CHAPTER16

DI
LUTI
VESECURI
TIESANDEARNI
NGSPERSHARE
I
FRSquest
ionsar
eav
ail
abl
eatt
heendoft
hischapt
er.

TRUE-
FALSE—Di
l
uti
veSecur
it
ies—Concept
ual
Answer No. Descr
ipt
ion
T 1. Account i
ngf orconv ertibl
ebondi ssue.
F 2. Repor t
inggai n/ l
ossonconv erti
bledebtr etirement .
T 3. Repor t
ingaddi ti
onal pay mentt oencour ageconv ersion.
F 4. Exerciseofconv ertiblepr eferredst ock.
F 5. Conv ertiblepr eferredst ockexer cise.
T 6. All
ocat ingpr oceedsbet weendebtanddet achablewar r
ant
s.
F 7. All
ocat ingpr oceedsf rom nondet achablewar r
ants.
T 8. I
ntri
nsi cv alueofast ockopt ion.
F 9. Compensat ionex pensei nf airvaluemet hod.
T 10. Serviceper i
odi nst ockopt ionpl ans.
F 11. Account i
ngf ornonexer ci
seofst ockopt i
ons.
F 12. Account i
ngf orst ockopt ionf orfeiture.
T 13. Cumul at iv
epr eferredst ockandEPS.
F 14. Restatingshar esf orst ockdi vi
dendsandst ockspl it
s.
T 15. Stockdi v i
dendandwei ght ed-aver ageshar esout standing.
F 16. Preferreddi v i
dendsandi ncomebef oreextraordinaryitems.
T. 17. Repor t
ingEPSi ncompl excapi tal struct
ure.
F. 18. Dil
utivest ockopt i
ons.
T 19. Contingenti ssueshar es.
F 20. Repor t
ingEPSf orincomef rom cont inui
ngoper ati
ons.

MULTI
PLECHOI
CE—Di
l
uti
veSecur
it
ies,
Concept
ual
Answer No. Descr
ipt
ion
d 21. Natureofconv erti
blebonds.
d 22. Recordingconv ersi
onofbonds.
b 23. Classif
icationofear l
yext inguishmentofconv erti
blebonds.
S
c 24. Reasonsf orissui
ngconv erti
bledebt.
S
a 25. Repor t
inggai n/l
ossonconv ersi
onofbonds.
S
d 26. Account ingforconv ersi
onofpr efer
redst ock.
b 27. Recordingconv ersi
onofpr eferr
edstock.
d 28. Bondsi ssuedwi t
hdet achabl estockwar rants.
d 29. Debtequi t
yfeaturesofdebti ssuedwithst ockwar rants.
d 30. Classif
icationofst ockwar r
antsoutstandi ng.
P
d 31. Bondsi ssuedwi t
hdet achabl estockwar rants.
P
c 32. Distr
ibut i
onofst ockrights.
S
b 33. Diff
erencebet weenconv er ti
bledebtandst ockwar r
ant s.
S
c 34. Charact eri
sticsofnoncompensat or
yst ockopt ionplan.
a 35. Measur ementofcompensat ioninstockopt i
on.
c 36. Recogni ti
onofcompensat ionexpensei nast ockoptionplan.
a 37. Compensat ionex penseinast ockoptionpl an.
d 38. Charact eri
sticsofnoncompensat or
yst ockpur chasepl an.
a *39. Compensat ionexpensei nani ncent
ivest ockopt i
onpl an.
16-2 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

MULTI
PLECHOI
CE—Di
l
uti
veSecur
it
ies,
Concept
ual
(cont
.)
Answer No. Descr
ipt
ion
d *
40. Stockappreciat
ionright
spl an.
b *
41. I
ncenti
vest ockoptionplan.
b *
42. Share-
basedl i
abil
i
tyawar ds.

MULTI
PLECHOI
CE—Di
l
uti
veSecur
it
ies,
Comput
ati
onal
Answer No. Descr
ipt
ion
a 43. Conv ersionofconv erti
bl ebonds.
b 44. Conv ersionofconv erti
bl ebonds.
a 45. Exerciseofst ockpur chaser ights.
c 46. Conv ersionofconv erti
bl ebonds.
b 47. Amor tizat i
onofbonddi scount.
b 48. Unamor tizedbonddi scountr elatedt oconv ertedbonds.
b 49. Conv ersionofconv erti
bl ebonds.
d 50. Conv ersionofconv erti
bl epreferredst ock.
b 51. Bondsi ssuedwi thdetachabl est ockwar rants.
c 52. Bondsi ssuedwi thdetachabl est ockwar rants.
c 53. Bondsi ssuedwi thdetachabl est ockwar rants.
c 54. Bondsi ssuedwi thdetachabl est ockwar rants.
c 55. Recor dingpaid- i
ncapital f
rom st ockwar rants.
b 56. Bondsi ssuedwi thdetachabl est ockwar rants.
b 57. Exerciseofst ockpur chaser ights.
b 58. Bondsi ssuedwi thdetachabl est ockwar rants.
c 59. Bondsi ssuedwi thdetachabl est ockwar rants.
b 60. Recor dingpaid- i
ncapital f
rom st ockwar rants.
b 61. Determi necompensat ionexpensei nast ockopt ionplan.
c 62. Determi necompensat ionexpensei nast ockopt ionplan.
c 63. I
mpactofst ockopt i
onsonneti ncome.
b 64. Determi necompensat ionexpensei nast ockopt ionplan.
b 65. Determi necompensat ionexpensei nast ockopt ionplan.
d 66. Determi necompensat ionexpensei nast ockopt ionplan.
d 67. Determi nepai d-i
ncapital amounti nast ockopt ionplan.
c 68. Determi necompensat ionexpensei nast ockopt ionplan.
c 69. Netincomeef fecti
nast ockopt ionpl an.
c 70. Determi necompensat ionexpensei nast ockopt ionplan.
c 71. I
mpactofst ockopt i
onsonst ockhol ders’ equity
.
b 72. Determi necompensat ionexpensei nast ockopt ionplan.
a 73. Determi necompensat ionexpensei nast ockopt ionplan.
c 74. I
ssuanceoft r
easuryst ocki nast ockopt i
onpl an.
b *
75. Compensat i
onexpenser ecogni zedi nfir
sty earinanSARpl an.
b *
76. Compensat i
onexpenser ecogni zedi nsecondy earinanSARplan.
a *
77. Compensat i
onexpenser ecogni zedi nthir
dy eari nanSARplan.
P
Thesequest
ionsalsoappeari
nthePr
obl
em-Solvi
ngSur
viv
alGui
de.
S
Thesequest
ionsalsoappeari
ntheSt
udyGuide.
*
Thistopi
cisdealtwit
hinanAppendi
xtothechapter
.
 Di
l
uti
veSecur
it
iesandEar
ningsperShar
e 16-3

MULTI
PLECHOI
CE—Di
l
uti
veSecur
it
ies,
CPAAdapt
ed
Answer No. Descr
ipt
ion
d 78. Cashproceedsfrom issuanceofconverti
blebonds.
a 79. Bondissuewithdetachablestockwarrants.
c 80. Compensationexpensei nastockopti
onpl an.
c *
81. Compensationexpenser ecogni
zedinanSARpl an.

MULTI
PLECHOI
CE—Ear
ningsPerShar
e,Concept
ual
Answer No. Descr
ipt
ion
c 82. Si
mpl ecapi talstructure.
d 83. Comput i
ngEPSf orasi mpl ecapi
talst
ructure.
d 84. Comput at
ionofwei ghted-aver
agesharesout st
anding.
c 85. Effectoftreasuryst ockonEPS.
S
b 86. Repor t
ingEPSbycompani es.
P
b 87. Dil
utedEPSandconv ersi
onofbonds.
d 88. Dil
utedEPS.
b 89. Dil
utiveconv erti
blesecur it
ies.
a 90. Cumul ativeconv erti
blepreferr
edstockincomeadj ustment
.
d 91. Treasuryst ockmet hod.
a 92. Treasuryst ockmet hod.
b 93. Treasuryst ockmet hod.
d 94. Antidi
lutiv
esecur i
ti
es.
d *95. EPScal culationwi t
ht wodi l
uti
veconvert
iblesecur
iti
es.

MULTI
PLECHOI
CE—Ear
ningsPerShar
e,Comput
ati
onal
Answer No. Descr
ipt
ion
c 96. Weightedav er
agenumberofcommonshar esoutstandi
ng.
c 97. Weightedav er
agenumberofcommonshar esoutstandi
ng.
b 98. Weightedav er
agenumberofcommonshar esoutstandi
ng.
b 99. Weightedav er
agenumberofshar esoutstanding.
c 100. Determinati
onofshar esusedi ncomput ingEPS.
a 101. Comput ati
onofear ningspershare.
c 102. BasicEPSwi thconv ert
ibl
epr ef
erredstock.
c 103. EPSandast ocksplit.
d 104. Weightedav er
agenumberofcommonshar esoutstandi
ng.
b 105. Dil
utedEPSandt het r
easurystockmet hod.
b 106. Dil
utedEPSwi thconv erti
blebonds.
c 107. Dil
utedEPSandcont i
ngentissuances.
d 108. BasicEPS.
c 109. Dil
utedEPSwi thconv erti
blebondsandpr efer
redstock.
d 110. Numberofshar esi
ncomput ingdilut
edEPS.
c 111. Dil
utedEPS.
c 112. EPSandcont i
ngentissuances.
b 113. Dil
utedEPSwi thconv erti
blebonds.
c 114. Dil
utedEPSwi thconv erti
blebonds.
b 115. Dil
utedEPSwi thconv erti
blebonds.
b 116. Dil
utedEPS.
d 117. BasicEPSwi thconv ert
ibl
ebondsandconv ert
ibl
eprefer
redst
ock.
16-4 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

MULTI
PLECHOI
CE—Ear
ningsPerShar
e,Comput
ati
onal(
cont
.)
Answer No. Descr
ipt
ion
c 118. Dil
utedEPS.
b 119. Denominatorincomput ingbasi cEPSandDEPSwi thconvert
ibl
ebonds.
b 120. Sharesoutst
andingforbasi cEPSandDEPS.
b 121. BasicEPSwi t
hconv ert
iblepreferredstock.
c 122. Dil
utedEPSwi thconvertiblebonds.
a 123. BasicEPSandDEPSwi thconv ert
iblebondsissuedduri
ngyear.
c 124. BasicEPSwi t
hconv ert
iblepreferredstockandconv er
ti
blebonds.
b 125. DEPSwi t
hconv ert
ibl
epr eferredstockandconv ert
ibl
ebonds.
c 126. DEPSandt hetreasuryst ockmet hod.
d 127. DEPSusingthet r
easuryst ockmet hod.

MULTI
PLECHOI
CE—Ear
ningsPerShar
e,CPAAdapt
ed
Answer No. Descr
ipt
ion
b 128. Deter
mineear ningspercommonshar e.
b 129. Deter
mineear ningspercommonshar e.
d 130. Deter
minedilutedEPS.
b 131. Numberofshar est ocalcul
atedi
l
utedEPS.
b 132. DEPSwi t
hconv ertibl
esecuri
ti
es.
d 133. Eff
ectofdivi
dendsonnonconv er
ti
blepr
efer
redst
ock.
a 134. "I
fconver
ted"met hod.

EXERCI
SES
I
tem Descr
ipt
ion
E16-
135 Converti
blebonds.
E16-
136 Converti
blebonds( essay).
E16-
137 Converti
bledebtanddebtwi t
hwar r
ant
s(essay
).
E16-
138 Stockoptions.
E16-
139 Weightedav er agesharesoutstandi
ng.
E16-
140 Earni
ngspershar e(essay)
.
E16-
141 Earni
ngspershar e.
E16-
142 Dil
utedear ningspershar e.
*
E16-
143 Stockappr eciationri
ghts.

PROBLEMS
I
tem Descr
ipt
ion
P16-
144 Convert
ibl
ebondsandst ockwarr
ants.
P16-
145 Earni
ngspershare.
P16-
146 Basicanddil
utedear
ningspershare.
P16-
147 Basicanddil
utedear
ningspershare.
P16-
148 Basicanddil
utedear
ningspershare.
 Di
l
uti
veSecur
it
iesandEar
ningsperShar
e 16-5

CHAPTERLEARNI
NGOBJECTI
VES
1. Descr
ibetheaccount
ing f
ort
he i
ssuance,conv
ersi
on,and r
eti
rementofconv
ert
ibl
e
secur
it
ies.
2. Expl
aint
heaccount
ingf
orconv
ert
ibl
epr
efer
redst
ock.
3. Contr
astthe account
ing f
orst
ock war
rant
s and st
ock war
rant
sissued wi
th ot
her
secur
it
ies.
4. Descri
be the account
ing f
orst
ock compensat
ion pl
ans undergener
all
y accept
ed
accounti
ngpri
ncipl
es.
5. Di
scusst
hecont
rov
ersyi
nvol
vi
ngst
ockcompensat
ionpl
ans.
6. Comput
eear
ningspershar
einasi
mpl
ecapi
tal
str
uct
ure.
7. Comput
eear
ningspershar
einacompl
excapi
tal
str
uct
ure.
*
8. Expl
aint
heaccount
ingf
orst
ock-
appr
eci
ati
onr
ight
spl
ans.
*
9. Comput
eear
ningspershar
einacompl
exsi
tuat
ion.
16-6 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

SUMMARYOFLEARNI
NGOBJECTI
VESBYQUESTI
ONS
I
tem Typ I
tem Typ I
tem Typ I
tem Typ I
tem Typ I
tem Typ I
tem Typ
e e e e e e e
Learni
ngObj
ecti
ve1
S
1. TF 21. MC 24. MC 44. MC 47. MC 78. MC 144. P
S
2. TF 22. MC 25. MC 45. MC 48. MC 135. E
3. TF 23. MC 43. MC 46. MC 49. MC 136. E
Learni
ngObj
ecti
ve2
S
4. TF 5. TF 26. MC 27. MC 50. MC
Learni
ngObj
ecti
ve3
S
6. TF 29. MC 33. MC 54. MC 58. MC 137. E
7. TF 30. MC 51. MC 55. MC 59. MC 144. P
P
8. TF 31. MC 52. MC 56. MC 60. MC
P
28. MC 32. MC 53. MC 57. MC 79. MC
Learni
ngObj
ecti
ve4
S
9. TF 34. MC 38. MC 64. MC 68. MC 72. MC 138. E
10. TF 35. MC 61. MC 65. MC 69. MC 73. MC
11. TF 36. MC 62. MC 66. MC 70. MC 74. MC
12. TF 37. MC 63. MC 67. MC 71. MC 80. MC
Learni
ngObj
ecti
ve6
S
13. TF 82. MC 86. MC 99. MC 103. MC 139. E
14. TF 83. MC 96. MC 100. MC 128. MC 140. E
15. TF 84. MC 97. MC 101. MC 129. MC 146. P
16. TF 85. MC 98. MC 102. MC 130. MC 147. P
Learni
ngObj
ecti
ve7
17. TF 90. MC 106. MC 113. MC 120. MC 127. MC 142. E
18. TF 91. MC 107. MC 114. MC 121. MC 131. MC 145. P
19. TF 92. MC 108. MC 115. MC 122. MC 132. MC 146. P
20. TF 93. MC 109. MC 116. MC 123. MC 133. MC 147. P
P
87. MC 94. MC 110. MC 117. MC 124. MC 134. MC 148. P
88. MC 104. MC 111. MC 118. MC 125. MC 140. E
89. MC 105. MC 112. MC 119. MC 126. MC 141. E
Lear
ningObj
ect
ive8*
39. MC 41. MC 75. MC 77. MC 143. E
40. MC 42. MC 76. MC 81. MC
Lear
ningObj
ect
ive9*
95. MC
Not
e: TF=Tr ue-Fal
se
MC=Mul tipl
eChoice
E=Exercise
P=Problem
 Di
l
uti
veSecur
it
iesandEar
ningsperShar
e 16-7

TRUE-
FALSE—Concept
ual
1. Therecor
dingofconver
ti
blebondsatt
hedat
eofi
ssuei
sthesameast
her
ecor
dingof
st
rai
ghtdebti
ssues.

2. Compani
esr
ecogni
zet
hegai
norl
ossonr
eti
ri
ngconv
ert
ibl
edebtasanext
raor
dinar
yit
em.

3. The FASB stat

es t
hatwhen an i
ssuermakes an addi
ti
onalpay
mentt
o encour
age
conv
ersi
on,thepay
mentshoul
dbereport
edasanexpense.

4. Themarketv
aluemet
hodi
susedt
oaccountf
ort
heexer
ciseofconv
ert
ibl
epr
efer
red
st
ock.

5. Compani
esr
ecogni
zeagai
norl
osswhenst
ockhol
der
sexer
ciseconv
ert
ibl
epr
efer
red
st
ock.

6. Acompanyshoul
dall
ocat
etheproceedsfr
om thesaleofdebtwit
hdet
achabl
est
ock
war
rant
sbet
weenthet
wosecur
it
iesbasedonthei
rmarketv
alues.

7. Nondet
achable war
rant
s,as wit
h detachabl
e war
rant
s,r
equi
re an al
l
ocat
ion oft
he
pr
oceedsbetweenthebondsandthewarrant
s.

8. Theint
ri
nsi
cvalueofast ockopt
ioni
sthediff
erencebet
weent
hemar
ketpr
iceoft
he
st
ockandtheexer
cisepr
iceoft
heopti
onsatt
hegrantdat
e.

9. Underthefai
rval
uemethod,compani
escomputet
otalcompensat
ionexpensebasedon
thef
airval
ueofopti
onsonthedat
eofexer
cise.

10. Theservi
ceper
iodi
nst
ockopt
ionpl
ansi
sthet
imebet
weent
hegr
antdat
eandt
he
vest
ingdat
e.

11. Ifanemployeefai
lstoexer
ciseast ockopt
ionbef
orei
tsexpi
rat
iondat
e,t
hecompany
shoul
ddecreasecompensat
ionexpense.

12. I
fanemploy
eeforf
eit
sastockopti
onbecauseoff ai
lur
etosati
sfyaser
vicer
equi
rement
,
t
hecompanyshoul
drecor
dpaid-
incapi
tal
from expi
redopt
ions.

13. Ifpr
efer
redstockiscumulat
iveandnodi
videndsaredecl
ared,t
hecompanysubt
ract
sthe
curr
entyearpref
err
eddiv
idendincomput
ingearni
ngspershare.

14. Whenstockdi
videndsorst
ockspl
it
soccur,
companiesmustr
estat
ethesharesout
stand-
i
ngaftert
hestockdivi
dendorspl
i
t,i
nordertocomputet
heweight
ed-av
eragenumberof
shar
es.

15. Ifast
ockdivi
dendoccursaf
teryear-
end,butbef
orei
ssuingthefi
nancialst
atements,a
companymustrest
atet
heweight
ed-aver
agenumberofsharesout
standi
ngfortheyear.

16. Pref
err
eddi
vi
dendsaresubtr
actedfr
om neti
ncomebutnoti
ncomebef
oreext
raor
dinar
y
i
temsincomput
ingear
ningspershar
e.

17. Whenacompanyhasacompl
excapi
talst
ruct
ure,i
tmustr
epor
tbot
hbasi
canddi
l
uted
16-8 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

ear
ningspershar
e.

18. I
ncomput i
ngdil
utedear
ningspershar
e,stockopt
ionsar
econsi
der
eddi
l
uti
vewhent
hei
r
opt
ionpr
iceisgr
eatert
hanthemarketpri
ce.

19. Inaconti
ngentissueagr
eement
,thecont
ingentsharesar
econsider
edoutst
andi
ngfor
comput
ingdil
utedEPSwhentheearni
ngsormar ketpri
cel
eveli
smetbyt heendoft
he
year
.

20. Acompanyshouldrepor
tpershareamount sf
ori
ncomebef
oreext
raor
dinar
yit
ems,but
notf
ori
ncomefrom cont
inui
ngoperat
ions.

Tr
ue-
Fal
seAnswer
s—Concept
ual
I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans.
1. T 6. T 11. F 16. F
2. F 7. F 12. F 17. T
3. T 8. T 13. T 18. F
4. F 9. F 14. F 19. T
5. F 10. T 15. T 20. F

MULTI
PLECHOI
CE—Di
l
uti
veSecur
it
ies,
Concept
ual
21. Convert
ibl
ebonds
a.hav epri
orit
yoverot
heri
ndebtedness.
b.ar eusual
lysecur
edbyafir
storsecondmor tgage.
c. payint
erestonl
yint
heeventearni
ngsar esuff
ici
entt
ocov
ert
hei
nter
est
.
d.maybeexchangedf orequi
tysecurit
ies.

22. Theconversionofbondsi
smostcommonl
yrecor
dedbyt
he
a.incr
ement al
method.
b.proporti
onal met
hod.
c. marketvaluemethod.
d.bookv aluemethod.

23. Whenabondi ssueroffer

ssomef or
m ofaddit
ionalconsi
der
ati
on(
a“sweet
ener
”)t
o
i
nduceconversion,thesweeteneri
saccount
edf
orasa( n)
a.extraor
dinaryit
em.
b.expense.
c. l
oss.
d.noneoft hese.
S
24. Corporati
onsi ssueconv ert
ibl
edebtf ort
womai nreasons.Onei sthedesi
retorai
seequit
y
capit
althat,assumi ngconv er
sion,wil
lari
sewhent heorigi
naldebtisconvert
ed.Theot
her
i
s
a.t heeasewi thwhi chconv ert
ibl
edebti ssol deveni fthecompanyhasapoorcr edi
t
rati
ng.
b.t hefactthatequi tycapi
talhasissuecostst hatconverti
bledebtdoesnot.
c. thatmanycor porati
onscanobt ai
nf i
nancingatlowerr ates.
d.t hatconv ert
ibl
ebondswi l
lalwayssellatapr emium.
S
25. Whenconv erti
bledebti sreti
redbyt heissuer,anymat erialdi
ffer
encebetweenthecash
 Di
l
uti
veSecur
it
iesandEar
ningsperShar
e 16-9

acquisit
ionpri
ceandt hecar
ryi
ngamountoft hedebtshoul
dbe
a.r efl
ectedcurr
entlyini
ncome, butnotasanextr
aor
dinar
yit
em.
b.r efl
ectedcurr
entlyini
ncomeasanext r
aor
dinar
yit
em.
c. treatedasapriorperi
odadjustment.
d.t reatedasanadjustmentofadditi
onalpai
d-i
ncapi
tal
.
S
26. Theconv ersi
onofprefer
redstocki nt
ocommonr equi
resthatanyexcessoftheparval
ue
ofthecommonshar esissuedov erthecarr
yingamountoft hepref
erredbei
ngconvert
ed
shouldbe
a.r efl
ectedcur
rentl
yinincome, butnotasanext raor
dinar
yitem.
b.r efl
ectedcur
rentl
yinincomeasanext r
aordinaryit
em.
c. treat
edasapr i
orperiodadjustment.
d.t reat
edasadi r
ectreducti
onofr etai
nedearnings.

27. Theconversionofpr ef
err
edst
ockmayber
ecor
dedbyt
he
a.incr
ement al
met hod.
b.bookv aluemet hod.
c. marketvaluemet hod.
d.parv al
uemet hod.

28. Whent hecashpr oceedsfrom abondissuedwi t

hdetachablest
ockwarr
antsexceedthe
sum oft heparv alueofthebondsandt hefairmarketvalueofthewar
rant
s,theexcess
shouldbecr editedt o
a.addi t
ional paid-incapi
talf
rom st
ockwarrants.
b.r etainedear nings.
c. aliabili
tyaccount .
d.pr emi um onbondspay abl
e.

29. Proceedsfrom anissueofdebtsecur i

ti
eshav i
ngst ockwar r
ant dnotbeal
sshoul l
ocat
ed
betweendebtandequi t
yf eat
ureswhen
a.t hemarketvalueoft hewar rant
si snotreadi
lyav ai
labl
e.
b.exer ci
seofthewar rant swit
hinthenextf ewfiscalperi
odsseemsr emot
e.
c. theall
ocati
onwoul dr esulti
nadi scountonthedebtsecur it
y.
d.t hewarrant
sissuedwi ththedebtsecuriti
esar enondetachabl
e.

30. St
ockwar r
antsoutst
andingshoul
dbecl
assi
fi
edas
a.liabil
it
ies.
b.r educti
onsofcapital
contri
but
edi
nexcessofparv
alue.
c. assets.
d.noneoft hese.
P
31. Acorporati
oni ssuesbondswi thdetachablewarr
ants.Theamounttoberecordedaspai
d-
i
ncapitali
spr eferably
a.zero.
b.calculatedbyt heexcessoft heproceedsoverthefaceamountofthebonds.
c. equaltothemar ketval
ueoft hewarrant
s.
d.basedont her el
ativemarketv al
uesofthetwosecurit
iesi
nvol
ved.
16-10 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on
P
32. Thedistri
buti
onofst
ockr
ight
stoexi
sti
ngcommonst
ockhol
der
swi
l
lincr
easepai
d-i
n
capi
talatthe
Dat
eofIssuance Dat
eofExer ci
se
oft
heRights oftheRights
a. Yes Yes
b. Yes No
c. No Yes
d. No No
S
33. Themaj ordiff
erencebet weenconv er
ti
bledebtandstockwar rantsi sthatuponexerci
se
oft
hewar r
ants
a.t hestockisheldbyt hecompanyf oradefinedperi
odoftimebef oretheyarei
ssuedto
thewarrantholder.
b.t heholderhastopayacer tai
namountofcasht oobtai
ntheshar es.
c. thestockinvolvedisrestr
ictedandcanonl ybesol
dbyt her ecipientaf
terasetperi
od
ofti
me.
d.nopai d-i
ncapitalinexcessofparcanbeapar toft
hetransaction.
S
34. Whichoft hef ollowingisnotachar acteri
sticofanoncompensatorystockopti
onplan?
a.Subst antiallyallful
l-
ti
meempl oyeesmaypar t
ici
pateonanequitabl
ebasis.
b.Thepl anof fersnosubst anti
veopt i
onf eatur
e.
c. Unl
imitedt i
meper i
odper mittedforexer ci
seofanopt i
onaslongast heholderissti
l
l
employ edbyt hecompany .
d.Discountf rom themar ketpriceofthest ocknogr eat
erthanwouldbereasonableinan
of
ferofst ockt ostockholdersorothers.

35. Thedateonwhi chtomeasurethecompensati

onel ementinastockopt
iongr
ant
edt
oa
cor
porat
eempl oyeeordi
nar
il
yisthedateonwhichtheemployee
a.isgrantedtheopt i
on.
b.hasper for
medal lcondi
ti
onsprecedentt
oexerci
singt
heoption.
c. mayfir
stexer ci
setheopti
on.
d.exerci
sest heopt i
on.

36. Compensat ionexpenseresul

ti
ngfrom acompensatoryst
ockoptionplanisgener
all
y
a.r ecognizedintheperi
odofexerci
se.
b.r ecognizedintheperi
odofthegrant.
c. all
ocatedtot heperi
odsbenef
it
edbyt heemploy
ee'srequi
redservi
ce.
d.al l
ocatedov ertheperi
odsoft
heempl oyee'
sser
v i
celi
fetoret
irement.

37. Thedateonwhicht ot
alcompensati
onexpenseiscomputedi
nast
ockopt
ionpl
ani
sthe
dat
e
a.ofgrant.
b.ofexerci
se.
c. t
hatthemarketpri
cecoinci
deswitht
heoptionpr
ice.
c. t
hatthemarketpri
ceexceedstheopt
ionpri
ce.

38. Whichofthefoll
owi snotachar
ngi act
erist
icofanoncompensat
oryst
ockpur
chasepl
an?
a.Itisopent oal
mostallf
ull
-t
imeempl oyees.
b.Thedi scountfr
om marketpr
iceissmall.
c. Theplanoffer
snosubstanti
veopti
onf eatur
e.
d.Al l
ofthesearecharact
eri
sti
cs.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-11
ngsperShar

*
39. Undertheintrinsicvaluemethod,
compensationexpenseresul
ti
ngfr
om anincenti
vestock
opt
ionisgener al
ly
a.notr ecogni zedbecausenoexcessofmar ketpr
iceovertheopt
ionpri
ceexistsatthe
dateofgr ant.
b.r ecognizedi ntheperi
odofthegrant.
c. all
ocatedt ot heperi
odsbenefi
tedbytheemployee'
srequir
edser
v i
ce.
d.r ecognizedi ntheperi
odofexercise.

*
40. Forstockappreci
ati
onright
s,t
hemeasurementdat
ef orcomput
ingcompensat
ioni
sthe
dat
e
a.t heri
ghtsmature.
b.t hestock’
spri
cereachesapredet
ermi
nedamount.
c. ofgrant.
d.ofexer ci
se.

*
41. Anexecutiv
epay snot axesatt imeofexer
cisei
na(
an)
a.st ockappreciat
ionrightsplan.
b.incenti
vest ockoptionplan.
c. nonquali
fi
edst ockopt i
onplan.
d.Taxeswoul dbepaidi nallofthese.

*
42. Acompanyestimatesthefai
rv al
ueofSARs, usi
nganopt
ion-
pri
cingmodel
,for
a.share-
basedequityawards.
b.share-
basedli
abili
tyawards.
c. bot
hequit
yawar dsandli
abi l
i
tyawards.
d.neit
herequi
tyawar dsorl
iabil
ityawar
ds.

Mul
ti
pleChoi
ceAnswer
s—Di
l
uti
veSecur
it
ies,
Concept
ual
I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans.
21. d 25. a 29. d 33. b 37. a *
41. b
22. d 26. d 30. d 34. c 38. d *
42. b
23. b 27. b 31. d 35. a *
39. c
24. c 28. d 32. c 36. c *
40. d
Sol
uti
onst
othoseMul
ti
pleChoi
cequest
ionsf
orwhi
cht
heansweri
s“noneoft
hese.
”
30.addi
ti
onst
ocont
ri
but
edcapi
tal
.

MULTI
PLECHOI
CE—Di
l
uti
veSecur
it
ies,
Comput
ati
onal
43. FogelCo.has$2, 500,
000of8% conv erti
blebondsout standi
ng.Each$1,000bondi s
converti
bleint
o30shar esof$30parv al
uecommonst ock.Thebondspayi ntereston
January31andJul y31.OnJul y31,2010,thehol der
sof$800, 000bondsexercisedt he
conversi
onpr i
vil
ege.Ont hatdat
ethemar ketpr i
ceofthebondswas105andt hemar ket
pri
ceoft hecommonst ockwas$36.Thet otalunamorti
zedbondpr emi
um atthedat eof
conversi
onwas$175, 000.Fogelshoul
dr ecord,asaresul
toft hi
sconver
sion,
a
a.cr editof$136,
000toPai d-
inCapi
talinExcessofPar .
b.cr editof$120,
000toPai d-
inCapi
talinExcessofPar .
c. creditof$56,
000toPr emium onBondsPay abl
e.
d.lossof$8, 000.
16-12 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

44. OnJuly1,2010,ani nter

estpay mentdate,$60,000ofPar ksCo.bondswereconver
ted
i
nto1,200shar esofPar ksCo.commonst ockeachhav ingaparv al
ueof$45anda
marketvalueof$54.Ther eis$2,400unamor ti
zeddiscountonthebonds.Usi
ngthebook
val
uemet hod,Parkswouldr ecor
d
a.nochangei npaid-
incapitali
nexcessofpar .
b.a$3, 600increaseinpaid-i
ncapit
alinexcessofpar .
c. a$7,200increaseinpaid-i
ncapit
alinexcessofpar .
d.a$4, 800increaseinpaid-i
ncapit
alinexcessofpar .

45. Mor ganCor porationhadt woissuesofsecur i

ti
esout standi
ng:commonst ockandan8%
conv er
t i
blebondi ssueint hef aceamountof$16, 000,000.Interestpay mentdat esoft he
bond i ssuear eJune30t h and December31st .Theconv er sion cl
ausei nt hebond
i
ndent ureent it
lest hebondhol derstoreceivef
ortyshar esof$20parv aluecommonst ock
i
nexchangef oreach$1, 000bond.OnJune30, 2010, theholdersof$2, 400,000f acevalue
bondsexer cisedt heconv ersi
onpr iv
il
ege.Themar ketpr i
ceoft hebondsont hatdatewas
$1,100 perbond and t he mar ketpri
ce oft he common st ock was $35.The t ot al
unamor t
izedbonddi scountatt hedateofconv ersionwas$1, 000,
000.Inappl yi
ngt he
bookv aluemet hod,whatamountshoul dMorgancr edittotheaccount" paid-i
ncapitalin
excessofpar ,
"asar esultofthisconv er
sion?
a.$330, 000.
b.$160, 000.
c. $1,440, 000.
d.$720, 000.

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions46t
hrough48.

ChangCor porati
oni ssued$3,
000,
000of9%,t en-
yearconv er
ti
blebondsonJul y1,2010at96.1
pl
usaccr uedi nt
erest.Thebondswer edatedApr i
l1,2010wi thinter
estpayabl
eApr i
l1and
October1.Bonddi scountisamort
izedsemi annual
lyonast rai
ght
-l
inebasi
s.OnApr il1,2011,
$600,000oft hesebondswer econv er
tedinto500shar esof$20parv aluecommonst ock.
Accruedinter
estwaspai di
ncashatthetimeofconv er
sion.

46. If"
inter
estpayabl
e"werecredit
edwhent hebondswereissued,whatshoul
dbet
he
amountofthedebi
tto"
int
erestexpense"onOct
ober1,
2010?
a.$64,500.
b.$67,500.
c. $70,
500.
d.$135,000.

47. Whatshouldbetheamountoft
heunamor
ti
zedbonddi
scountonApr
il1,
2011r
elat
ingt
o
thebondsconv
erted?
a.$23,400.
b.$21,600.
c. $11,
700.
d.$22,200.

48. Whatwastheeff
ecti
vei
nter
estr
ateont
hebondswhent
heywer
eissued?
a.9%
b.Abov e9%
c. Bel
ow9%
d.Cannotdeter
minefr
om thei
nfor
mat
iongi
ven.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-13
ngsperShar

49. LitkeCorporati
oni
ssuedatapr emium of$5,000a$100, 000bondissueconv ert
ibl
einto
2,000shar esofcommonst ock( parv al
ue$40).Att het imeoft heconversion,the
unamor t
izedpremi
um is$2,000, t
hemar ketval
ueofthebondsi s$110,000,
andt hestock
i
squot edont hemarketat$60pershar e.Ift
hebondsareconv er
tedi
ntocommon, whatis
theamountofpai d-i
ncapitalinexcessofpart oberecor dedontheconv er
sionoft he
bonds?
a.$25, 000
b.$22, 000
c. $32,000
d.$40, 000

50. In 2010,Eklund,I nc.

,i ssued for$103 pershar e,60, 000 shar
es of$100 parv alue
converti
blepreferr
edst ock.Oneshar eofpr ef
err
edst ockcanbeconv ert
edi nt
ot hree
sharesofEklund's$25parv al
uecommonst ockattheopt i
onofthepr
efer
redstockholder.
InAugust2011,al lofthepr efer
redst ockwasconv er t
edi nt
ocommonst ock.Themar ket
val
ueoft hecommonst ockatthedat eoftheconv ersi
onwas$30pershar e.Whattot al
amountshoul dbecr editedtoaddi ti
onalpaid-
incapitalfrom commonstockasar esultof
theconversi
onoft hepr eferr
edst ockintocommonst ock?
a.$1, 020,
000.
b.$780, 000.
c. $1,500,
000.
d.$1, 680,
000.

51. OnDecember1,2010,Lest erCompanyissuedat103,t wohundr edofi t

s9%,$1, 000
bonds.At t
achedt oeachbondwasonedet achablestockwar rantent itl
i
ngtheholderto
purchase10shar esofLester'
scommonst ock.OnDecember1, 2010, t
hemar ketv
alueof
thebonds,wi thoutthestockwar r
ants,was95,andt hemar ketv alueofeachst ock
purchasewarrantwas$50.Theamountoft heproceedsfrom thei ssuancethatshouldbe
accountedforast hei
nit
ial
carryi
ngval
ueoft hebondspay abl
ewoul dbe
a.$193, 640.
b.$195, 700.
c. $200,000.
d.$206, 000.

52. OnMar ch1,2010,RuizCor porati

onissued$800, 000of8%nonconv ert
ibl
ebondsat104,
whichar edueonFebr uary28,2030.I nadditi
on,each$1, 000bondwasi ssuedwi th25
detachablestockwarrants,eachofwhi chenti
tl
edt hebondholdertopurchasef or$50one
shareofRui zcommonst ock,parv al
ue$25.Thebondswi thoutthewar rantswould
normallysellat95.OnMar ch1,2010,t hef
airmar ketval
ueofRui z’
scommonst ockwas
$40pershar eandt hef ai
rmar ketval
ueoft hewar rantswas$2. 00.Whatamountshoul d
RuizrecordonMar ch1, 2010aspai d-
incapit
alfrom stockwarrants?
a.$28, 800
b.$33, 600
c. $41,600
d.$40, 000
16-14 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

53. During2010,GordonCompanyi ssuedat104t hr

eehundred,$1,
000bondsduei ntenyears.
Onedet achabl
est ockwarrantentitl
ingtheholdertopurchase15shar esofGor don’s
commonst ockwasat t
achedt oeachbond.Att hedateofissuance,t
hemar ketval
ueof
thebonds,wi thoutthestockwar rants,wasquotedat96.Themar ketvalueofeach
detachablewarrantwasquot edat$40.Whatamount ,ifany,oftheproceedsfrom the
i
ssuanceshouldbeaccount edforaspar tofGor
don’sst
ockholder
s'equit
y?
a.$0
b.$12, 000
c. $12,480
d.$11, 856

54. OnApr il7,2010,Kegi

nCor por
ati
onsol da$2, 000,
000,twent y-
year,8percentbondissue
for$2,120,
000.Each$1,000bondhast wodet achablewarrants,eachofwhi chper
mi t
sthe
purchaseofoneshar eoft hecorporati
on'
scommonst ockf or$30.Thest ockhasapar
value of$25 pershar e.Immedi at
elyaftert he sal
e oft he bonds,the corporat
ion'
s
securi
tieshadthefoll
owingmarketvalues:
8%bondwi
thoutwar
rant
s $1,
008
Warr
ant
s 21
Commonst
ock 28
WhataccountsshouldKegi
ncredi
ttor
ecor
dthesal
eofthebonds?
a.BondsPay able $2,
000,
000
Premium onBondsPayabl
e 77,
600
Paid-
inCapital
—St
ockWarrant
s 42,
400
b.BondsPay able $2,
000,
000
Premium onBondsPayabl
e 16,
000
Paid-
inCapital
—St
ockWarrant
s 84,
000
c. BondsPay able $2,
000,
000
Premium onBondsPayabl
e 35,
200
Paid-
inCapital
—St
ockWarrant
s 84,
800
d.BondsPay able $2,
000,
000
PremiumsonBondsPay abl
e 120,
000

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions55and56.

OnMay1, 2010,PayneCo.issued$300,
000of7%bondsat103, whicharedueonApri
l30,2020.
Twentydet
achablestockwarrant
sentit
li
ngtheholdertopurchasefor$40oneshareofPayne’s
commonst ock,$15parv al
ue,wereattachedtoeach$1, 000bond.Thebondswi t
houtt he
warr
antswouldsellat96.OnMay1,2010,t hefai
rvalueofPayne’scommonst ockwas$35per
shar
eandoft hewarrant
swas$2.
55. OnMay1, 2010,
Pay
neshoul
dcr
edi
tPai
d-i
nCapi
tal
from St
ockWar
rant
sfor
a.$11,520.
b.$12,000.
c. $12,
360.
d.$21,000.

56. OnMay1, 2010,Payneshoul

drecor
dthebondswi
tha
a.discountof$12,000.
b.discountof$3,360.
c. di
scountof$3,
000.
d.premium of$9,000.
Di
l
uti
veSecur
it
iesandEar
ni e 16-15
ngsperShar
16-16 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

57. OnJuly4, 2010, ChenCompanyi ssuedf or$4, 200,000atotalof40, 000sharesof$100par

val
ue,7% noncumul ati
v epr eferredst ockal ongwi t
honedet achablewar r
antforeach
shareissued.Eachwar rantcontai nsar i
ghtt opur chaseoneshar eofChen$10parv alue
commonst ockf or$15pershar e.Thest ockwi t
houtthewar rantswouldnor mall
ysellfor
$4,
100,000.Themar ketpr iceoft her i
ghtsonJul y1,2010,was$2. 50perr i
ght.On
October31, 2010, whent hemar ketpriceoft hecommonst ockwas$19pershar eandt he
marketv alueoft heri
ght swas$3. 00perr i
ght ,16,
000r i
ghtswer eexercised.Asaresultof
theexer ci
seoft he16, 000r ightsandt hei ssuanceoft herelatedcommonst ock,what
j
ournal entrywoul dChenmake?
a.Cash 240,
000
CommonSt ock
160,000
Paid-i
nCapi tal i
nExcessofPar
80,
000
b.Cash 240,
000
Paid-inCapi tal—StockWar rant s 40,
000
CommonSt ock
160,000
Paid-i
nCapi tal i
nExcessofPar
120,000
c. Cash 240,
000
Paid-inCapi tal—StockWar rant s 100,
000
CommonSt ock
160,000
Paid-i
nCapi tal i
nExcessofPar
180,000
d.Cash 240,
000
Paid-inCapi tal—StockWar rant s 60,
000
CommonSt ock
160,000
Paid-i
nCapi tal i
nExcessofPar
140,000

58. VernonCor por at

ionoff
ereddetachable5-
yearwarrant
stobuyoneshar eofcommon
stock(parv alue$5)at$20(atati
mewhent hestockwasselli
ngfor$32)
.Thepr i
cepaid
for2,000,$1,000bondswiththewarrant
satt
achedwas$205,000.Themarketpriceofthe
Vernonbondswi thoutt
hewar r
antswas$180,000,andthemarketpri
ceoft hewar r
ants
withoutthebondswas$20, 000.Whatamountshouldbeall
ocat
edtothewarrants?
a.$20, 000
b.$20, 500
c. $24,000
d.$25, 000

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions59and60.

OnMay1, 2010,MarlyCo.issued$500,000of7%bondsat103, whicharedueonApril

30,2020.
Twentydet
achablestockwar r
antsentitl
ingthehol
dertopurchasefor$40oneshareofMarly
’s
commonst ock,$15parvalue,wereattachedtoeach$1,000bond.Thebondswi t
houtthe
warr
antswouldsellat96.OnMay1, 2010, t
hefai
rval
ueofMar ly’
scommonst ockwas$35per
shar
eandoft hewarrantswas$2.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-17
ngsperShar

59. OnMay1, 2010,Marl

yshoul
drecor
dthebondswi
tha
a.discountof$20,
000.
b.discountof$5,
000.
c. di
scountof$5,
600.
d.premium of$15,
000.
16-18 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

60. OnMay1, 2010,

Mar
lyshoul
dcr
edi
tPai
d-i
nCapi
tal
from St
ockWar
rant
sfor
a.$35,000
b.$20,600
c. $20,
000
d.$19,200

61. OnJul y1,2010, El

li
sonCompanygr ant edSam Wi ne,
anempl oyee,anopti
ontobuy400
sharesofEl l
isonCo.stockfor$30pershar e,theopti
onexer cisablefor5year
sfrom dat
e
ofgrant.Usingaf ai
rvalueopti
onpricingmodel ,t
otalcompensat ionexpenseis
determinedtobe$1, 800.WineexercisedhisoptiononOct ober1, 2010andsoldhis400
sharesonDecember1, 2010.Quotedmar ketpri
cesofEll
isonCo.st ocki
n2010wer e:
Jul
y1 $30pershar e
October1 $36pershar e
December1 $40pershar e
Theservi
ceperi
odisforthr
eeyearsbegi
nni
ngJanuary1,2010.Asar esul
toft
heopt
ion
grant
edt oWine,
usingthefai
rval
uemethod,El
l
isonshouldrecogni
zecompensat
ion
expenseonitsbooksintheamountof
a.$1, 800.
b.$600.
c. $450.
d.$0.

62. OnJanuar y1,2010,TrentCompanygr antedDi ckWill

iams,anempl oyee,anoptiontobuy
100sharesofTr entCo.stockf or$30pershar e,theoptionexerci
sabl
ef or5y earsf
rom
dat
eofgr ant.Usingafairvalueoptionpr i
cingmodel ,
totalcompensationexpenseis
det
erminedt obe$900.Wi ll
iamsexer cisedhisopt i
ononSept ember1, 2010,andsoldhis
100sharesonDecember1, 2010.Quot edmar ketpri
cesofTr entCo.stockdur i
ng2010
were:
January1 $30pershar e
September1 $36pershar e
December1 $40pershar e
Theser vi
ceperiodi
sfortwoy ear
sbeginni
ngJanuar
y1,2010.Asar esultoft
heopti
on
grant
edt oWi l
li
ams,usingt
hef ai
rval
uemethod,Tr
entshouldrecognizecompensat
ion
expensef or2010onitsbooksintheamountof
a.$1, 000.
b.$900.
c. $450.
d.$0.

63. OnDecember31, 2010, Gonzal

ezCompanygr antedsomeofi t
sexecut i
vesopt ionsto
purchase100, 000shar esofthecompany ’
s$10parcommonst ockatanoptionpr i
ceof
$50pershar e.TheBl ack-Schol
esoptionpri
cingmodel determinestotalcompensat i
on
expenset obe$750, 000.Theopt i
onsbecomeexer cisabl
eonJanuar y1,2011, and
representcompensat ionforexecuti
ves’ser
vicesov erathree-yearperi
odbegi nning
Januar y1,2011.AtDecember31, 2011noneoft heexecut iv
eshadexer cisedt heiropti
ons.
Whati sthei mpactonGonzal ez’
snetincomef orthey earendedDecember31, 2011asa
resultofthistransactionunderthefairval
uemet hod?
a.$250, 000increase.
b.$750, 000decr ease.
c. $250, 000decr ease.
d.$0.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-19
ngsperShar

64. OnJanuar y1,2011ReeseCompanygr antedJackBuchanan,anempl oyee,anoptionto

buy100shar esofReeseCo.st ockfor$40pershare,theopti
onexercisablefor5years
fr
om dateofgr ant
.Usingafairval
ueoptionprici
ngmodel ,
tot
alcompensat i
onexpenseis
deter
minedt obe$1,200.Buchananexercisedhisopti
ononSeptember1, 2011,andsold
hi
s100shar esonDecember1, 2011.Quot edmarketpri
cesofReeseCo.st ockduring
2011wer e:
January1 $40pershar e
September1 $48pershar e
December1 $54pershar e
Theser vi
ceperiodi
sfort
woy earsbeginni
ngJanuary1,2011.Asar esultoft
heopt
ion
grant
edt oBuchanan,usi
ngthefairv
aluemethod,Reeseshouldrecognizecompensat
ion
expensef or2011onit
sbooksintheamountof
a.$0.
b.$600.
c. $1,200
d.$1, 400

65. OnJune30, 2010,YangCor porationgrantedcompensatoryst

ockopt i
onsf or20,000
sharesofits$24parv aluecommonst ockt ocert
ainofit
skeyempl oyees.Themar ket
pri
ceoft hecommonst ockont hatdat
ewas$31pershar eandtheopt i
onpr i
cewas$28.
Usingaf ai
rvalueoptionpr i
cingmodel , t
otalcompensati
onexpenseisdet erminedt obe
$64,000.Theopt i
onsar eexer cisabl
ebegi nni
ngJanuary1,2012,
providi
ngt hosekey
empl oy
eesar esti
lli
nt heempl oyofthecompanyatt hetimetheoptionsar eexercised.
Theopt i
onsexpireonJune30, 2013.
OnJanuar y4,2012,whent hemarketpri
ceofthestockwas$36pershar e,al
lopt
ionsf or
the20,000shareswer eexerci
sed.Theservi
ceperi
odisfort
woy earsbeginni
ngJanuar y1,
2010.Usingthefairval
uemet hod,whatshouldbetheamountofcompensat i
onex pense
recor
dedbyYangCor porati
onfortheseopti
onsonDecember31, 2010?
a.$64, 000
b.$32, 000
c. $15,000
d.$0

66. I
nor dertoret
aincer
tainkeyexecuti
ves,
SmileyCorpor
ationgrant
edthem i
ncent
ivest
ock
opti
onsonDecember31, 2009.80,
000opti
onswer egrantedatanopti
onpri
ceof$35
pershare.Marketpr
icesofthestockwereasfoll
ows:
December31, 2010 $46pershare
December31, 2011 51pershar
e
Theopt i
onsweregrant edascompensat i
onforexecutiv
es’servi
cestober ender
edovera
two-yearperi
odbeginningJanuary1,2010.TheBlack-Scholesopti
onprici
ngmodel
deter
mi nestot
alcompensat ionexpensetobe$800,000.Whatamountofcompensat ion
expenseshouldSmi l
eyr ecogni
zeasar esul
tofthi
splanf ortheyearendedDecember31,
2010undert hefai
rvaluemet hod?
a.$1, 400,
000.
b.$880, 000.
c. $800,000.
d.$400, 000.
16-20 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

67. OnJanuar y1,2011,Ritt

erCompanygr antedstockoptionstoof f
icer
sandkeyempl oyees
forthepur chaseof10, 000shar esoft hecompany 's$1parcommonst ockat$20per
shareasaddi t
ionalcompensationf orservi
cestober enderedov erthenextt hr
eey ears.
Theopt ionsar eexerci
sabledur i
ng af i
ve-
yearperiod beginni
ng January1,2014 by
granteesst i
l
lempl oyedbyRitt
er.TheBl ack-
Scholesopt i
onpri
cingmodeldet erminestotal
compensat i
onexpenset obe$90, 000.Themar ketpriceofcommonst ockwas$26per
shareatt hedat eofgrant.Thejournalentrytorecordt hecompensationexpenser el
ated
totheseopt i
onsf or2011woul di ncludeacr editt
ot hePaid-inCapital—StockOpt i
ons
accountfor
a.$0.
b.$18, 000.
c. $20,000.
d.$30, 000.

68. OnJanuar
y1,2011,Ev ansCompanygr ant
edTi m Tel
fer,anempl oyee,anopt i
ont obuy
1,
000shar
esofEv ansCo.stockfor$25pershar e,t
heopt i
onexercisabl
ef or5yearsfr
om
dat
eofgrant.Usingaf airvalueopti
onpr i
cingmodel ,totalcompensat ionexpenseis
det
ermi
nedtobe$7, 500.Telf
erexerci
sedhisopt i
ononSept ember1,2011,andsol dhis
1,
000shar
esonDecember1, 2011.Quotedmar ketpri
cesofEv ansCo.st ockduri
ng2011
were
January1 $25pershar e
September1 $30pershar e
December1 $34pershar e
Theser vi
ceperi
odisf
orthr
eeyear
sbegi
nningJanuary1,2011.Asar esul
toft
heoption
grant
edt oTelfer
,usi
ngthefai
rvaluemethod,Evansshouldrecognizecompensat
ion
expensefor2011onit
sbooksi
ntheamountof
a.$9, 000.
b.$7, 500.
c. $2,500.
d.$1, 500.

69. OnDecember31,2010,Kessl erCompanygr antedsomeofi tsexecuti

vesoptionst o
purchase50,000shar esoft hecompany 's$10parcommonst ockatanopt i
onpr i
ceof
$50 pershar e.Theopt ionsbecomeexer cisableon Januar y1,2011,and represent
compensat i
onf orexecutives'servi
cesoverathree-y
earper i
odbegi
nningJanuar
y1, 2011.
TheBl ack-
Schol esopt i
onpr ici
ngmodeldet erminest otalcompensati
onexpenset obe
$300,000.AtDecember31,2011,noneoft heexecut i
veshadexer ci
sedthei
ropt i
ons.
Whati stheimpactonKessl er'
snetincomef orthey earendedDecember31,2011asa
resul
tofthistransact i
onundert hefai
rval
uemet hod?
a.$100, 000incr ease
b.$0
c. $100,000decr ease
d.$300, 000decr ease
 Di
l
uti
veSecur
it
iesandEar
ni e 16-21
ngsperShar

70. WeiserCorp.onJanuary1,2007,grantedst ockopti

onsf or40,000shar esofit
s$10par
val
uecommonst ocktoitskeyemployees.Themar ketpri
ceoft hecommonst ockont hat
datewas$23pershar eandt heopti
onpr icewas$20.TheBl ack-Scholesopti
onpr i
cing
model det
erminestot
alcompensati
onex pensetobe$240,000.Theopt ionsareexer
cisable
begi
nningJanuary1,2010,pr
ov i
dedt
hosekeyempl oy eesaresti
lli
nWei ser’
semployatt he
ti
met heopti
onsareexerci
sed.Theopti
onsex pir
eonJanuar y1,2011.
OnJanuary1,2010,whent hemar ketpr
iceoft
hestockwas$29pershare,all40,000
opti
onswereexerci
sed.Theamountofcompensati
onexpenseWei
sershoul
dr ecordfor
2009underthef
airval
uemet hodi
s
a.$0.
b.$40,000.
c. $80,
000.
d.$120,000.

71. OnDecember31,2010,HouserCompanygr anted someofi tsexecuti

vesopt ionst o
purchase45,000shar esofthecompany '
s$50parcommonst ockatanopt i
onpr i
ceof$60
pershare.TheBl ack-
Scholesoptionpri
ci
ngmodeldet erminestotalcompensati
onex pense
to be$900, 000.Theopt ionsbecomeex er
cisableon Januar y1,2011,and r epresent
compensat i
onf orexecuti
ves'pastandf ut
ureser v
icesov erat hree-
yearperi
odbegi nning
January1,2011.Whati st heimpactonHouser '
st otalstockholder
s'equit
yfort hey ear
endedDecember31, 2010,asar esul
tofthi
stransacti
onundert hef ai
rval
uemet hod?
a.$900, 000decr ease
b.$300, 000decr ease
c. $0
d.$300, 000increase

72. OnJune30,2008,Nor manCor porat

iongrantedcompensat orystockoptionsfor30,
000
sharesofi ts$20parv al
uecommonst ocktocer tainofit
skeyempl oyees.Themar ket
pri
ceoft hecommonst ockonthatdatewas$36pershar eandtheoptionpr i
cewas$30.
TheBl ack-Schol
esoptionpri
cingmodeldet erminest ot
alcompensationexpenset obe
$360,000.Theopt i
onsareexerci
sablebeginningJanuar y1,2011,providedthosekey
employ eesaresti
lli
nNorman’semployatthet i
met heopt
ionsareexer
cised.Theopti
ons
expi
reonJune30, 2012.
OnJanuary4,2011,whent hemar ketpri
ceofthestockwas$42pershar e,al
l30,
000
opt
ionswereexer
cised.Whatshouldbet heamountofcompensati
onexpenserecor
ded
byNormanCorporat
ionfort
hecalendaryear2010usi
ngthef
airv
aluemethod?
a.$0.
b.$144,000.
c. $180,
000.
d.$360,000.
16-22 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

73. Inordert
or et
aincert
ainkeyexecut
ives,
JensenCorpor
ati
ongrant
edthem i
ncent
ivest
ock
opti
onsonDecember31, 2009.50,
000optionswer
egrantedatanopt
ionpri
ceof$35per
shar
e.Mar ketpri
cesofthestockwereasfoll
ows:
December31,
2010 $46pershar
e
December31,
2011 51pershar
e
Theopt i
onswer egrantedascompensat i
onforexecut
ives'ser
vicestoberenderedov
era
two-yearperiod beginni
ng January1,2010.TheBl ack-Scholesopt i
on pr
ici
ng model
deter
mi nestotalcompensationexpensetobe$500,000.Whatamountofcompensat ion
expenseshoul dJensenrecognizeasaresul
tofthi
splanforthey earended
December31, 2010underthefairv
aluemethod?
a.$250, 000.
b.$500, 000.
c. $550,000.
d.$1, 750,
000.

74. Grant
,Inc.had40, 000sharesoftreasur
ystock( $10parv alue)atDecember31,2010,
whichitacqui
redat$11pershare.OnJune4,2011,Gr anti
ssued20, 000tr
easur
yshares
toempl oyeeswhoexer ci
sedoptionsunderGr ant'semploy eest ockoptionplan.The
marketv al
uepersharewas$13atDecember31,2010,$15atJune4,2011,and$18at
December31,2011.Thest ockoptionshadbeengr ant
edf or$12pershar e.Thecost
methodi sused.Whatist hebal
anceoft hetreasurystockonGr ant'sbal
ancesheetat
December31, 2011?
a.$140, 000.
b.$180, 000.
c. $220,000.
d.$240, 000.

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions75t
hrough77.

OnJanuary1,2010,Kor
sak,I
nc.est
abli
shedastockappr
eci
ationri
ght
splanforit
sexecuti
ves.I
t
ent
it
ledthem t
orecei
vecashatanytimeduri
ngthenextf
ouryearsf
orthedi
ff
erencebetweenthe
marketpri
ceofitscommonst ockandapr e-
establ
i
shedpri
ceof$20on60, 000SARs.Cur r
ent
marketpri
cesofthest
ockareasfol
lows:
Januar
y1,2010 $35pershar
e
December31,2010 38pershar
e
December31,2011 30pershar
e
December31,2012 33pershar
e

Compensati
onexpenser
elat
ingt
othepl
ani
stober
ecor
dedov
eraf
our
-yearper
iodbegi
nni
ng
Januar
y1,2010.

*
75. Whatamountofcompensat
ionexpenseshoul
dKor
sakr
ecogni
zef
ort
hey
earended
December31,2010?
a.$180,000
b.$270,000
c. $225,
000
d.$1,080,
000
 Di
l
uti
veSecur
it
iesandEar
ni e 16-23
ngsperShar

*
76. Whatamountofcompensat
ionexpenseshoul
dKor
sakr
ecogni
zef
ort
hey
earended
December31,2011?
a.$0
b.$30,000
c. $300,
000
d.$150,000

*
77. On December31,2012,16,000 SARsareexer
cised byexecutiv
es.Whatamountof
compensati
onexpenseshoul
dKorsakr
ecogni
zef
orthey earendedDecember31,
2012?
a.$285,000
b.$195,000
c. $585,
000
d.$78,000

Mul
ti
pleChoi
ceAnswer
s—Di
l
uti
veSecur
it
ies,
Comput
ati
onal
I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans.
43. a 48. b 53. c 58. b 63. c 68. c 73. a
44. b 49. b 54. c 59. c 64. b 69. c 74. c
45. a 50. d 55. c 60. b 65. b 70. c *
75. b
46. c 51. b 56. b 61. b 66. d 71. c *
76. b
47. b 52. c 57. b 62. c 67. d 72. b *
77. a

MULTI
PLECHOI
CE—Di
l
uti
veSecur
it
ies,
CPAAdapt
ed
78. OnJanuar y2,2010,Far rCo.i
ssued10- yearconv ert
ibl
ebondsat105.Dur ing2012,these
bondswer econv ertedintocommonst ockhav inganaggr egateparvalueequalt othe
tot
alfaceamountoft hebonds.Atconv ersion,t
hemar ketpriceofFarr
’scommonst ock
was50per centabov eitsparvalue.OnJanuar y2, 2010,cashpr oceedsf
rom theissuance
oftheconv ert
ibl
ebondsshoul dber eportedas
a.pai d-i
ncapi t
alfortheentir
epr oceeds.
b.pai d-i
ncapi t
alf ortheportionoft hepr oceedsat t
ri
butablet otheconv er
sionfeat
ure
andasal i
abil
ityforthebalance.
c. aliabil
ityforthef aceamountoft hebondsandpai d-i
ncapi t
alfort
hepr emium over
thefaceamount .
d.al iabi
li
tyfortheent ir
eproceeds.

79. LangCo.issuedbondswithdetachabl
ecommonst ockwar r
ants.Onl
ythewarr
antshada
knownmar ketval
ue.Thesum ofthefairval
ueoft
hewar rantsandthefaceamountoft
he
bondsexceedsthecashproceeds.Thi
sexcessisreport
edas
a.DiscountonBondsPay abl
e.
b.Pr emium onBondsPayable.
c. CommonSt ockSubscri
bed.
d.Pai d-
inCapit
ali
nExcessofPar —StockWarr
ant
s.
16-24 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

80. OnJanuar y1,2010,SharpCor

p.grant
edanempl oy
eeanopt i
ont opurchase6,000shares
ofSharp's$5parv al
uecommonst ockat$20pershare.TheBlack-
Scholesopt i
onpri
cing
modeldet erminestotalcompensati
on expenseto be$140,000.Theopt ion became
exer
cisableonDecember31,2011,af tert
heemployeecompl et
edt woy ear
sofser vi
ce.
Themar ketpri
cesofSharp'
sstockwereasf ol
l
ows:
Januar
y1,2010 $30
December31,2011 50
For2011,shoul
drecogni
zecompensat
ionexpenseundert
hef
airv
aluemet
hodof
a.$90,000.
b.$30,000.
c. $70,
000.
d.$0.

*
81. OnJanuar y2,2010,f orpastservices,RosenCor p.grantedNennPi ne,it
spr esi
dent,
16,
000st ockappr eci
ationri
ghtsthatareexerci
sabl
ei mmedi at
elyandexpireon
January2, 2011.Onexer ci
se,Nennisent i
tl
edtoreceivecashfortheexcessoft hemar ket
pri
ceoft hest ockont heexerci
sedat eoverthemar ketpr i
ceonthegr antdate.Nenndi d
notexerciseanyoft her i
ghtsduri
ng2010.Themar ketpriceofRosen'sstockwas$30on
January2,2010,and$45onDecember31,2010.Asar esul
toft hestockappr eci
ati
on
ri
ghts,
Rosenshoul drecognizecompensat i
onexpensef or2010of
a.$0.
b.$80, 000.
c. $240,000.
d.$480, 000.

Mul
ti
pleChoi
ceAnswer
s—Di
l
uti
veSecur
it
ies,
CPAAdapt
ed
I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans.
78. d 79. a 80. c *
81. c

MULTI
PLECHOI
CE—Ear
ningsPerShar
e—Concept
ual
82. Wit
hr especttothecomput ati
onofear ningspershare,whichofthef oll
owingwoul
dbe
mostindicati
veofasimplecapi t
alst
ructure?
a.Commonst ock,pr
eferr
edst ock,
andconv er
ti
blesecuri
ti
esoutstandinginlot
sofeven
t
housands
b.Ear ni
ngsder i
vedfr
om onepr imaryl
ineofbusiness
c. Owner shi
pinter
estconsist
ingsolel
yofcommonst ock
d.Noneoft hese

83. Incomput ingearningspershareforasimplecapitalstructur

e,ifthepref
err
edst
ockis
cumulativ
e,t heamountt hatshouldbededuct edasanadj ust
mentt othenumerat
or
(ear
nings)isthe
a.pr efer
reddividendsi
narrear
s.
b.pr efer
reddividendsi
narrear
sti
mes( oneminusthei ncomet axrate)
.
c. annual pr
eferreddi
vi
dendtimes(oneminustheincomet axrat
e).
d.noneoft hese.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-25
ngsperShar

84. Incomput at
ionsofwei ghtedav er
ageofsharesout st
andi
ng,whenastockdi
vi
dendor
stockspli
toccur
s,theadditional
sharesare
a.wei ghtedbythenumberofday soutst
andi
ng.
b.wei ghtedbythenumberofmont hsoutst
anding.
c. consider
edoutstandingatthebeginni
ngoftheyear.
d.consi der
edoutstandingatthebeginni
ngoftheearli
esty
earr
epor
ted.

85. Whatef fectwil

ltheacqui sit
ion oft
reasur
yst
ockhav
eon st
ockhol
der
s'equi
tyand
ear
ningspershare,respect
ivel
y?
a.Decr easeandnoef fect
b.Increaseandnoef f
ect
c. Decreaseandincrease
d.Increaseanddecr ease
S
86. Duetotheimport
anceofearni
ngspershar
einf
ormat
ion,
iti
srequi
redt
ober
epor
tedbyal
l
Publ
icCompanies Nonpubl
icCompani
es
a. Yes Yes
b. Yes No
c. No No
d. No Yes
P
87. Aconver
ti
blebondi
ssueshouldbei
ncl
udedi
nthedil
utedearni
ngspersharecomputat
ion
asi
fthebondshadbeenconvert
edi
ntocommonstock,i
ftheeff
ectofi
tsincl
usi
onis
Di
lut
ive Ant
idi
l
uti
ve
a. Yes Yes
b. Yes No
c. No Yes
d. No No

88. Whencomput i
ngdil
utedearningspershare,convert
ibl
ebondsare
a.ignored.
b.assumedconv er
tedwhet hertheyar
edi l
utiv
eorantidi
l
uti
ve.
c. assumedconver
tedonlyiftheyareanti
diluti
ve.
d.assumedconv er
tedonlyiftheyaredil
uti
v e.

89. Di
luti
veconv
erti
blesecuri
tiesmustbeusedi
nthecomput
ati
onof
a.basicearni
ngspershar eonl
y.
b.dilut
edearni
ngspershar eonl
y.
c. di
lut
edandbasicearningspershar
e.
d.noneofthese.

90. Incomputi
ngear ningspershar e,theequivalentnumberofsharesofconver
ti
bleprefer
red
stockar
eaddedasanadj ustmenttothedenomi nat
or(numberofsharesoutst
anding).I
f
thepref
err
edst ocki scumul ati
ve,whichamountshoul dthenbeaddedasanadj ustment
tothenumerator(netear ni
ngs)?
a.Annual pr
eferreddividend
b.Annual pr
eferreddividendt i
mes( onemi nustheincomet axr
ate)
c. Annualpr
eferreddividendt i
mest heincomet axrate
d.Annual pr
eferreddividenddividedbyt heincomet axrate

91. I
nthedi
l
utedear
ningspershar
ecomput
ati
on,t
het
reasur
yst
ockmet
hodi
susedf
or
16-26 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

opti
onsandwar rantst or ef
lectassumedr eacqui sit
ionofcommonst ockattheaverage
marketpricedur i
ngt heper i
od.Ift
heexercisepriceoft heopt i
onsorwar rant
sexceedsthe
aver
agemar ketpr i
ce, thecomput ati
onwoul d
a.f ai
rl
ypr esentdi lut edearningspershareonapr ospectivebasis.
b.f ai
rl
ypr esentt hemaxi mum pot enti
aldi l
utionofdi l
utedear ni
ngspershar eona
prospect iv
ebasi s.
c. refl
ecttheexcessoft henumberofshar esassumedi ssuedov erthenumberofshares
assumedr eacqui redast hepotenti
aldi
luti
onofear ningspershar e.
d.beant idilutive.

92. Inapply
ingt hetreasurystockmethodt odeterminethedi l
utiv
eeffectofst ockopti
onsand
warrant
s,thepr oceedsassumedt ober ecei
veduponexer ciseoftheopt i
onsandwar r
ants
a.ar eusedt ocal culatethenumberofcommonshar esr epurchasedatt heaverage
marketpr i
ce, whencomput i
ngdil
ut edearningspershar e.
b.ar eadded, netoft ax,tot
henumer atorofthecalculati
onfordil
utedear ningspershare.
c. aredisregardedi nt hecomputat
ionofear ningspershar eiftheexer cisepri
ceoft he
opti
onsandwar r
ant sisl
esst
hant heendingmar ketpri
ceofcommonst ock.
d.noneoft hese.

93. Whenapplyi
ngthetreasur
yst ockmethodfordil
utedear
ningspershar
e,t
hemar
ketpr
ice
oft
hecommonst ockusedf ortherepur
chaseisthe
a.priceatt
heendoft heyear.
b.averagemarketpri
ce.
c. pr
iceatt
hebeginningoftheyear.
d.noneofthese.

94. Ant
idil
ut i
vesecur i
ti
es
a.shoul dbei ncl
udedi nthecomput ati
onofdilut
edearni
ngspersharebutnotbasi
c
earningspershar e.
b.ar et hosewhosei ncl
usioni nearningspersharecomputat
ionswouldcausebasi
c
earningspershar etoexceeddil
utedear ni
ngspershar
e.
c. i
ncludest ockopt i
onsandwar rantswhoseexer ci
sepricei
sl esst
hantheaver
age
mar ketpr
iceofcommonst ock.
d.shoul dbei gnoredinallear
ningspershar ecal
cul
ati
ons.

*
95. Assumet her
earetwodi l
uti
veconv er
ti
blesecur
it
ies.Theonet
hatshoul
dbeusedf
ir
stt
o
recal
culateearni
ngspershareisthesecuri
tywit
ht he
a.gr eaterearni
ngsadj
ustment.
b.gr eaterearni
ngspershareadjustment.
c. smal l
erearni
ngsadjust
ment .
d.smal l
erearni
ngspershareadjustment.

Mul
ti
pleChoi
ceAnswer
s—Ear
ningsPerShar
e—Concept
ual
I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans.
82. c 84. d 86. b 88. d 90. a 92. a 94. d
83. d 85. c 87. b 89. b 91. d 93. b *
95. d
Sol
uti
ont
oMul
ti
pleChoi
cequest
ionf
orwhi
cht
heansweri
s“noneoft
hese.
”
83. annual
pref
err
eddi
vi
dend.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-27
ngsperShar

MULTI
PLECHOI
CE—Ear
ningsPerShar
e—Comput
ati
onal
96. Hil
lCorp.had600,
000sharesofcommonst ockoutst
andi
ngonJanuar y1,i
ssued900,
000
sharesonJuly1,andhadincomeapplicabl
et ocommonst ockof$1,050,
000forthey
ear
endi
ngDecember31, 2010.Ear
ningspershareofcommonst ockfor2010wouldbe
a.$1. 75.
b.$. 83.
c. $1.00.
d.$1. 17.

97. AtDecember31,2010,HancockCompanyhad500, 000sharesofcommonst ocki ssued

andoutstandi
ng,400,
000ofwhichhadbeeni ssuedandoutstandi
ngt
hroughoutt heyear
and100,000ofwhi chwereissuedonOct ober1,2010.Netincomeforthey earended
December31,2010,was$1, 020,
000.Whatshoul d beHancock's2010 earningsper
commonshar e,r
oundedtothenearestpenny
?
a.$2.02
b.$2.55
c. $2.
40
d.$2.27

98. MiloCo.had600,
000sharesofcommonst ockoutstandi
ngonJanuar y1,i
ssued126,000
sharesonMay1,purchased63,
000sharesoftreasuryst
ockonSept ember1,andissued
54,
000sharesonNovember1.Theweightedaveragesharesout
standingf
ortheyearis
a.651,000.
b.672,000.
c. 693,
000.
d.714,000.

99. OnJanuar y1,2011,Gri

dleyCor porati
onhad125,
000shar esofits$2parv al
uecommon
stockoutstanding.OnMar ch1,Gr i
dleysol
danadditi
onal250,000sharesont heopen
mar ketat$20pershar e.Gridl
eyi ssueda20% stockdivi
dendonMay1.OnAugust1,
Gridleypur
chased140,000shar esandi mmedi
atelyret
ir
edt hestock.OnNov ember1,
200,000shar esweresoldf or$25pershar e.Whatisthewei ghted-
aver
agenumberof
sharesoutstandingf
or2011?
a.510, 000
b.375, 000
c. 358,333
d.258, 333

100. Thef
oll
owi
ngi
nfor
mat
ioni
sav
ail
abl
eforBar
oneCor
por
ati
on:
January1,2011 Sharesout
standi
ng 1,
250,
000
Apri
l1,2011 Sharesi
ssued 200,
000
Jul
y1, 2011 Treasur
ysharespur
chased 75,
000
October1,2011 Sharesi
ssuedina100%stockdi
vi
dend 1,
375,
000
Thenumberofshar
est
obeusedi
ncomput
ingear
ningspercommonshar
efor2011i
s
a.2,825,
500.
b.2,737,
500.
c. 2,
725,
000.
d.1,706,
250.
16-28 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

101. AtDecember31,2010Ri ceCompanyhad300, 000sharesofcommonst ockand10,000

sharesof5%,$100parv al
uecumul ati
vepreferredstockoutst
anding.Nodivi
dendswere
declaredonei therthepr
eferr
edorcommonst ocki n2010or2011.OnJanuar y30,2012,
priortot heissuanceofitsfinanci
alst at
ement sf ort
hey earendedDecember31,2011,
Ricedecl areda100% st ockdi vi
dendoni t
scommonst ock.Neti ncomefor2011was
$950,000.I ni t
s2011f inancialstatements,Ri ce's2011earningspercommonshar e
shouldbe
a.$1. 50.
b.$1. 58.
c. $3. 00.
d.$3. 17.

102. Ful
tz Company had 300, 000 shar es ofcommon st ock issued and outstandi
ng at
December31, 2010.Dur
ing2011, noaddi t
ionalcommonst ockwasi ssued.OnJanuary1,
2011,Ful t
zi ssued400,000shar esofnonconv er
ti
blepreferr
edst ock.Duri
ng2011,Fultz
decl
ar edandpai d$180,000cashdi videndsont hecommonst ockand$150, 000ont he
nonconv ert
ibleprefer
redst ock.Neti ncomef orthey earendedDecember31,2011,was
$960,000.Whatshoul dbeFul t
z's2011ear ningspercommonshar e,roundedtot he
nearestpenny ?
a.$1. 16
b.$2. 10
c. $2. 70
d.$3. 20

103. AtDecember31, 2010PineCompanyhad200, 000sharesofcommonst ockand10,

000
sharesof4%, $100parvaluecumul at
ivepr
efer
redstockoutstandi
ng.Nodivi
dendswere
declaredonei therthepr
efer
redorcommonst ockin2010or2011.OnFebr uar
y10,2012,
pri
ortot heissuanceofitsfi
nancialstat
ementsfortheyearendedDecember31,2011,
Pinedecl ar
eda100%st ockspli
toni t
scommonst ock.Netincomef or2011was
$720,000.Inits2011f i
nanci
alstatements,
Pine’
s2011ear ni
ngspercommonshar e
shouldbe
a.$3. 40.
b.$3. 20.
c. $1. 70.
d.$1. 00.

104. StineInc.had300, 000sharesofcommonst ockissuedandoutstandingatDecember31,

2010.OnJul y1,2011anaddi t
ional
300,000shareswereissuedforcash.Sti
nealsohad
stockopt ionsoutstandingatt
hebeginni
ngandendof2011whi chall
owt heholder
sto
pur chase90,000shar esofcommonst ockat$28pershare.Theav er
agemar ketpr
iceof
Stine’scommonst ockwas$35dur ing2011.Thenumberofshar estobeusedi n
comput i
ngdilut
edear ni
ngspersharefor2011is
a.672, 000
b.618, 000
c. 522, 000
d.468, 000
 Di
l
uti
veSecur
it
iesandEar
ni e 16-29
ngsperShar

105. Kasr aviCo.hadneti ncomef or2011of$300,000.Theav

eragenumberofshares
outst andingf ortheperiodwas200,000shares.Theaver
agenumberofsharesunder
outst andingopt i
ons,atanopt i
onpriceof$30persharei
s12,000shar
es.Theaverage
mar ketpr iceoft hecommonst ockduri
ngtheyearwas$36.Whatshoul
dKasraviCo.
repor tfordilutedearningspershareforthey
earended2011?
a.$1. 50
b.$1. 49
c. $1. 43
d.$1. 42

106. OnJanuary2,2011,WorthCo.i
ssuedatpar$2, 000,000of7%conv ert
ibl
ebonds.Each
$1,
000bondisconv er
ti
blei
nto10sharesofcommonst ock.Nobondswer econvert
ed
dur
ing2011.Worthhad200,000sharesofcommonst ockoutst
andingduri
ng2011.
Worth’
s2011netincomewas$600, 000andt heincomet axratewas30%.Wor t
h’sdil
uted
ear
ningspersharef
or2011wouldbe( roundedt othenearestpenny):
a.$3.49.
b.$3.17.
c. $3.
00.
d.$3.36.

107. BeatyInc.purchasedDunbarCo.andagreedtogiv est

ockholder
sofDunbarCo.10,000
addi
tionalsharesin2012ifDunbarCo.’
snetincomei n2011is$500,000;
in2010Dunbar
Co.’
sneti ncomeis$520,000.BeatyI
nc.hasnetincomef or2010of$200,000andhasan
aver
agenumberofcommonshar esout
standi
ngf or2010of100,000shares.Whatshoul
d
Beatyreportasdilut
edearni
ngspersharefor2010?
a.$2. 22
b.$2. 00
c. $1.82
d.$1. 67

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions108and109.

HansonCo.had200, 000sharesofcommonst ock,20,000shar esofconvert

ibl
eprefer
redst
ock,
and$1,000,000of10%converti
blebondsoutstandi
ngduring2011.Thepr eferr
edstockis
conver
tiblei
nto40,000shar
esofcommonst ock.Duri
ng2011, Hansonpai ddivi
dendsof$1.
20
pershareont hecommonst ockand$4pershar eonthepr ef
erredstock.Each$1,000bondi
s
conver
tiblei
nto45sharesofcommonst ock.Thenetincomef or2011was$800, 000andthe
i
ncomet axrat
ewas30%.

108. Basicearni
ngspershar
efor2011i
s(r
oundedt
othenear
estpenny
)
a.$2. 94.
b.$3. 22.
c. $3.35.
d.$3. 60.

109. Di
lutedearni
ngspershar
efor2011i
s(r
oundedt
othenear
estpenny
)
a.$2. 77.
b.$2. 81.
c. $3.05.
d.$3. 33.
16-30 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

110. Fugate Companyhad 500, 000 shares ofcommon st ockissued and outstanding at
December31,2010.OnJul y1,2011anaddi ti
onal500,000shareswer eissuedf orcash.
Fugatealsohadst ockopti
onsoutstandingatthebegi
nni ngandendof2011whi chall
ow
theholderstopurchase150,000sharesofcommonst ockat$20pershar e.Theav er
age
marketpr i
ceofFugat e'
scommonst ockwas$25dur ing2011.Whati st henumberof
sharesthatshouldbeusedi ncomputingdil
utedearni
ngspershar ef orthey earended
December31, 2011?
a.1, 030,
000
b.870, 000
c. 787,500
d.780, 000

111. Shi
pleyCorpor
ati
onhadneti ncomef orthey earof$480,000andawei ghtedaverage
numberofcommon shar es outstandi
ng during the per
iod of200, 000 shar
es.The
companyhasaconv er
ti
blebondissueoutstanding.Thebondswer eissuedfouryear
sago
atpar($2,
000,
000),carr
ya7% i nterestrat
e,andar econver
ti
bleinto40,000sharesof
commonstock.Thecompanyhasa40%t axrate.Dil
utedearni
ngspershar eare
a.$1.65
b.$2.23.
c. $2.
35.
d.$2.58.

112. Col
tCorpor
ati
onpur chasedMasseyInc.andagr eedtogivestockhol
dersofMasseyI nc.
50,
000addi
ti
onalsharesin2012ifMasseyInc.’
snetincomei n2011is$400,000ormor e;
i
n2010MasseyI nc.’
snetincomeis$410,000.Colthasnetincomef or2010of$800,000
andhasanaveragenumberofcommonshar esoutstandi
ngfor2010of500, 000shares.
Whatshoul
dColtreportasearni
ngspersharefor2010?
Basi
cEarni
ngs Di
l
utedEarni
ngs
PerShar
e PerShare
a. $1.
60 $1.
60
b. $1.
45 $1.
60
c. $1.
60 $1.
45
d. $1.
45 $1.
45

113. OnJanuar y2,2010,PerezCo.issuedatpar$10,000of6%bondsconv ert

ibl
ei ntotali
nto
1,
000 shar es ofPerez's common st ock.No bonds wer e converted during 2010.
Throughout2010,Perezhad1, 000shar
esofcommonst ockoutst
anding.Per ez'
s2010
netincomewas$3, 000,andi tsincometaxrateis30%.Nopot enti
all
ydil
utivesecur i
ti
es
otherthantheconvert
iblebondswer eoutst
andingduring2010.Perez'
sdi l
utedear ni
ngs
persharefor2010wouldbe( roundedtothenearestpenny)
a.$1. 50.
b.$1. 71.
c. $1.80.
d.$3. 42.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-31
ngsperShar

114. AtDecember31, 2010,Kif

erCompanyhad500, 000sharesofcommonst ockoutstandi
ng.
OnOct ober1,2011,anaddi t
ional100,000shar esofcommonst ockwerei ssued.In
addi
tion,Kiferhad$10, 000,
000of6% conv erti
blebondsout st
andingatDecember31,
2010,whi char econv ert
ibl
einto 225,000 sharesofcommonst ock.No bondswer e
convertedintocommonst ockin2011.Theneti ncomefortheyearendedDecember31,
2011,was$3, 000,000.Assumingt heincomet axr at
ewas30%,t hedil
utedearningsper
shareforthey earendedDecember31, 2011,shouldbe(roundedtothenearestpenny)
a.$6. 52.
b.$4. 80.
c. $4.56.
d.$4. 00.

115. OnJanuary2,2011,Mi zeCo.issuedatpar$300,000of9% conv erti

blebonds.Each
$1,
000bondi sconvert
iblei
nto30shar es.Nobondswereconv er
tedduring2007.Mize
had50,000shar
esofcommonst ockoutstandi
ngdur
ing2011.Mize's2011neti ncome
was$160,000andt heincomet axratewas30%.Mi ze'
sdilut
edearningspershar efor
2011wouldbe(roundedt ot
henearestpenny)
a.$2.71.
b.$3.03.
c. $3.
20.
d.$3.58.

116. AtDecember31,2010,SagerCo.had1, 200,

000sharesofcommonst ockoutstanding.In
additi
on,Sagerhad450,000sharesofprefer
redst
ockwhichwereconv ert
iblei
nto750,000
sharesofcommonst ock.Duri
ng 2011,Sagerpai
d $600,000 cashdi vi
dendsont he
commonst ockand$400, 000cashdivi
dendsonthepref
err
edstock.Neti ncomef or2011
was$3, 400,
000andt heincomet axr
atewas40%.Thedilut
edearningspersharef or2011
i
s( r
oundedt othenearestpenny)
a.$1. 24.
b.$1. 74.
c. $2.51.
d.$2. 84.

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions117and118.
LernerCo.had200,000sharesofcommonst ock,20,000shar esofconv er
ti
bleprefer
redstock,
and $1,000,
000 of10% conver
ti
blebondsout standing duri
ng 2011.Thepr ef
err
ed stockis
convert
iblei
nto40,
000sharesofcommonst ock.During2011,Ler nerpai
ddi v
idendsof$.90per
shareont hecommonst ockand$3.00pershar eont hepref
erredstock.Each$1,000bondi s
convert
iblei
nto45sharesofcommonst ock.Theneti ncomefor2011was$600, 000andt he
i
ncomet axr
atewas30%.

117. Basicearni
ngspershar
efor2011i
s(r
oundedt
othenear
estpenny
)
a.$2. 21.
b.$2. 42.
c. $2.51.
d.$2. 70.

118. Di
lutedearni
ngspershar
efor2011i
s(r
oundedt
othenear
estpenny
)
a.$2. 14.
b.$2. 25.
c. $2.35.
d.$2. 46.
16-32 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

119. Yoder,I
ncorporated,has3,200,
000sharesofcommonst ockoutst
andingon
December31, 2010.Anaddi ti
onal800,
000sharesofcommonst ockwereissuedon
Apri
l1,2011,and400, 000mor eonJuly1,2011.OnOct ober1,2011,Yoderissued20,
000,
$1,
000f acev alue,8% conv er
ti
blebonds.Eachbondi sconv er
ti
bleinto20shar esof
commonst ock.Nobondswer econvert
edintocommonst ockin2011.Whati st he
numberofshar est obeusedi ncomputingbasicear
ningspershar eanddilutedear
nings
pershare,r
espect i
vel
y?
a.4,000,000and4, 000,000
b.4,000,000and4, 100,000
c. 4,
000,000and4, 400,000
d.4,400,000and5, 200,000

120. Nolt
eCo.has4, 000,
000sharesofcommonst ockoutstandi
ngonDecember31, 2010.An
addi
tional200,
000sharesareissuedonApr il1, 2011,and480,
000mor eonSept ember1.
OnOct ober1,Nolteissued$6, 000,
000of9% conv ert
ibl
ebonds.Each$1, 000bondi s
converti
blei
nto40sharesofcommonst ock.Nobondshav ebeenconvert
ed.Thenumber
ofsharestobeusedincomput ingbasicearningspershar eanddil
utedear
ningspershare
onDecember31, 2011is
a.4, 310,
000and4,310,000.
b.4, 310,
000and4,370,000.
c. 4,310,
000and4,550,000.
d.5, 080,
000and5,320,000.

121. AtDecember31,2010,Tat um Company had 2, 000,000 shares ofcommon st ock

outst
anding.OnJanuar y1,2011,Tat um issued500,000shar esofpr ef
erredstockwhich
wereconv erti
bleinto1,000,000shar esofcommonst ock.During2011,Tat um decl
ared
andpai d$1,500,000cashdi videndsont hecommonst ockand$500, 000cashdi vi
dends
on the preferred stock.Neti ncome fort he yearended December31,2011,was
$5,
000,000.Assumi ngani ncomet axrateof30%,whatshoul dbedi l
utedearningsper
shareforthey earendedDecember31, 2011?( Roundtot henearestpenny.)
a.$1. 50
b.$1. 67
c. $2.50
d.$2. 08

122. AtDecember31,2010,Eml ey Company had 1, 200,000 shares ofcommon st ock

outstandi
ng.OnSept ember1,2011,anaddi ti
onal400,000sharesofcommonst ockwer e
i
ssued.I n addi
ti
on,Eml eyhad $12,000,000 of6% conv ert
ible bondsout st
anding at
December31,2010,whi chareconv ert
ibl
ei nto800,000shar esofcommonst ock.No
bondswer econv er
tedintocommonst ocki n2011.Theneti ncomef ort
hey earended
December31, 2011,was$4,500,
000.Assumi ngt hei
ncomet axratewas30%, whatshould
bet hedil
utedearni
ngspersharef orthey earendedDecember31,2011,r oundedtot he
nearestpenny?
a.$2. 11
b.$3. 38
c. $2.35
d.$2. 45
 Di
l
uti
veSecur
it
iesandEar
ni e 16-33
ngsperShar

123. Grimm Companyhas1, 800,

000shar esofcommonst ockout st
andi
ngonDecember31,
2010.Anaddi ti
onal150, 000sharesofcommonst ockwerei ssuedonJul
y1,2011,and
300,000mor eonOct ober1,2011.OnApr il
1,2011,Gri
mm issued6,000,
$1,
000facevalue,
8% conv ert
iblebonds.Eachbondi sconv er
ti
bleinto40shar esofcommonst ock.No
bondswer econv er
tedint ocommonst ockin2011.Whatist henumberofsharestobe
usedi ncomput ingbasicear ni
ngspershar eanddilut
edearningspershar
e,r
especti
vely,
fortheyearendedDecember31, 2011?
a.1, 950,000and2, 130,000
b.1, 950,000and1, 950,000
c. 1,950,000and2, 190,000
d.2, 250,000and2, 430,000

Uset
hef
oll
owi
ngi
nfor
mat
ionf
orquest
ions124and125.
I
nfor
mati
onconcerni
ngthecapit
alst
ruct
ureofPi
perCorporati
onisasfol
lows:
December31,
2011 2010
Commonst ock 150,
000shar es 150,
000shares
Conv
ert
ibl
epr ef
err
edstock 15,
000shar es 15,
000shares
9%conver
ti
blebonds $2,400,
000 $2,400,
000
Duri
ng2011, Pi
perpaiddiv
idendsof$1.20pershareonit
scommonst ockand$3.00pershareon
i
tspreferr
edstock.Thepreferr
edstockisconvert
ibl
einto30,000sharesofcommonst ock.The
9%conv ert
ibl
ebondsar econverti
blei
nto75,000sharesofcommonst ock.Thenetincomefor
theyearendedDecember31, 2011,was$600,
000.Assumet hatthei
ncomet axrat
ewas30%.

124. Whatshouldbet hebasicearni

ngspershar
efort
hey
earendedDecember31,2011,
roundedtot
henearestpenny
?
a.$2. 66
b.$2. 92
c. $3.70
d.$4. 00

125. Whatshouldbethedil
utedear
ningspershar
efort
hey
earendedDecember31,2011,
roundedtot
henear
estpenny
?
a.$3. 20
b.$2. 95
c. $2.83
d.$2. 35

126. Warrants exercisabl

e at$20 each to obtai
n 30,000 shar
esofcommon st ockwere
out
standi ngduringaperiodwhentheaveragemar ketpr
iceofthecommonstockwas$25.
Appli
cationoft het r
easuryst
ockmethodf ortheassumedexer ci
seofthesewarr
ant
sin
comput i
ngdi l
utedear ningspersharewi l
lincreasethewei ght
edaveragenumberof
out
standi ngsharesby
a.30, 000.
b.24, 000.
c. 6,000.
d.7, 500.
16-34 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

127. TerryCor porati

onhad300, 000sharesofcommonst ockout st
andingatDecember31,
2010.I naddi t
ion,ithad90,000stockopti
onsout st
andi ng,whi
chhadbeengr antedt o
cer
t ainexecutives,andwhichgavethem t
her i
ghttopur chasesharesofTer
ry'
sstockat
anopt ionpriceof$37pershar e.Theaver
agemar ketpr i
ceofTer r
y'scommonstockf or
2010was$50.Whati sthenumberofshar esthatshoul dbeusedi ncomputi
ngdilut
ed
earningspershar eforthey
earendedDecember31, 2010?
a.300, 000
b.331, 622
c. 366, 600
d.323, 400

Mul
ti
pleChoi
ceAnswer
s—Ear
ningsPerShar
e—Comput
ati
onal
I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans.
96. c 101. a 106. b 111. c 116. b 121. b 126. c
97. c 102. c 107. c 112. c 117. d 122. c 127. d
98. b 103. c 108. d 113. b 118. c 123. a
99. b 104. d 109. c 114. c 119. b 124. c
100. c 105. b 110. d 115. b 120. b 125. b

MULTI
PLECHOI
CE—Ear
ningsPerShar
e—CPAAdapt
ed
128. DiddeCo.had300,000sharesofcommonst ocki ssuedandoutstandi
ngatDecember31,
2010.Nocommonst ockwasi ssuedduri
ng2011.OnJanuar y1,2011,Di ddeissued
200,000sharesofnonconver
tibl
epref
err
edst ock.During2011,Diddedecl
aredandpai d
$100,000cashdivi
dendsont hecommonst ockand$80, 000ont hepref
err
edst ock.Net
i
ncomef ortheyearendedDecember31,2011was$620, 000.WhatshouldbeDi dde'
s
2011earningspercommonshar e?
a.$2. 07
b.$1. 80
c. $1.73
d.$1. 47

129. AtDecember31,2011and2010,Mi l
eyCorp.had180,000shar
esofcommonst ockand
10,
000sharesof5%,$100parvaluecumulati
vepref
erredst
ockout
standi
ng.Nodividends
weredecl
aredoneitherthepr
eferr
edorcommonst ockin2011or2010.Netincomef or
2011was$400,000.For2011,
earni
ngspercommonshar eamount
edto
a.$2.22.
b.$1.94.
c. $1.
67.
d.$1.11.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-35
ngsperShar

130. Mar sh Co.had 2,400,000 shar

es ofcommon st ock outstandi
ng on January1 and
December31,2011.I nconnecti
onwiththeacquisi
tionofasubsi di
arycompanyi nJune
2010, Marshisrequi
redtoissue100,
000additi
onalsharesofitscommonst ockonJuly1,
2012,t otheformerowner soft hesubsidi
ary
.Mar shpaid$200, 000inpreferr
edstock
di
videndsi n2011,andr eport
ednetincomeof$3, 400,000forthey ear
.Mar sh'
sdil
uted
earningspersharefor2011shouldbe
a.$1. 42.
b.$1. 36.
c. $1.33.
d.$1. 28.

131. Foyl
e,Inc.
,had560,000shar esofcommonst ockissuedandoutstandingatDecember31,
2010.OnJuly1, 2011, anaddi
tional
40,000sharesofcommonst ockwer eissuedforcash.
Foyl
eal sohadunexer cisedst
ockopt i
onstopurchase32,000shar esofcommonst ockat
$15pershar eoutstandingatthebeginni
ngandendof2011.Theav eragemar ketpri
ceof
Foyl
e'scommonst ockwas$20dur ing2011.Whatisthenumberofshar esthatshouldbe
usedincomput i
ngdi l
ut edear
ningspersharefort
hey earended
December31, 2011?
a.580, 000
b.588, 000
c. 608,000
d.612, 000

132. Whencomput ingdil

utedear ni
ngspershare,
convert
ibl
esecur
it
iesar
e
a.ignored.
b.recognizedonlyiftheyaredil
uti
ve.
c. r
ecognizedonlyiftheyareanti
dil
uti
ve.
d.recognizedwhethert heyaredi
lut
iveoranti
dil
uti
ve.

133. In determining di
luted ear
nings pershar e,divi
dends on nonconv
ert
ibl
e cumul
ati
ve
prefer
redst ockshouldbe
a.di sregarded.
b.addedbackt onetincomewhet herdecl
aredornot.
c. deduct edfrom neti
ncomeonl yifdecl
ared.
d.deduct edfrom neti
ncomewhet herdeclaredornot.

134. Theif-
convert
edmet hodofcomput i
ngear ni
ngspershar edat aassumesconv er
sionof
conver
ti
blesecur
it
iesasoft he
a.beginningoft
heear l
iestperi
odreport
ed( oratt i
meofi ssuance, i
flat
er).
b.beginningoft
heear l
iestperi
odreport
ed( regardlessofti
meofi ssuance).
c. middl
eoftheearli
estperiodrepor
ted(regardlessoftimeofi ssuance).
d.endingoftheearli
estperiodrepor
ted(regardlessoftimeofi ssuance).

Mul
ti
pleChoi
ceAnswer
s—Ear
ningsPerShar
e—CPAAdapt
ed
I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans. I
tem Ans.
128. b 129. b 130. d 131. b 132. b 133. d 134. a
16-36 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on
 Di
l
uti
veSecur
it
iesandEar
ni e 16-37
ngsperShar

DERI
VATI
ONS—Di
l
uti
veSecur
it
ies,
Comput
ati
onal
No. Answer Der
ivat
ion
43. a $800,
000+(
$175,
000×.
32)–(
800×30×$30)=$136,
000.

44. b $60,
000–(
1,200×$45)–$2,
400=$3,
600.

45. a ($2,400,000÷$1,000)×40×$20=$1,920,000(commonst ock)

(
$2,
400,
000÷$16,000,000)×$1,000,
000=$150,
000(unamor ti
zeddi
scount)
$2,400,000–$1,920,000–$150,
000=$330, 000.

46. c (
$3,
000,
000–$2,
883,
000)÷117=$1,
000/mont
h
(
$3,
000,
000×.
09×3/12)+($1,
000×3)=$70,
500.

47. b $117,
000÷117=$1,
000/
mont
h
$600,
000
$117,
000–[(
$1,
000×3)+($1,
000×6]× —————=$21,
600
$3,
000,
000

48. b Bondsi
ssuedatadi
scount
,mar
ketr
ate>couponr
ate.

49. b $100,
000+$2,
000–(
2,000×$40)=$22,
000.

50. d $6,
180,
000–(
60,
000×3×$25)=$1,
680,
000.

51. b (
$200,
000×.
95)+(
200×$50)=$200,
000;$200,
000×1.
03=$206,
000

$190,
000
————×$206,
000=$195,
700.
$200,
000

52. c (
$800,
000×.
95)+(
800×25×$2)=$800,
000;$800,
000×1.
04=$832,
000

$40,
000
————×$832,
000=$41,
600.
$800,
000

53. c (
$300,
000×.
96)+(
300×$40)=$300,
000;$300,
000×1.
04=$312,
000

$12,
000
————×$312,
000=$12,
480.
$300,
000

54. c (
2,000×$1,
008)+(
4,000×$21)=$2,
100,
000

$2,
016,
000
—————×$2,120,
000=$2,
035,
200,
bonds:
$2,
000,
000
$2,
100,
000

$84,
000
Pr
emi
um:
$35,
200;—————×$2,
120,
000=$84,
800.
$2,
100,
000
16-38 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on
 Di
l
uti
veSecur
it
iesandEar
ni e 16-39
ngsperShar

DERI
VATI
ONS—Di
l
uti
veSecur
it
ies,
Comput
ati
onal
(cont
.)
No. Answer Der
ivat
ion
55. c ($300,000×.
96)+(
6,000×$2)=$300,
000;
$300,000×1.
03=$309,000

$12,
000
————×$309,
000=$12,
360.
$300,
000

56. b $300,
000– =$3,
360.

57. b Dr
.Cash:16,
000×$15=$240, 000
Dr
.Pai
d-i
nCapital
—StockWarrant
s:$100,000×16/40=$40,
000
Cr
.CommonSt ock:16,
000×$10=$160, 000
Cr
.Pai
d-i
nCapitali
nExcessofPar:(
$5+$2. 50)×16,
000=$120,
000.

58. b [
$20,
000÷(
$20,
000+$180,
000)
]×$205,
000=$20,
500.

59. c ($500,000.
96)+( 50020$2)=$500,
000
($480,000$500,
000)($500,
0001.
03)=$494,
400
$500,000–$494,400=$5,600.

60. b 50020$2=$20, 000

($20,
000$500,
000)$515,
000=$20,
600.

61. b $1,
8003=$600.

62. c $9002=$450.

63. c $750,
0003=$250,
000decr
ease.

64. b $1,
2002=$600.

65. b $64,
0002=$32,
000.

66. d $800,
0002=$400,
000.

67. d $90,
000÷3=$30,
000.

68. c $7,
500÷3=$2,
500.

69. c $300,
000÷3=$100,
000.

70. c $240,
000÷3=$80,
000/
year
.
16-40 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

DERI
VATI
ONS—Di
l
uti
veSecur
it
ies,
Comput
ati
onal
(cont
.)
No. Answer Der
ivat
ion
71. c $900,
000– =$300,
000i
ncr
ease(
from t
hecr
edi
ttoPai
d-i
n

Capi
tal
—StockOpti
ons).Off
setby$300,
000decr
ease(
from t
hedebi
tto
Compensati
onExpense).

72. b =$144,
000.

73. a $500,
000÷2=$250,
000.

74. c 20,
000×$11=$220,
000.

*
75. b (
$38–$20)×60,
000×.
25=$270,
000.

*
76. b ($30–$20)×60,
000×.
5=$300,000
$300,
000–$270,
000=$30,
000.

*
77. a ($33–$20)×60,
000×.
75=$585,000
$585,
000–$300,
000=$285,
000.

DERI
VATI
ONS—Di
l
uti
veSecur
it
ies,
CPAAdapt
ed
No. Answer Der
ivat
ion
78. d Concept
ual
.

79. a Concept
ual
.

80. c $140,
000÷2=$70,
000.

*
81. c (
$45–$30)×16,
000=$240,
000.

DERI
VATI
ONS—Ear
ningsPerShar
e,Comput
ati
onal
No. Answer Der
ivat
ion
$1,
050,
000
96. c ————————————=$1.
00.
6
600,
000+(900,000×—)
12

$1,
020,
000
97. c ————————————=$2.
40.
3
400,
000+(100,000×—-)
12
 Di
l
uti
veSecur
it
iesandEar
ni e 16-41
ngsperShar

DERI
VATI
ONS—Ear
ningsPerShar
e,Comput
ati
onal
(cont
.)
No. Answer Der
ivat
ion
98. b 600,
000+(
126,
000×8/
12)–(
63,
000×4/
12)+(
54,
000×2/
12)=672,
000.

99. b [
(125,
000×2×1.20)+(
375,000×2×1.
20)+(
450,
000×3)+(
310,
000×3)
+(510,
000×2)
]÷12=375,000.

100. c [
(1,
250,
000×3×2)+(1,
450,
000×3×2)+(
1,375,
000×3×2)
+(2,
750,
000×3)
]÷12=2,725,
000.

101. a [
$950,
000–(
10,
000×$100×.
05)
]÷(
300,
000×2)=$1.
50.

$960,
000–$150,
000
102. c ——————————=$2.
70.
300,
000

103. c [
$720,
000–(
10,
000$100.
04)
](
200,
0002)=$1.
70.

104 d (
300,
0006/
12)+(
600,
0006/
12)+[
((
35–28)35)90,
000]=468,
000.

105. b [
($36–$30)$36]12,
000=2,000
$300,
000(200,
000+2,
000)=$1.49.

106. b ($2,000,000$1,
000)10=20,000
$2,000,000.07(1–.30)=$98,000
($600,000+$98,000)(
200,
000+20, 000)=$3.
17.

107. c Si
nce$520,
000$500,
000incl
ude10,
000shar
esi
nDEPS
$200,
000(100,
000+10,
000)=$1.
82.

108. d [
$800,
000–(
20,
000$4]200,
000=$3.
60.

109. c [
$800,
000+(
$1,
000,
000.
10.
7)][
200,
000+40,
000+(
1,00045)
]
=$3.
05.

110. d 500,
000+(
500,
000×6/
12)+[
(25–20)
/25×150,
000]=780,
000.

111. c [
$480,
000+(
$2,
000,
000×.
07×.
60)
]÷(
200,
000+40,
000)=$2.
35.

112. c Basis: $800,000÷500,000=$1.60.

Dil
uted: $800,
000÷(500,000+50,000)=$1.
45

$3,
000+(
$10,
000×.
06×.
70)
113. b ——————————————=$1. 71.
1,
000+1,000
16-42 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

DERI
VATI
ONS—Ear
ningsPerShar
e,Comput
ati
onal
(cont
.)
No. Answer Der
ivat
ion
$3,000,
000+(
$10,000,
000×.
06×.
7)
114. c —————————————————=$4. 56.
3
500,
000+(
100,000×—-)+225,000
12

$160,
000+( $300,
000×.
09×.
7)
115. b —————————————————=$3. 03.
50,
000+[(
$300,
000÷$1,000)×30)]

$3,400,
000
116. b ——————————=$1.
74.
1,
200,000+750,
000

$600,
000–(
20,000×$3)
117. d ———————————=$2.
70.
200,
000

$600,
000+($1,
000,
000×.
10×.
7)
118. c ————————————————=$2. 35.
200,
000+45,
000+40,000

119. b 3,
200,
000+(
800,
000×9/
12)+(400,
000×6/12)=4,
000,
000(
BEPS)
4,
000,
000+(
20,
000×20×3/12)=4,
100,
000(DEPS)
.

120. b 4,
000,
000+(
200,000×9/12)+(480,
000×4/12)=4,310,000.
4,
310,
000+[
($6,
000,000÷$1,
000)×40×3/12]=4,370,000.

$5,
000,000
121. b ——————————=$1.
67.
2,
000,000+1,000,
000

$4,
500,
000+($12,
000,
000×.
06×.
7)
122. c ——————————————————=$2. 35.
1,
200,
000+( 0004/
400, 12)+800,
000

123. a 1,
800,
000+(
150,000×6/
12)+(300,000×3/12)=1,
950,
000
1,
950,
000+(
6,000×40×9/12)=2,130,
000.

$600,
000–(
15,
000×$3.
00)
124. c —————————————=$3. 70.
150,
000
 Di
l
uti
veSecur
it
iesandEar
ni e 16-43
ngsperShar

DERI
VATI
ONS—Ear
ningsPerShar
e,Comput
ati
onal
(cont
.)
No. Answer Der
ivat
ion
$600,
000+( $2,
400,
000×.
09×.
7)
125. b ————————————————=$2. 95.
150,
000+75,
000+30,000

126. c 30,
000×$20÷$25=24,
000
30,
000–24,
000=6,
000.

127. d 90,
000–(90,
000×$37÷$50)=23,
400
300,
000+23,
400=323,
400.

DERI
VATI
ONS—Ear
ningsPerShar
e,CPAAdapt
ed
No.Answer Deri
vat
ion
128. b $620,
000–$80,
000
—————————=$1. 80.
300,
000

129. b $400,
000–(
10,
000×$100×.
05)
———————————————=$1. 94.
180,
000

130. d $3,
400,
000–$200,
000
——————————–=$1. 28.
2,
400,
000+100,
000

131. b 560,
000+(
40,
000×6/
12)+[
32,
000–(
32,
000×$15÷$20)
]=588,
000.

132. b Concept
ual
.

133. d Concept
ual
.

134. a Concept
ual
.

EXERCI
SES
Ex.16-
135—Conv
ert
ibl
eBonds.
GarrCo.issued$5, 000,000of12%, 5-
yearconverti
blebondsonDecember1, 2010for$5,020,
800
pl
usaccruedi nt
er est.Thebondswer edatedApril1,2010wit
hi nt
erestpay
abl
e
Apr
il1andOct ober1.Bondpr emium isamortizedeachi nt
erestperi
odonast r
aight
-l
inebasis.
GarrCo.hasaf iscaly earendofSeptember30.

OnOctober1,2011,$2,
500,
000oft hesebondswer
econv
ert
edint
o35,000shar
esof$15par
commonstock.Accr
uedint
erestwaspaidi
ncashatt
het
imeofconv
ersi
on.
16-44 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

I
nst
ructi
ons
(
a) Prepar
etheent
rytorecor
dt heint
erestexpenseatApri
l1,2011.Assumet
hati
nter
est
payabl
ewascr
edit
edwhenthebondswereissued(r
oundt
onearestdol
l
ar)
.

(
b) Prepar
etheentr
yt orecor
dt heconv
ersi
ononOctober1,2011.Assumet
hattheent
ryt
o
recor
damort
izat
ionofthebondpremi
um andi
nter
estpay
menthasbeenmade.

Sol
uti
on16-
135
(
a) I
nter
estPayable 100,
000
I
nter
estExpense 198,
400
Pr
emium onBondsPay
abl
e 1,
600
Cash 300,
000

Cal
cul
ations:
Issuanceprice $5,
020,
800
Parv alue 5,
000,
000
Tot alpremi
um $ 20,800

Mont
hsremaini
ng 52
Pr
emium permonth $400
Pr
emium amort
ized(4×$400) $1,
600

(
b) BondsPayabl
e 2,
500,
000
Premi
um onBondsPayable 8,
400
CommonSt ock(35,
000×$15) 525,
000
Paid-
inCapi
tal
inExcessofPar 1,
983,
400

Cal
cul
ati
ons:
Premi
um relat
edt o1/2oft
hebonds $10,
400 (
$20,800÷2)
Lesspremium amorti
zed 2,
000 [
($10,
400÷52)×10]
Premi
um remaining $8,400

Ex.16-
136—Conv
ert
ibl
eBonds.
KochCo.sol dconv ert
iblebondsatapr emium.I nt
erestispaidonMay31andNov ember30.On
May31, afteri nter
estwaspai d,100, $1,
000bondsar etenderedf
orconv
ersi
oni
nto3,000shares
of$10parv aluecommonst ockt hathadamar ketpri
ceof$40pershare.HowshouldKochCo.
accountf ort heconv ersionoft hebondsi nt
ocommonst ockundert
hebookvaluemet hod?
Discussther ational
efort hi
smet hod.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-45
ngsperShar

Sol
uti
on16-
136
Toaccountf ort heconv ersionofbondsundert hebookv al
uemet hod,BondsPay abl
eshoul dbe
debitedf orthef aceval ue,Premi um onBondsPay ableshouldbedebi ted,andCommonSt ock
shouldbecr edi t
edatparf ortheshar esissued.Usingt hebookv aluemet hod,nogain(loss)on
conversionisr ecorded.Theamountt ober ecordedfort hestockisequalt othebook(car r
ying)
value(facev aluepl usunamor tizedpremi um)oft hebonds.Paid-i
nCapi talinExcessofParwoul d
becr edi
tedf ort hedifferencebet weenthebookv al
ueoft hebondsandt heparv al
ueoft hestock
i
ssued.Ther ationalefort hebookv aluemet hodi sthattheconv ersionist hecompleti
onoft he
tr
ansact i
oni ni t
iatedwhent hebondswer eissued.Si ncet hi
sisv iewedasat r
ansactionwi th
stockholders, nogai n(loss)shoul dber ecognized.

Ex.16-
137—Conv
ert
ibl
eDebtandDebtwi
thWar
rant
s(Essay
).
Whataccount
ingtr
eatmenti
srequi
redforconv
ert
ibl
edebt
?Why
?Whataccount
ingt
reat
menti
s
r
equi
redfordebti
ssuedwit
hstockwarr
ants?Why?

Sol
uti
on16-
137
Conv er
tibledebti str
eatedsolelyasdebt.Onereasonisthatthedebtandconver si
onopti
onar e
i
nsepar able.Thehol dercannotselloneandr et
aintheother.Thetwochoi cesar emut ual
ly
exclusi
v e.Anot herreasoni sthatthevaluat
ionoft heconversi
onoptionort hedebtsecur i
ty
withoutt heconv ersi
onoptionissubject
ivebecausetheseval
uesarenotestablishedsepar
ately
i
nt hemar ket
place.
Whendebtisissuedwithstockwar r
ant
s, t
hewarr
antsar egi
venseparater
ecogniti
on.Af
terissue,
thedebtandthedetachablewarrant
stradesepar
ately
.Theproceedsmaybeal locatedt
othet wo
elementsbasedont her el
ati
vef ai
rvaluesofthedebtsecur i
tywithoutthewar r
antsandt he
warrant
sattheti
meofi ssuance.Theproceedsal
locatedtot
hewar r
antsshouldbeaccountedf or
aspaid-
incapi
tal
.

Ex.16-
138—St
ockopt
ions.
Pr
eparethenecessar
yentri
esfrom 1/
1/10-2/
1/12forthef
oll
owi
ngev
ent
susi
ngt
hef
airv
alue
method.I
fnoentr
yisneeded,wr
ite"
NoEntryNecessar
y."

1.On1/ 1/10,thestockhol
dersadoptedastockopt
ionpl
anfort
opexecut
iveswher
ebyeach
mightreceiv
erightstopurchaseupto12,
000shar
esofcommonst
ockat$40pershar
e.The
parvalueis$10pershare.

2.On2/ 1/10,optionsweregr ant

edt oeachoff i
veexecutivestopurchase12,000shares.The
opt
ionswer enon- tr
ansfer
ableandt heexecut
ivehadt oremainanempl oyeeofthecompany
toexercisetheopt i
on.Theopt i
onsexpir
eon2/ 1/12.Iti
sassumedt hatt
heopt i
onswerefor
ser
vicesper formed equall
yi n 2010 and 2011.The Bl ack-
Schol
es option pr
ici
ng model
det
ermi nestotalcompensationexpensetobe$1,300,000.

3.At2/
1/12,f
ourexecut
ivesexer
cisedthei
ropt
ions.Thef
if
thexecut
ivechosenott
oexer
cise
hi
sopti
ons,
whichther
eforewer
ef or
fei
ted.
16-46 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

Sol
uti
on16-
138
1. 1/
1/10
Noent
rynecessar
y.

2. 2/
1/10
Noent
rynecessar
y.

12/
31/
10
Compensati
onExpense 650,
000
Paid-
inCapi
tal
—StockOpt
ions 650,
000
12/
31/
11
Compensati
onExpense 650,
000
Paid-
inCapi
tal
—StockOpt
ions 650,
000

3. 2/
1/12
Cash(4×12,000×$40) 1,
920,
000
Pai
d-i
nCapital
—StockOpti
ons( $1,
300,
000×4/5) 1,
040,
000
CommonSt ock 480,
000
Pai
d-i
nCapital
inExcessofPar 2,
480,
000

Pai
d-i
nCapital
—StockOpt
ions 260,
000
Pai
d-i
nCapit
alf
rom Expi
redSt
ockOpt
ions 260,
000

Ex.16-
139—Wei
ght
edav
erageshar
esout
standi
ng.
OnJanuar y1,2010, War
renCor por
ationhad1,
000,000sharesofcommonst ockoutst
anding.On
Mar ch1,thecor por
ati
oni ssued150,000new sharestoraiseaddi
ti
onalcapit
al.OnJuly1,the
corporati
ondeclaredandissueda2- f
or-1st
ockspli
t.OnOctober1,t
hecorporat
ionpurchasedon
themar ket600,
000ofitsownout standi
ngsharesandreti
redthem.

I
nstruct
ions
Computet hewei
ght
edav
eragenumberofshar
est
obeusedi
ncomput
ingear
ningspershar
efor
2010.

Sol
uti
on16-
139
Incr
ease Months
(
Decrease) Outst
andi
ng Out
standi
ng ShareMonths
Jan.1 — 1,000,
000 2 2/
1 4,
000,
000
March1 150,000 1,150,
000 4 2/
1 9,
200,
000
Jul
y1 1,
150,000 2,300,
000 3 6,
900,
000
Oct.1 (600,
000) 1,700,
000 3 5,
100,
000
12 25,
200,
000
(
25,
200,
000÷12) 2,
100,
000
 Di
l
uti
veSecur
it
iesandEar
ni e 16-47
ngsperShar

Ex.16-
140—Ear
ningsPerShar
e.(
Essay
)
Def
inet
hef
oll
owi
ng:
(
a) Thecomput
ati
onofear
ningspercommonshar
e
(
b) Compl
excapi
tal
str
uct
ure
(
c) Basi
cear
ningspershar
e
(
d) Di
l
utedear
ningspershar
e

Sol
uti
on16-
140
(
a) Earni
ngspercommonsharei
scomputedbydivi
dingneti
ncomel
esspr
efer
reddi
vi
dendsby
theweight
edaver
ageofcommonshar
esoutst
anding.
(
b) Acomplexcapit
alstr
uct
ureexist
swhenacorporat
ionhasconver
ti
blesecur
it
ies,opti
ons,
war
rant
s,orot
herri
ghtst
hatuponconv
ersi
onorexer
cisecoul
ddi
l
uteearni
ngspershare.
(
c) Basicear
ningspershar
ei sear
ningspershar
ecomput
edbasedont
hecommonshar
es
outst
andi
ngduri
ngtheperi
od.
(
d) Dil
utedearni
ngspershar
eisear
ningspersharecomputedbasedoncommonst
ockandal
l
potent
ial
l
ydilut
ivecommonshar
esthatwereoutst
andi
ngduri
ngtheper
iod.

Ex.16-
141—Ear
ningspershar
e.
SantanaCor porati
onhas400, 000sharesofcommonst ockoutstandingthroughout2010.In
additi
on,thecorporat
ionhas5,000,20-
year,7%bondsissuedatparin2008.Each$1, 000bondis
converti
bleinto20sharesofcommonst ockaft
er9/23/11.Dur
ingthey ear2010,thecor
porat
ion
earned$600, 000aft
erdeduct
ingall
expenses.Thetaxratewas30%.

I
nstr
uct
ions
Comput
et hepr
operear
ningspershar
efor2010.

Sol
uti
on16-
141
Netincome $600,000
Ear
ningspershar
e: —————————=————=$1. 50
Out
standingshar
es 400,000

Neti
ncome+Inter
estaf
tert
axes
Ear
ningspershar
eassumi
ngbondconv
ersi
on: ———————————————
Assumedout
standi
ngshares

$600,
000+$245,
000
(
$350,
000×.
7=$245,
000)
;——————————=$1. 69
400,
000+100,
000

Therefor
ethebondsar
eant
idi
l
uti
ve,andear
ningspercommonshar
eout
standi
ngof$1.
50
shouldberepor
ted.
16-48 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

Sol
uti
on16-
141(
Cont
.)

Not
ethatt
heconv
ert
ibl
esecur
it
yisant
idi
l
uti
ve:

Bondi
nterestaf
tertaxes $245,000
—————————————= ————=$2. 45
Assumedincrementalshares 100,000

Ex.16-
142—Di
l
utedear
ningspershar
e.
DunbarCompanyhad400, 000sharesofcommonst ockoutstandi
ngdur
ingtheyear2011.In
addi
tion,atDecember31,2011,90,
000shareswereissuabl
euponexerci
seofexecuti
vestock
opti
onswhi chrequi
rea$40cashpaymentuponexerci
se(opti
onsgrant
edin2009)
.Theaverage
marketpriceduri
ng2011was$50.

I
nstr
uct
ions
Comput
et henumberofshar
est
obeusedi
ndet
ermi
ningdi
l
utedear
ningspershar
efor2011.

Sol
uti
on16-
142
Shar
esoutst
andi
ng 400,
000
Add:Assumedi
ssuance 90,
000
490,
000
Deduct
:Pr
oceeds/
Aver
agemar
ketpr
ice(
$3,
600,
000÷$50) (
72,
000)
Numberofshar
es 418,
000

*
Ex.16-
143—St
ockappr
eci
ati
onr
ight
s.
OnJanuary1,2009,OrrCo.est
ablishedastockappr eciat
ionr
ight
spl anforit
sexecuti
ves.They
coul
dreceiv
ecashatanyt i
medur ingthenextf oury ear
sequaltot hedif
ferencebet
weent he
marketpr
iceoft hecommonst ockandapr eestabl
ishedpri
ceof$16on300, 000SARs.The
marketpr
iceisasf ol
lows:12/31/09—$21;12/ 31/10—$18;12/31/11—$19;12/ 31/
12—$20.On
December31,2011,50, 000SARsar eexercised,andt heremainingSARsar eexer
cisedon
December31,2012.

I
nst
ructi
ons
(
a) Prepareaschedulethatshowstheamountofcompensationexpenseforeachoft
hef
our
yearsstart
ingwit
h2009.
(
b) Preparethejour
nalentr
yat12/31/10t
orecordcompensationexpense.
(
c) Preparethejour
nalentr
yat12/31/12t
orecordtheexer
ciseoftheremaini
ngSARs.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-49
ngsperShar

*
Sol
uti
on16-
143
(
a) Schedul
eofCompensat
ionExpense
300,
000SARs

Mar
ket Set Value Percent Accr
ued
Date Pri
ce Pri
ce ofSARs Accrued toDate Expense
12/
31/09 $21 $16 $1,
500,000 25% $375,
000 $375,
000
(
75,
000)
12/
31/
10 18 16 600,
000 50% 300,
000 (
75,
000)
375,
000
12/
31/
11 19 16 900,
000 75% 675,
000 375,
000
325,
000
12/
31/
12 20 16 1,
000,
000 100% 1,
000,
000 325,
000
(
$4×250,
000)

(
b) Li
abi
l
ityUnderSt
ockAppreci
ati
onPl
an 75,
000
Compensati
onExpense 75,
000

(
c) Li
abi
l
ityUnderSt
ockAppr
eci
ati
onPl
an 1,
000,
000
Cash 1,
000,
000

PROBLEMS
Pr
.16-
144—Conv
ert
ibl
ebondsandst
ockwar
rant
s.
Foreachoftheunrel
atedt
ransact
ionsdescr
ibedbel
ow,pr
esentt
heent
ry(
ies)r
equi
redt
orecor
d
thebondt
ransact
ions.
1.OnAugust1,2011,LaneCorporati
oncal
ledit
s10% conv ert
ibl
ebondsf orconver
sion.The
$8,
000,000parbondswereconv er
tedi
nto320,000sharesof$20parcommonst ock.On
August1,ther
ewas$700,000ofunamor ti
zedpr emium appli
cabletothebonds.Thef ai
r
marketval
ueofthecommonstockwas$20pershar e.I
gnorealli
nter
estpay
ments.
2.Packard,I
nc.deci
dest oi
ssueconverti
blebondsinsteadofcommonstock.Thecompany
i
ssues10%conv er
tibl
ebonds,par$3,
000,000,at97.Theinv
est
mentbankeri
ndi
cat
esthati
f
thebondshadnotbeenconvert
ibl
etheywouldhavesoldat94.
3.GomezCompanyi ssues$5,000,
000ofbondswi thacouponr ateof8%.Tohelpthesale,
detachabl
estockwarrantsar
eissuedattherat
eoft enwarrant
sf oreach$1,
000bondsol
d.It
i
sest i
mat edt
hatthev al
ueofthebondswi t
houtthewar r
antsis$4,935,
000andtheval
ueof
thewarrantsi
s$315,000.Thebondswit
ht hewarr
ant ssol
dat101.

Sol
uti
on16-
144
1.BondsPayabl
e 8,
000,
000
Premi
um onBondsPayabl
e 700,
000
CommonSt ock 6,
400,
000
Paid-
inCapi
tal
inExcessofPar 2,
300,
000
16-50 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

Sol
uti
on16-
144(
Cont
.)

2.Cash 2,
910,
000
Di
scountonBondsPayabl
e 90,
000
BondsPayabl
e 3,
000,
000

3.Cash 5,
050,
000
Di
scountonBondsPayabl
e 253,
000
BondsPayable 5,
000,
000
Paid-i
nCapi
tal
—StockWarr
ant
s 303,
000
(
$315,
000÷$5,250,
000×$5,
050,
000=$303,
000)

Pr
.16-
145—Ear
ningspershar
e.
ColsonCorp.had$500,000netincomei n2011.OnJanuar
y1,2007ther
ewere200,
000sharesof
commonst ockoutst
anding.OnApril1,20,
000shareswerei
ssuedandonSeptember1,Adcock
bought30,000sharesoftreasur
ystock.Thereare30,
000opt
ionstobuycommonstockat$40a
shareoutstandi
ng.Themar ketpri
ceoft hecommonst ockaver
aged$50duri
ng2011.Thet ax
rat
eis40%.

Dur
ing2011,ther
ewere40,
000sharesofconvert
ibl
eprefer
redstockoutst
andi
ng.Thepref
err
ed
i
s$100par,pays$3.
50ayeardi
vi
dend,andisconver
tibl
eint
othreeshar
esofcommonst ock.

Colsonissued$2,
000,
000of8%conv
ert
ibl
ebondsatf
acev
aluedur
ing2010.Each$1,
000bondi
s
convert
ibl
einto30shar
esofcommonstock.

I
nstr
uct
ions
Comput
edilut
edear
ningspershar
efor2011.Compl
etet
heschedul
eandshowal
lcomput
ati
ons.

Net Adj
ust
- Adj
usted Adj
ust
- Adjusted
Secur
it
y I
ncome ment NetI
ncome Shar
es ment Shares EPS

Sol
uti
on16-
145
Net Adj
ust
- Adj
usted Adj
ust
- Adjusted
Secur
it
y I
ncome ment NetI
ncome Shar
es ment Shares EPS
Com.Stock $500,
000 $(
140,
000) $360,
000 200,
000 000a
5, 205,
000 $1.
76
Opti
ons 360,
000 205,
000 000b
6, 211,
000 1.
71
Bonds 360,
000 000c
96, 456,
000 211,
000 60,
000 271,
000 1.
68
Pref
err
ed 456,
000 140,
000 596,
000 271,
000 120,
000 391,
000 1.
52

a
20,
000×3/
4= 15,
000
30,
000×1/
3= (
10,
000)
5,
000 SA
 Di
l
uti
veSecur
it
iesandEar
ni e 16-51
ngsperShar

Sol
uti
on16-
145(
Cont
.)

b
30,
000
$1,
200,
000÷$50= (
24,
000) (
or)[
(50¬–40)÷50]×30,
000=6,
000 SA
6,
000 SA

$96,000 $140,000
c
$2,
000,
000×.
08×.
6=$96,
000 ————=$1.60 ————=$1. 17
60,
000 120,000

Pr
.16-
146—Basi
canddi
l
utedEPS.
Assumet
hatt
hef
oll
owi
ngdat
arel
ati
vet
oKaneCompanyf
or2010i
sav
ail
abl
e:
NetI
ncome $2,
100,
000

Transacti
onsinCommonShar es Change Cumulati
ve
Jan.1,2010,Begi nni
ngnumber 700,000
Mar.1,2010,Pur chaseoft
reasur
yshar
es (
60,000) 640,000
June1, 2010,
St ockspli
t2-
1 640,000 1,
280,000
Nov .1,
2010,Issuanceofshares 120,000 1,
400,000
8%Cumul ativ
eConverti
blePr
eferredSt
ock
Soldatpar,conv
erti
blei
nto200,000sharesofcommon
(adj
ustedforspl
it
). $1,
000,
000
StockOpt i
ons
Exercisabl
eattheopt
ionpr
iceof$25pershar
e.Aver
age
mar ketpri
cein2010,
$30(marketpr
iceandopt
ionpr
ice
adjustedforspl
it
). 60,
000shar
es

I
nst
ruct
ions
(
a) Computet
hebasi
cear
ningspershar
efor2010.(
Roundtothenear
estpenny.
)
(
b) Computet
hedi
lut
edear
ningspershar
efor2010.(
Roundtothenear
estpenny.
)

Sol
uti
on16-
146
Comput
ati
onofwei
ght
edav
erageshar
esout
standi
ngdur
ingt
hey
ear
:
Januar
y1 Outst
anding 700,000
March1 Repurchase(
5/6×60,
000) (
50,000)
650,000
June1 2-
for
-1spl
it 1,
300,
000
November1 I
ssued(1/
6×120,
000) 20,
000
1,
320,
000
16-52 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

Sol
uti
on16-
146(
Cont
.)
Addi
ti
onal
shar
esf
orpur
posesofdi
l
utedear
ningspershar
e:
Pot
enti
all
ydilut
ivesecur i
ties
8%conv erti
blepr ef
erredstock 200,
000
St
ockopt ions
Proceedsf rom exerci
seof60, 000opti
ons(60,000×$25) $1,
500,
000
Sharesi ssueduponexer ciseofopti
ons 60,
000
Less:treasurystockpur chasabl
ewithproceeds
($1,500,000÷$30) 50,
000 10,
000
Di
luti
vesecur i
ti
es—additi
onal shar
es 210,
000
$2,
100,
000–$80,
000
(
a) Basi
cear
ningspershar
e:——————————=$1. 53
1,
320,
000
$2,
100,
000
(
b) Di
l
utedear
ningspershar
e: ———–——————=$1. 37
1,
320,
000+210,
000

Pr
.16-
147—Basi
canddi
l
utedEPS.
Pr
esent
edbel
owi
sinf
ormat
ionr
elat
edt
oSt
arrCompany
.

1.NetI
ncome[
incl
udi
nganext
raor
dinar
ygai
n(netoft
ax)of$70,
000] $230,
000

2.Capit
alSt
ruct
ure
a.Cumul at
ive8%pref
err
edstock,$100par
,
6,
000sharesi
ssuedandoutstandi
ng $600,
000

b.$10parcommonstock,74,
000sharesoutst
andingonJanuar
y1.
OnApri
l1,40,
000shar
eswer ei
ssuedforcash.OnOctober1,
16,
000shareswer
epurchasedandreti
red. $1,
000,
000

c. OnJanuar y2ofthecurrentyear
,Star
rpurchasedOsloCor porat
ion.
Oneoft heter
msoft hepurchasewast hati
fStarr
'snetincomef ort
he
fol
l
owi ngyeari
s$2,400,000ormor e,
50,000addit
ionalshareswould
beissuedtoOslostockholdersnextyear
.

3.Ot
herInfor
mat i
on
a.Av er
agemar ketpr
icepershar
eofcommonst
ockdur
ingent
ir
eyear $30
b.Incomet axrat
e 30%

I
nstr
uct
ions
Comput
eearni
ngspershar
efort
hecur
renty
ear
.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-53
ngsperShar

Sol
uti
on16-
147
I
ncomebef oreextraor
dinaryit
em $160,
000
Lesspreferreddivi
dends (
48,
000)
Avai
labl
et ocommonbef oreextr
aordi
nar
yit
em 112,
000
Addextraordinarygain(netoftax) 70,
000
I
ncomeav ail
abletocommon $182,
000

Wei
ghtedaverageshar
esout
standi
ng:
Januar
y1 74,
000
3/4×40,000 30,
000
1/4×16,000 (4,
000)
100,
000
Basi
cear ningspershare:
Incomebef oreext
raordi
naryi
tem $1.
12 (
a)
Extraordinaryit
em (netoft
ax) .
70 (
b)
Neti ncome $1.
82 (
c)

Cal
cul
ati
ons:
$112,000 $70,
000 $182,
000
(
a) ———— (
b) ———— (
c) ————
100,000 100,
000 100,
000

Di
l
utedearningspershare:
I
ncomebef oreext
raordi
naryi
tem $.75 (
a)
Ext
raordinaryit
em (netoft
ax) .
46 (
b)
NetIncome $1.
21 (
c)

Cal
cul
ati
ons:
$112,
000 $70,
000 $182,
000
(
a) ———————— (
b) ———— (
c) ————————
100,
000+50,
000 150,
000 100,000+50,
000

Pr
.16-
148—Basi
canddi
l
utedEPS.
Thef
oll
owi
ngi
nfor
mat
ionwast
akenf
rom t
hebooksandr
ecor
dsofLudwi
ck,
Inc.
:

1.Neti
ncome $ 280,
000

2.Capit
alstr
uctur
e:
a.Conv ert
ibl
e6%bonds.Eachofthe300,
$1,000bondsi
sconv
erti
ble
i
nto50shar esofcommonstockatt
hepresentdat
eandf
orthenext
10years. 300,
000

b.$10parcommonstock,
200,
000shar
esi
ssuedandout
standi
ng
dur
ingtheent
ir
eyear
. 2,
000,
000

c. Stockwar
rantsoutst
andi
ngt
obuy16,
000shar
esofcommonst
ock
at$20pershare.
16-54 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

Pr
.16-
148(
Cont
.)
3.Otherinfor
mat i
on:
a.Bondsconv ertedduri
ngthey ear None
b.I ncomet axrate 30%
c. Conv er
ti
bledebtwasout standi ngt
heenti
rey
ear
d.Av er
agemar ketpri
cepershar eofcommonstockdur
ingt
hey
ear $32
e. War r
antswer eoutst
andingt heentir
eyear
f. War r
antsexercisedduri
ngt hey ear None

I
nstr
uct
ions
Comput
ebasicanddi
l
utedear
ningspershar
e.

Sol
uti
on16-
148
Basi
cEPS=$280,
000÷200,
000sh.=$1.
40

Net Adj
ust
- Adjusted Adj
ust
- Adjusted Dil
uted
Secur
it
y Income ment NetI
ncome Shar
es ment Shares EPS
Com.Stock $280,
000 — $280,000 200,
000 — 200,000 $1.40
Warr
ant
s 280,
000 — 280,
000 200,
000 0001
6, 206,
000 1.
36
Conv
.Bonds 280,
000 6002
$12, 292,
600 206,
000 15,
000 221,
000 1.
32

16,
000
1
320,
000
———— = (
10,
000)
32
6,
000 SA

$12,
600
2
000.
$300, 06.
7=$12,
600 ————=$.84
15,
000
 Di
l
uti
veSecur
it
iesandEar
ni e 16-55
ngsperShar

I
FRSQUESTI
ONS

Tr
ue/
Fal
se

1.i
GAAPandU. S.GAAPhavesigni
fi
cantdi
ffer
encesi
nt her
eport
ingofsecur
it
ieswi
th
char
act
eri
sti
csofdebtandequit
y,suchasconver
ti
bledebt.

2.Underi
GAAP,
all
oft
hepr
oceedsofconv
ert
ibl
edebtar
erecor
dedasl
ong-
ter
m debt
.

3.Underi
GAAP,conver
ti
blebondsare“bi
fur
cat
ed”—separ
atedi
ntotheequi
tycomponent(
the
val
ueoftheconv
ersi
onoption)oft
hebondissueandt
hedebtcomponent.

4.UnderbothU.
S.GAAPandi
GAAP,
thecal
cul
ati
onofbasi
canddi
l
utedear
ningspershar
eis
i
denti
cal.

5.Underi
GAAPr ecor
dingfort
heissuanceofBondsPay
able,
theDi
scountonBondsPay
abl
e
andthePai
d-i
nCapital
-Conver
ti
bleBondscoul
dbeuti
li
zed.

Answerst
oTr
ue/
Fal
se:
1.True
2.False
3.True
4.False
5.True

Mul
ti
pleChoi
ce:

1.Wit
hr egardtorecogni
zi
ngst ock-
basedcompensat i
on
a.iGAAPandU. S.GAAPf oll
owthesamemodel .
b.iGAAPandU. S.GAAPst andardsareunder
goingmajorr ef
orm onval
uat
ionissues.
c. i
thasbeenagr eedthatthesestandar
dswi l
lnotbemer gedduetothedif
fer
encesin
curr
encies.
d.t heref
orm ofU.S.GAAPst andardswil
lnotbeaddresseduntil
iGAAPstandardshavebeen
fi
nali
zed.

2.Thepr i
maryi
GAAPr
epor
ti
ngst
andar
dsr
elat
edt
ofi
nanci
ali
nst
rument
s,i
ncl
udi
ngdi
l
uti
ve
securi
ti
es,
is
a.I AS33.
b.I AS39.
c. IFRS2.
d.I AS2.
16-56 TestBankf
orI
nter
medi
ateAccount
ing,
Thi
rt
eent
hEdi
ti
on

3.When$5, 000,
000i
nconv ert
ibl
ebondsar
eissuedatparwith$800,000inv al
ueoftheequi
ty
opt
ionembeddedi nthebond,thei
GAAPjournalent
rywil
li
ncludeadebi tof
a.$800, 000toPaid-i
nCapi t
al— Conver
tibl
eBondsandacr edittoPr emium onBonds
Pay abl
e.
b.$800, 000toPremium onBondsPay ableandacr edittoPai d-
inCapital— Conver
ti
ble
Bonds.
c. $800,000toDiscountonBondsPay ableandacr edittoPai d-
inCapital— Conver
ti
ble
Bonds.
d.$4, 200,
000toCashal ongwithadebi
tof$800,000toDiscountonBondsPay abl
eanda
creditt
oBondsPayableandacredi
ttoPaid-
inCapi
tal—Conv erti
bleBonds.

4.Wit
hr egar
dtocont ract
sthatcanbesettl
edineit
hercashorshar
es
a.iGAAPr equiresthatshar
esettl
ementmustbeused.
b.iGAAPgi vescompani esachoiceofei
thercashorshar
es.
c. U.S.GAAPr equir
esthatshar
esettl
ementmustbeused.
d.t heFASBpr oj
ectproposesthattheIASBadopttheU.S.GAAPappr
oach,r
equi
ri
ngt
hat
shareset
tlementmustbeused.

5.Wi t
hregardt orecogni zingstock-basedcompensat ionunderiGAAPt hef ai
rval
ueofshar es
andoptionsawar dedt oempl oyeesisr ecognized
a.int hefir
stf i
scal periodoftheempl oyees’servi
ce.
b.ov erthefiscal periodstowhi chtheempl oyees’ser
vicesrel
ate.
c. i
nt helastfiscal periodoftheempl oyees’serv
icewhent hetotalvaluecanbecalculated.
d.afterlastfiscal periodoftheempl oyees’servi
cewhent hetotalvaluecanbecalculated.

Answer
stoMul
ti
pleChoi
ce:
1.a
2.b
3.c
4.a
5.b

Shor
tAnswer

1.Bri
efl
ydescri
besomeoft hesimil
ari
ti
esanddi f
fer
encesbetweenU.S.GAAPandiGAAP
wit
hrespecttotheaccount
ingfordi
lut
ivesecuri
ti
es,st
ock-
basedcompensat
ion,
and
ear
ningspershare.
 Di
l
uti
veSecur
it
iesandEar
ni e 16-57
ngsperShar

1.i
GAAPandU. S.GAAParesubst anti
all
yt hesameintheaccountingfordilut
ivesecur
iti
es,
stock-basedcompensation,andearningspershare.Forexample,bothiGAAPandU. S.
GAAPf ol
lowthesamemodel forrecognizi
ngstock-
basedcompensat i
on.Thatis,t
hefair
valueofsharesandopt i
onsawar dedt oemployeesisrecogni
zedov ertheperiodto
whi chtheemployees’
servicesrel
ate.

Themai ndi fferencesconcer n(1)theaccountingf orconv erti

bledebt .UnderU.S.GAAP
allofthepr oceedsofconv erti
bledebtarerecordedasl ongt erm debt .UnderiGAAP,
convertibl
ebondsar e“
bifurcated”,orseparat
edi ntotheequi tycomponent–t hev al
ueof
theconv ersionopt ion–oft hebondi ssueandt hedebtcomponent ;(2)ami nor
dif
ferencei nEPSr eport
ing–t heFASBal l
owscompani est orebutthepr esumpt i
onthat
contractsthatcanbeset t
ledinei t
hercashorshar eswi llbeset t
ledi nshares.iGAAP
requir
est hatshar esettl
ementmustbeusedi nt hissituation;(3)otherEPSdi ffer
ences
rel
atet othet reasurystockmet hodandhowt hepr oceedsf rom extinguishmentofa
li
abil
ityshoul dbeaccount edf orandhowt omaket hecomput ationf ortheweighted-
averageofcont i
ngentl
yissuableshar es.

2.Bri
efl
ydiscusst
heconvergenceef
for
tsthatareunderwaybyt
heI
ASBandFASBi
nthear
ea
ofdil
uti
vesecur
it
iesandearni
ngspershare.

2.TheFASBhasbeenwor ki
ngonast andardt hatwil
lli
kel
yconv er getoiGAAPi nthe
accountingforconver
tibledebt.SimilartotheFASB, theIASBi sexami ningt he
cl
assifi
cationofhybri
dsecur it
ies;t
heI ASBi sseeki
ngcommentonadi scussion
documentsi mil
artotheFASBPr el
iminaryViewsdocument :“FinancialInstrumentswit
h
Characteri
sti
csofEquity“ .I
tishopedt hattheboar dswil
l developaconv ergedstandar
d
i
nt hi
sar ea.Whil
eU.S.GAAPandi GAAPar esimil
arastot hepr esentati
onofEPS, t
he
Boardshav ebeenwor kingtogethertor esolveremaini
ngdi f
ferencesr elatedtoearni
ngs
persharecomput ati
ons.