively.330.000 more on October 1.000. Assume that the income tax rate was 30%. .150.95 c. Piper paid dividends of $0. Information concerning the capital structure of Piper Corporation is as follows: December 31. Grimm issued 6.000 and 2. rounded to the nearest penny? a.000 shares of common stock were issued on July 1. 2.000 and 2.000 b. $2.000 shares of common stock outstanding on December 31. 2013.000.000. $1. $1.000 shares 15.000. 126.13 b.89 d. 10.000 c.000 face value. $1.31 Grimm Company has 2. 2013.630. 124. 8% convertible bonds.000 and 2. was $400.Dilutive Securities and Earnings per Share 123.80 per share on its common stock and $2.000 shares 6% convertible bonds $2. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share. 2.150.000 shares Convertible preferred stock 15.000 d. 40.96 c.000 shares 150. 2013? a.00 per share on its preferred stock. The preferred stock is convertible into 30. 125. The 6% convertible bonds are convertible into 75.67 What should be the diluted earnings per share for the year ended December 31. An additional 150. On April 1.47 d. 2013.000. 50.000. No bonds were converted into common stock in 2013. Each bond is convertible into 40 shares of common stock. 2.400. 2013 2012 Common stock 150.000 shares of common stock were outstanding during a period when the average market price of the common stock was $25. for the year ended December 31.400. $1.

96.16 . During 2013. No dividends were declared on either the preferred or common stock in 2013 or 2012. For 2013. No common stock was issued during 2013. $2.32 Test Bank for Intermediate Accounting. earnings per common share amounted to a. $2. had 300. 100.000 shares of 6%. 466.11. 118. 104. d.600 d.622 c. 108. c. On January 1. 122. $3. Item Ans. . Item Ans. Didde issued 200. 105.60 d. 2012. 123. b c a c b 126. 2012? a.70 c. 107.400 Multiple Choice Answers—Earnings Per Share—Computational Item Ans. $2. 113.000. 120. b c d c d 111. Item Ans. Item Ans. Didde declared and paid $150. 109. c d MULTIPLE CHOICE—Earnings Per Share—CPA Adapted 128. a c c d b 106. 114. What should be Didde's 2013 earnings per common share? a.000 b. $2. $2. 423.000 cash dividends on the common stock and $120. had 180. In addition. 2013. 98. 2013 was $930. 2012.000 shares of nonconvertible preferred stock. Item Ans. 124. 119. c c b c b 116. 112. Miley Corp.67. which had been granted to certain executives.000. c c b b c 101. Net income for the year ended December 31. b.00. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31. $100 par value cumulative preferred stock outstanding. 103. 102. 117. 99. Net income for 2013 was $480.33. $2.000 shares of common stock issued and outstanding at December 31. 431. The average market price of Terry's common stock for 2012 was $50. $2.20 At December 31.000 shares of common stock outstanding at December 31.000 on the preferred stock.000 stock options outstanding. 97. 125.000 shares of common stock and 10. 127.10 b. 129. it had 90. b d c b b 121. Fourteenth Edition 127. 115. Terry Corporation had 400. Item Ans. 400. 2013 and 2012. 110. Didde Co. and which gave them the right to purchase shares of Terry's stock at an option price of $37 per share.

a . Foyle. 16 . deducted from net income whether declared or not. an additional 40. 131. Foyle also had unexercised stock options to purchase 32. beginning of the earliest period reported (regardless of time of issuance). c. d.100.00.000 shares of common stock were issued for cash.000 c. 2013? a. 2013. b 129. 134. 128. 630. Marsh is required to issue 100. d 131. to the former owners of the subsidiary. 658. ignored. added back to net income whether declared or not.92. In connection with the acquisition of a subsidiary company in June 2012. 132. On July 1.000 additional shares of its common stock on July 1.000 d.Dilutive Securities and Earnings per Share 130. deducted from net income only if declared. and reported net income of $5. had 610. In determining diluted earnings per share.13. beginning of the earliest period reported (or at time of issuance. Item Ans. Item Ans. recognized only if they are dilutive. d 134. b. 2012. 133. recognized whether they are dilutive or antidilutive. Marsh's diluted earnings per share for 2013 should be a.000 b. 638. The average market price of Foyle's common stock was $20 during 2013. had 2. c. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31. b. disregarded. if later). b. 2013.400. b 132. $2. c. middle of the earliest period reported (regardless of time of issuance). d. 662.000 for the year. Marsh paid $300. b 130. Item Ans. 2014. $2. b. $1. d. recognized only if they are antidilutive. The if-converted method of computing earnings per share data assumes conversion of convertible securities as of the a.000 shares of common stock issued and outstanding at December 31. dividends on nonconvertible cumulative preferred stock should be a.000 shares of common stock outstanding on January 1 and December 31. Multiple Choice Answers—Earnings Per Share—CPA Adapted Item Ans.. convertible securities are a. Item Ans.000 in preferred stock dividends in 2013. b 133. c.33 Marsh Co.04. ending of the earliest period reported (regardless of time of issuance). $2.000 shares of common stock at $15 per share outstanding at the beginning and end of 2013. Item Ans.000 When computing diluted earnings per share. Inc. Item Ans. d.

000 $3.000 ———— × $412.000 × 1.000 × 3 × $25) = $2. $400.04 = $520. Computational No.000 × . $1. $100.400.000 = $52.000) × $1.000 – (1. ($6.000 – $5.024.000 × $21) = $3.000.000. market rate > coupon rate.000. 49.000 – (2.000 Premium: $52.052.600 × 30 × $30) = $272.000.000 46. ————— × $3.000 ÷ 117 = $2.000 × 25 × $2) = $1.000. $80.000/month $1.000 × 3) = $141.95) + (1.000 ÷ $20.00.500.150.008) + (6.000 ———— × $1. c (3. c ($500.000 = $187. c ($1.000 = $391. b b d b Bonds issued at a discount.400.400. 51.800. a b a Derivation $1.000 × 1.000. $500.000 $380.000. $234. Fourteenth Edition DERIVATIONS — Dilutive Securities.04 = $1.150. 44.000 53.000.600 × $45) – $3.800.96) + (500 × $40) = $500.000 × .000 ÷ $1.000 – (80.000.000 = $127.000 .000) × 40 × $20 = $2.600.000 $3.000 × .000 + ($350.34 Test Bank for Intermediate Accounting. $1.000 – [($2.000. $3.16 .000/month ($6.200.000 × . Answer 43.000.240.000 ————— × $3.000 × $1.000 = $3.766.000. 47. ($400.200.150.000 × .000 $234. $400.000 = $20.000 + $2.95) + (400 × $50) = $400.040.000 × 6] × ————— = $43.000 52.500 (unamortized discount) $3.180.180.000 $50. $500.000.040.000.000 (common stock) ($3.03 = $412.000 × $25) = $52.250.800.000 × 1.000 ———— × $520.000 – $187.800.000 54.32) – (1.200 $6.000.000 – $2.500 = $412.240. ($3. $8.000 $126. 50.000 × 3) + ($2.09 × 3/12) + ($2. bonds: $3. 45.000.000 $20.200 = $4.000. c b 48.000.000.000) ÷ 117 = $2.

000.50) × 24.000 ÷ 3 = $120.000 + $360.35 DERIVATIONS — Dilutive Securities.000 × $2) = $500.000 × .000 ÷ 3 = $300. 59. 64. 70. 68.000. b c c b b d d c c c .000 × $15 = $360. $360. Paid-in Capital—Stock Warrants: $150.000. $900.000. $500.000 × $10 = $240. $2.000.200.000 × .000 ÷ 2 = $500. ($1.000 Dr.350. 58.800 = $11.000.000 ($480.000) × $515.96) + (10.Dilutive Securities and Earnings per Share 16 .000.000 = $20.000 ÷ 3 = $5.000 × 24/60 = $60.000 = $20.000 56.000 – $988. 69.000 ———— × $515.000 decrease.600. Common Stock: 24.000 ÷ $500.000 ÷ $1. 500 × 20 × $2 = $20.000. Answer 55.200. 67.000 Cr. 66.) No. $96. 57. c Derivation ($500.000 × 20 × $2) = $1.000)] × $410.000 = $41.000 = $180.000. $2.000/year. [$40. $2. $1.700 ÷ 2 = 1. 65.000. $180.000 ($20.000 × 1.000 $20. 63.000 ÷ 3 = $150.000.000 × 1. $450.96) + (1.800 $1.700 ÷ 3 = $900.000.000.400 ÷ 2 = $1.000 Cr.000 ÷ 2 = $48. $500. b 61.000) × ($1.03 = $515.600.000 = $5.000. Computational (cont. $500. $15. 62.600. b b ×$515.03) = $988. b c 60. Paid-in Capital in Excess of Par: ($5 + $2.000 ÷ 3 = $60.000 –   $500.000 ÷ ($40.000  Dr.000   $480. Cash: 24.

000 –   3 Capital—Stock Options). Answer 78. *75.000 + (100. ($33 – $20) × 80.) 12 97.000 = $380.000. 79.25 = $360.000 $400.16 .000 decrease (from the debit to Compensation Expense).000 – $400. *77.5 = $400.000. 6 600. Computational No.000 × . Offset by $500.000 – $360.530.000. 80.) No.000 × — ) 12 $1. ($45 – $30) × 20.   30  2 72. 74.680.000.000 × . ($38 – $20) × 80. 3 400.000.000×  = $500. Fourteenth Edition DERIVATIONS — Dilutive Securities.000.000. c . DERIVATIONS — Earnings Per Share. DERIVATIONS — Dilutive Securities. Answer 96.000. Answer 71. 12  $480.000 = $40.000 ÷ 2 = $350. 25. *81.000 ÷ 2 = $105. CPA Adapted No. Computational (cont. *76.000 = $300. $210. d a c c Derivation Conceptual.000 × . c Derivation $1.60.000 × $11 = $275. c Derivation $1 . Conceptual. b a c b b a $700.000 × —.000 + (900.000 ———————————— = $3.000 increase (from the credit to Paid-in $1.000 $780.000 ———————————— = $1. 73.36 Test Bank for Intermediate Accounting. ($30 – $20) × 80.500.60.000×  = $192.75 = $780.500.

000.000 $400.07 × . 100.40.18 106.000 – (10.13.000 ($300.000 – (10. $1.000 [$900. 104 105. [$1.500.98.000.000 × 8/12) – (63. [(1.) No.000 + ($10.000 × $100 × . 110.000 + 1.000 = 2.000 × 2)] ÷ 12 = 562. Computational (cont.300.000 × 3 × 2) + (3.500.000 + 40.170.270.000 + ($1.140.000 × 2/12) = 872.000 × 3 × 2) + (1.000 × .000 ÷ (100.7)] ÷ [200. [$600.15.000 – (20. [(187.000 × 6/12) + [(25 – 20)/25 × 225. $1.000 include 10.000 + $49.000 .000) × 20 = 20.70. 101. 112.000) = $1.000 + 20.000 ÷ $1.000] = 624. c 108. 750.000 × 2) = $2.30) = $49.000 —————————— = $3.Dilutive Securities and Earnings per Share 16 .000 + 2.000 × 45)] = $2. ($1.000 × 4/12) + (54.37 DERIVATIONS — Earnings Per Share.000 + ($2. [$600.075 × .200.29.000 ÷ (500.20) + (562.200.000 shares in DEPS $300.000 + 40.000 ÷ 500.650.06)] ÷ (300.000) ÷ (200. b $4.94.60)] ÷ (200.500. [$600.000 + (126. Basis: Diluted: $1.000 × 6/12) + (800.07 × (1 – .000 × .000 × 6/12) + [((35 – 28) ÷ 35) × 120.000 × .000) = $2. (400.59.000 ÷ (200. 103.000) = $1.28.500 × 2 × 1.000) = $2.000 × 2) = $1.000.000 + 10. 111.000 × $100 × .000 – $175. b 107.000.73.20) + (675. 1.000 > $500.740.500 × 2 × 1.000) = $2.000 × 3) + (465. 102.000 = $2.000 × .000 = $2. 300. Since $520.000 + (1.000] = 1.000 × 3 × 2) + (1.000.000 × $3] ÷ 200.000 + (750.80.000 × 3) + (765.08 × .000 × 3)] ÷ 12 = 3. 99.05)] ÷ (200. Answer 98.70) —————————————— = $2.000. 109.120.000. b b c a c c d b Derivation 800. d c d c c 113.000 + 50. [($36 – $30) ÷ $36] × 12.000 $1.

c 123. b 122.110.000 $900. Answer 114.000 × 9/12) + (480.000.000 12 $160.000 4.500.000 (DEPS). Fourteenth Edition DERIVATIONS — Earnings Per Share.000 2.) + 270.000. 1. c .56. 150.000. a 124.7) ———————————————— = $3. 3 600.10 × .000 + [($6.000 × .000 + (150. 100.47.000.000) × 60)] $4.53. b 116.000) × 40 × 3/12] = 5.000 × .000 × $4.80. c b b 121.110.000 × 3/12) = 2. 120. 5.000 × 40 × 9/12) = 2. 200.000 —————————— = $2.000 – (20.000 (BEPS) 5. d 118.000 + (200.000 × 6/12) = 5.250.000 + 750.000 —————————— = $2. 200.000 $900.000 × 20 × 3/12) = 5.) No.000 115.7) —————————————————— = $1.000 + (6. 4.09 × . b 117.000.000.000.000.000 + ($8.200.000.200.000 + 40. c Derivation $3.000 × —. Computational (cont.000 – (15.000 + ($300.000 $3.000 + ($1.000 × .000 + [($300.7) ————————————————— = $3.05.200.000 × 6/12) + (300.800.16 .150.000 ÷ $1.00. $6. 1.000 × 4/12) = 5.000. 119.000 + (120.000 × 4/12) + 800. 2.000 × 9/12) + (400.38 Test Bank for Intermediate Accounting.50) ————————————— = $4.000.150.000.000 × $2.000 + (20.18.000 × . $400.7) ————————————————— = $1.000 2.100.000 ÷ $1.000.000 + (400.000 + (800.00) ————————————— = $2.000 + ($10.000 + 1.52.06 × .000 + 45.330.06 × .170.000.

Conceptual.06) ——————————————— = $2. 90.70. 16-135—Convertible Bonds.000 × 6/12) + [32.100.39 DERIVATIONS — Earnings Per Share.000 50.000 × . Garr Co.000 – $120. Computational (cont. b c d Derivation $400. Garr Co. d 131. . DERIVATIONS — Earnings Per Share.000 – (32. 134.000 shares of $15 par common stock.400.Answer 128.400 400. Conceptual. Bond premium is amortized each interest period on a straight-line basis.96.000 plus accrued interest. Answer 125.000 + (40. 2.500.013. Accrued interest was paid in cash at the time of conversion. Conceptual. 132.000 + 100.000 = 10. b Derivation $930. 180. b 130.000 – 40. 127. 2012 for $3.7) ———————————————— = $1.000 + 30.000 $480.000 + 75.400 = 423. 133. 2012 with interest payable April 1 and October 1. $1.000 $5.000. 150.000 × $15 ÷ $20)] = 638. 5-year convertible bonds on December 1.Dilutive Securities and Earnings per Share 16 .000 – (90. 300. b b d a EXERCISES Ex. has a fiscal year end of September 30.400.92.000 × $37 ÷ $50) = 23.000 × $100 × .000 ——————————– = $1.000 50.06 × .33.400. CPA Adapted No.000 + 23.000 + ($2. issued $3.000 × $20 ÷ $25 = 40.000 of 12%.) No. 129.000 – $300.000.000 of these bonds were converted into 20.000 – (10. 126. On October 1. The bonds were dated April 1. 2013.000 610.000 ————————— = $2.000.

................... 2013... .................................... Premium on Bonds Payable......... after interest was paid......... 16-136—Convertible Bonds.........16 ..013....................................500.000 180.....250 [($6............... account for the conversion of the bonds into common stock under the book value method? Discuss the rationale for this method.............500 ($13.......000 52 $250 $1... Interest is paid on May 31 and November 30...................000 bonds are tendered for conversion into 3..............000 $ 13............. 5..............000 3.205..... On May 31.........000 1......... (b) Prepare the entry to record the conversion on October 1.... Calculations: Premium related to 1/2 of the bonds Less premium amortized Premium remaining 300....250 Common Stock (20...........000 ÷ 2) 1......................000 × $15)....000 60....000..000 119.. Interest Expense......................................40 Test Bank for Intermediate Accounting..250 $6...........000 1........... 2013........ Fourteenth Edition Instructions (a) Prepare the entry to record the interest expense at April 1. Solution 16-135 (a) Interest Payable.... Calculations: Issuance price Par value Total premium Months remaining Premium per month Premium amortized (4 × $250) (b) $3....... 100........ Assume that the entry to record amortization of the bond premium and interest payment has been made...............500 ÷ 52) × 10] $ 5............. 1......................000 Premium on Bonds Payable........250 Ex. Koch Co.................. Cash.... Assume that interest payable was credited when the bonds were issued (round to nearest dollar).000 Bonds Payable............... $1.......... Paid-in Capital in Excess of Par....................................... sold convertible bonds at a premium...... How should Koch Co.................000 shares of $10 par value common stock that had a market price of $40 per share.

Premium on Bonds Payable should be debited. no gain (loss) on conversion is recorded. the stockholders adopted a stock option plan for top executives whereby each might receive rights to purchase up to 15. Using the book value method. no gain (loss) should be recognized. The proceeds may be allocated to the two elements based on the relative fair values of the debt security without the warrants and the warrants at the time of issuance. What accounting treatment is required for convertible debt? Why? What accounting treatment is required for debt issued with stock warrants? Why? Solution 16-137 Convertible debt is treated solely as debt. Since this is viewed as a transaction with stockholders. The rationale for the book value method is that the conversion is the completion of the transaction initiated when the bonds were issued. four executives exercised their options. The two choices are mutually exclusive. One reason is that the debt and conversion option are inseparable. The options expire on 2/1/14. and Common Stock should be credited at par for the shares issued. On 2/1/12.000 shares. write "No Entry Necessary. Bonds Payable should be debited for the face value. The holder cannot sell one and retain the other. 16-138—Stock options. After issue. At 2/1/14. the debt and the detachable warrants trade separately. which therefore were forfeited. The proceeds allocated to the warrants should be accounted for as paid-in capital. It is assumed that the options were for services performed equally in 2012 and 2013. The amount to be recorded for the stock is equal to the book (carrying) value (face value plus unamortized premium) of the bonds. On 1/1/12. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. 3. Ex. The Black-Scholes option pricing model determines total compensation expense to be $1.41 To account for the conversion of bonds under the book value method. Paid-in Capital in Excess of Par would be credited for the difference between the book value of the bonds and the par value of the stock issued.600. The fifth executive chose not to exercise his options.Dilutive Securities and Earnings per Share Solution 16-136 16 . 16-137—Convertible Debt and Debt with Warrants (Essay). the warrants are given separate recognition. Prepare the necessary entries from 1/1/12-2/1/14 for the following events using the fair value method. Another reason is that the valuation of the conversion option or the debt security without the conversion option is subjective because these values are not established separately in the marketplace. If no entry is needed. When debt is issued with stock warrants.000 shares of common stock at $40 per share. The par value is $10 per share." 1. Ex. options were granted to each of five executives to purchase 15.000. 2. .

....700......000 3.... the corporation issued 150..... 12/31/12 Compensation Expense...000 Jan.........400....280...............................800...000..............000 × $40) ........... Paid-in Capital—Stock Options... the corporation purchased on the market 400...000 of its own outstanding shares and retired them..000 9....000 Paid-in Capital—Stock Options ($1. Paid-in Capital—Stock Options.000 shares of common stock outstanding........ 3... Fourteenth Edition Solution 16-138 1... On March 1.........000 800............ 2.. 1 2/1 2/1 ....000 1.......... Warren Corporation had 1...........000 2...000 600........150...... 1 March 1 July 1 Oct.000 800...000 320..000.............800........................................ 320...000 1. Solution 16-139 Increase (Decrease) — 150...000 ÷ 12) Share Months 4..600....000 2............................000 2/1/12 1/1/12 2/1/14 Cash (4 × 15....000 new shares to raise additional capital.. 2013.... Paid-in Capital—Expired Stock Options.......000 Months Outstanding 2 4 3 3 12 (25........ 12/31/13 Compensation Expense......000 1...... 16-139—Weighted average shares outstanding...42 Test Bank for Intermediate Accounting.000 6. On October 1.900.....000 25............................ Paid-in Capital in Excess of Par.150.......900...... On July 1..........150......200.......... 1...................................000 × 4/5) ............000 Common Stock...080............ Paid-in Capital—Stock Options............. No entry necessary.... On January 1...... 2. 800.300...............000......000 800... No entry necessary.........16 ......000 5...... Instructions Compute the weighted average number of shares to be used in computing earnings per share for 2013...........000) Outstanding 1....000 (400.000 Ex....... the corporation declared and issued a 2-for-1 stock split...

options. 16-140—Earnings Per Share. (b) A complex capital structure exists when a corporation has convertible securities.000 ($450. (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 Solution 16-140 16 .43 (a) Earnings per common share is computed by dividing net income less preferred dividends by the weighted average of common shares outstanding.000 Net income + Interest after taxes Earnings per share assuming bond conversion: ——————————————— Assumed outstanding shares $900. Ex.000 shares of common stock outstanding throughout 2013. the corporation earned $900.25 Outstanding shares 400. Santana Corporation has 400. and earnings per common share outstanding of $2. warrants.7 = $315. Instructions Compute the proper earnings per share for 2010.000 after deducting all expenses. 9% bonds issued at par in 2011. Each $1. or other rights that upon conversion or exercise could dilute earnings per share. .000). the corporation has 5.000 bond is convertible into 20 shares of common stock after 9/23/14. 20-year. 16-141—Earnings per share.25 should be reported. The tax rate was 30%.Dilutive Securities and Earnings per Share Ex.000.000 Earnings per share: ————————— = ———— = $2. Solution 16-141 Net income $900. —————————— = $2. During the year 2013. (d) Diluted earnings per share is earnings per share computed based on common stock and all potentially dilutive common shares that were outstanding during the period.000 + 100. In addition. (c) Basic earnings per share is earnings per share computed based on the common shares outstanding during the period.000 + $315.43 400.000 × .000 Therefore the bonds are antidilutive.

15 Assumed incremental shares 100.44 Test Bank for Intermediate Accounting. 100. and the remaining SARs are exercised on December 31. 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. at December 31. 12/31/12—$18. On December 31. 12/31/13—$19. 2013. 2014. The market price is as follows: 12/31/11—$21. 2011.000 Ex.000 490. (b) Prepare the journal entry at 12/31/12 to record compensation expense.000 shares of common stock outstanding during the year 2013. 60. 12/31/14—$20.000 SARs. Instructions Compute the number of shares to be used in determining diluted earnings per share for 2013. 2013. 16-143—Stock appreciation rights. The average market price during 2013 was $50. Orr Co.000 ÷ $50) Number of shares 400. Dunbar Company had 400.16 .000 90. Instructions (a) Prepare a schedule that shows the amount of compensation expense for each of the four years starting with 2011. 16-142—Diluted earnings per share. Fourteenth Edition Solution 16-141 (Cont. On January 1.) Note that the convertible security is antidilutive: Bond interest after taxes $315.000 ————————————— = ———— = $3.000) 442.400. .000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise (options granted in 2011).000 *Ex. established a stock appreciation rights plan for its executives.000 (48. Solution 16-142 Shares outstanding Add: Assumed issuance Deduct: Proceeds/Average market price ($2.000 SARs are exercised. (c) Prepare the journal entry at 12/31/14 to record the exercise of the remaining SARs. In addition.

. 2..000 150..........000... For each of the unrelated transactions described below.. (c) 150.........000.000 1.000 SARs Set Price $16 16 16 16 Value of SARs $3...870.. To help the sale........000) Percent Accrued 25% 50% 75% 100% Accrued to Date $750..................................................... The $6..........................000.................... 4.....900..........000 bond sold.......... 6......000 (150.........000....000 par bonds were converted into 240...45 Date 12/31/11 12/31/12 12/31/13 12/31/14 Expense $750.. 2013..000 Common Stock..000.....000. The company issues 10% convertible bonds.......000) 600.....000 Liability Under Stock Appreciation Plan.....000 1...........000 650.... Ignore all interest payments..800..000 ..200......... there was $700.................000 of unamortized premium applicable to the bonds..800..000 of bonds with a coupon rate of 8%. present the entry(ies) required to record the bond transactions.000 2.... Solution 16-144 1....000.......000...........000 1.....000 2...000 shares of $20 par common stock...000) 750... 1................000 2........ Packard......000..........000 and the value of the warrants is $630........ Inc.. detachable stock warrants are issued at the rate of ten warrants for each $1.... 16-144—Convertible bonds and stock warrants.000....000 650..... 2... Gomez Company issues $10..... It is estimated that the value of the bonds without the warrants is $9................. decides to issue convertible bonds instead of common stock.........000 750.. The investment banker indicates that if the bonds had not been convertible they would have sold at 94........... at 97.....Dilutive Securities and Earnings per Share *Solution 16-143 (a) Market Price $21 18 19 20 Schedule of Compensation Expense 600....... par $3.. 3...... Paid-in Capital in Excess of Par.....000 1..... The fair value of the common stock was $20 per share.................000 (150........... PROBLEMS Pr........000 ($4 × 500......... Bonds Payable..... Compensation Expense.350......000 (b) Liability Under Stock Appreciation Plan..................000 Cash..000. On August 1.. The bonds with the warrants sold at 101.. 700........000 Premium on Bonds Payable. On August 1...... Lane Corporation called its 10% convertible bonds for conversion........000 16 .

05 1... Stock Options Bonds Preferred a Net Income $600.000 bond is convertible into 30 shares of common stock...000 SA .....000 271.000 6.000 of 8% convertible bonds at face value during 2012..000 EPS $2.......000 696.000) Pr..000) 96.............. On January 1..000 shares of convertible preferred stock outstanding.......... On April 1..000 Adjusted Net Income $460..... During 2013.. Adcock bought 30...000 460.....000 556................000 Discount on Bonds Payable.............. 606..000 Discount on Bonds Payable..................... 3.......000 Paid-in Capital—Stock Warrants....000 Bonds Payable.000. 10....000 × 3/4 = 30....000 × $10.000 shares were issued and on September 1.000 211..000......000 shares of treasury stock.16 .......................... 2013 there were 200.............000 205....... 20.78 20..000 ÷ $10....000 a Adjusted Shares 205.. Colson issued $2...000 3.. There are 30..000 ($630.... 2............24 2............ and is convertible into three shares of common stock........... Each $1..........000 391...000) 5....000 shares of common stock outstanding...............50 a year dividend......................................... The tax rate is 40%................ Colson Corp....100..... Fourteenth Edition Solution 16-144 (Cont..........) 2....... 506............. Security Net Income Adjustment Adjusted Net Income Shares Adjustment Adjusted Shares EPS Solution 16-145 Security Com.....46 Test Bank for Intermediate Accounting.....000 options to buy common stock at $40 a share outstanding...18 2.000 (10..000 271. Cash......000 460...000 Bonds Payable............ Complete the schedule and show all computations.000 Adjustment $(140...................000c 140...............000 net income in 2013....10......000 211....................910. Cash...... 16-145—Earnings per share..100.. Instructions Compute diluted earnings per share for 2013.................................000b 60.... 90..... there were 40.....000 Shares 200. pays $3..000 × 1/3 = 15........000.000 = $606.... The market price of the common stock averaged $50 during 2013.000 120....... had $600.......000 Adjustment 5....... The preferred is $100 par....500.....000 556..

(Round to the nearest penny. Stock Options Exercisable at the option price of $25 per share.000 $2.000) 6.000 1.000 640.000 180.000 1.000 $2.000 ÷ $50 = (24. Issuance of shares 8% Cumulative Convertible Preferred Stock Sold at par.000 SA $96.) b 16 .000 Cumulative 700. Average market price in 2013. 1.47 30. 1.000) 2-for-1 split Issued (1/6 × 180.000 $1.300.) Solution 16-146 Computation of weighted average shares outstanding during the year: January 1 March 1 June 1 November 1 Outstanding Repurchase (5/6 × 60. Beginning number Mar.60 60.000 $1.17 120.000 = 6.000 ———— = $1.000) 650.000 shares of common (adjusted for split). 1. Stock split 2-1 Nov. Assume that the following data relative to Kane Company for 2013 is available: Net Income Transactions in Common Shares Jan. $30 (market price and option price adjusted for split).000) 640.000 1.460.000 1.000.000 90.08 × .000 × .000. 16-146—Basic and diluted EPS.000 shares Instructions (a) Compute the basic earnings per share for 2013.Dilutive Securities and Earnings per Share Solution 16-145 (Cont.000 SA c (or) [(50 – 40) ÷ 50] × 30.000 $140.200.000 .) (b) Compute the diluted earnings per share for 2013.330.280. (Round to the nearest penny. 2013. 2013.000 (50. Change (60.000 ———— = $1. 2013.000 Pr.000) 700. 2013. Purchase of treasury shares June 1.000 30.6 = $96. convertible into 200.100.

Cumulative 8% preferred stock.000 (a) Basic earnings per share: —————————— = $1.000 ÷ $30) Dilutive securities—additional shares $2.16 . One of the terms of the purchase was that if Starr's net income for the following year is $2.36 1.250.000 75.000 15. Net Income [including an extraordinary gain (net of tax) of $70.52 1.) Additional shares for purposes of diluted earnings per share: Potentially dilutive securities 8% convertible preferred stock Stock options Proceeds from exercise of 90.000 90.000 options (90.000 ———–—————— = $1. 74. On January 2 of the current year.000 shares outstanding on January 1. Income tax rate Instructions Compute earnings per share for the current year.000 additional shares would be issued to Oslo stockholders next year.000 shares issued and outstanding b.000 . On October 1.000 Pr. 3.250. 50. 6. 16. Average market price per share of common stock during entire year b.100.000 × $25) Shares issued upon exercise of options Less: treasury stock purchasable with proceeds ($2.000 shares were issued for cash.000 – $80. Starr purchased Oslo Corporation. 1.100. Presented below is information related to Starr Company.000 215. Capital Structure a. 40. Other Information a.000] 2.000 (b) Diluted earnings per share: $2.000 shares were purchased and retired.000 $1.000 or more.000 $600. c. On April 1.400. 16-147—Basic and diluted EPS.330. $30 30% $280. $100 par. $10 par common stock.48 Test Bank for Intermediate Accounting.000. Fourteenth Edition Solution 16-146 (Cont.000 200.000 $2.000 + 215.330.

: 1.000 shares issued and outstanding during the entire year.000 (48.000 ———————— 100.000 shares of common stock at $20 per share. 16-148—Basic and diluted EPS. $1. Capital structure: a.000 ———————— 100.000 ———— 100.000 Basic earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net income Calculations: (a) $162.000.000 $232.000 $ .000 (b) $70.000 $1.000 1/4 × 16.000 2.55 (a) (b) (c) $232.000 ———— 100.32 (a) (b) (c) 16 .000 (c) $232.000 (4.000 ———— 100.000 $210.70 $2.46 $1.1. The following information was taken from the books and records of Ludwick. Stock warrants outstanding to buy 16.000 + 50.000 (b) $70.62 .000 74. b.Dilutive Securities and Earnings per Share Solution 16-147 Income before extraordinary item Less preferred dividends Available to common before extraordinary item Add extraordinary gain (net of tax) Income available to common Weighted average shares outstanding: January 1 3/4 × 40. Convertible 6% bonds. Each of the 300.000) 162.000 (c) Pr.000 bonds is convertible into 50 shares of common stock at the present date and for the next 10 years. c.000 ———— 150. Inc.08 .000 70.000) 100.000 .000 300. Net income 2.49 Diluted earnings per share: Income before extraordinary item Extraordinary item (net of tax) Net Income Calculations: (a) $162. 200. $ 350.000 + 50. $10 par common stock.000 30.

000 Adjustment — 6. Stock Warrants Conv.75 1.000 200.000 1 320.06 × .000 206. Solution 16-148 Basic EPS = $350.000 Adjusted Shares 200.70 1.000 Adjustment — — $12. = $1.000 221.6002 Adjusted Net Income $350. Warrants exercised during the year Instructions Compute basic and diluted earnings per share.16 .84 15.0001 15.000 ÷ 200.000 SA $12.000 × . Fourteenth Edition Pr.000 Diluted EPS $1. Bonds Net Income $350. Convertible debt was outstanding the entire year d.) 3. Average market price per share of common stock during the year e.000 2 $300. Warrants were outstanding the entire year f. Other information: a.600 .50 Test Bank for Intermediate Accounting. Income tax rate c.000) 32 6.75 Security Com.000 350.000 362.600 Shares 200.7 = $12.64 None 30% $32 None 16.000 sh.000 350.000 206. 16-148 (Cont. Bonds converted during the year b.000 350.000 ———— = (10.600 ———— = $.

S. the Discount on Bonds Payable and the Paid-in Capital-Convertible Bonds could be utilized. including dilutive securities. is a. IFRS 2. With regard to recognizing stock-based compensation a. IFRS and U. all of the proceeds of convertible debt are recorded as long-term debt. IFRS and U. d. 2. True Multiple Choice: 1. IAS 2.S. c. False 3.S. c. GAAP follow the same model. the reform of U. such as convertible debt. True 2. GAAP and IFRS. IFRS and U.S. IAS 39. Under IFRS. GAAP standards will not be addressed until IFRS standards have been finalized. False 5. 2. 4. 5. Under both U.51 IFRS QUESTIONS True/False 1. GAAP have significant differences in the reporting of securities with characteristics of debt and equity.Dilutive Securities and Earnings per Share 16 . . b. it has been agreed that these standards will not be merged due to the differences in currencies. b.S. the calculation of basic and diluted earnings per share is identical. GAAP standards are undergoing major reform on valuation issues. 3. True 4. IAS 33. The primary IFRS reporting standards related to financial instruments. d. 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. Under IFRS recording for the issuance of Bonds Payable. Answers to True/False: 1.

S. Fourteenth Edition 3. b. in the first fiscal period of the employees’ service.in the last fiscal period of the employees’ service when the total value can be calculated. d. b 3.000 in value of the equity option embedded in the bond. Answers to Multiple Choice: 1. $800. the FASB project proposes that the IASB adopt the U. d. c. and earnings per share. . IFRS requires that share settlement must be used.200.000. d.16 . When $5. a 2. over the fiscal periods to which the employees’ services relate. IFRS gives companies a choice of either cash or shares.000 to Premium on Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.52 Test Bank for Intermediate Accounting.000 to Cash along with a debit of $800.000 to Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.000 to Paid-in Capital — Convertible Bonds and a credit to Bonds Payable. c 4. b Short Answer 1. Briefly describe some of the similarities and differences between U.S. stock-based compensation. GAAP approach. U. after last fiscal period of the employees’ service when the total value can be calculated. b. a 5. $4. the IFRS journal entry will include a debit of a. GAAP requires that share settlement must be used. requiring that share settlement must be used. $800. With regard to recognizing stock-based compensation under IFRS the fair value of shares and options awarded to employees is recognized a. c. 4. 5.000 to Discount on Bonds Payable and a credit to Bonds Payable and a credit to Paid-in Capital — Convertible Bonds.S. c.000 in convertible bonds are issued at par with $800. GAAP and IFRS with respect to the accounting for dilutive securities. $800. b. With regard to contracts that can be settled in either cash or shares a.

It is hoped that the boards will develop a converged standard in this area. While U. IFRS and U. GAAP are substantially the same in the accounting for dilutive securities.S. (2) a minor difference in EPS reporting – the FASB allows companies to rebut the presumption that contracts that can be settled in either cash or shares will be settled in shares. That is. 2. convertible bonds are “bifurcated”. or separated into the equity component – the value of the conversion option – of the bond issue and the debt component. The main differences concern (1) the accounting for convertible debt. Briefly discuss the convergence efforts that are under way by the IASB and FASB in the area of dilutive securities and earnings per share. the IASB is examining the classification of hybrid securities. GAAP all of the proceeds of convertible debt are recorded as long term debt. The FASB has been working on a standard that will likely converge to iGAAP in the accounting for convertible debt.S. Under IFRS. both IFRS and U.Dilutive Securities and Earnings per Share 16 . GAAP and iGAAP are similar as to the presentation of EPS. the IASB is seeking comment on a discussion document similar to the FASB Preliminary Views document: “Financial Instruments with Characteristics of Equity “. the fair value of shares and options awarded to employees is recognized over the period to which the employees’ services relate. the Boards have been working together to resolve remaining differences related to earnings per share computations. Similar to the FASB.53 1. IFRS requires that share settlement must be used in this situation. For example. . Under U. stock-based compensation.S. (3) other EPS differences relate to the treasury stock method and how the proceeds from extinguishment of a liability should be accounted for and how to make the computation for the weighted-average of contingently issuable shares. GAAP follow the same model for recognizing stock-based compensation.S. 2. and earnings per share.

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