*BE16.16 (LO6) Ferraro, Inc.

established a share-appreciation rights (SARs) program on January

1, 2019, which entitles executives to receive cash at the date of exercise for the difference
between the market price of the shares and the pre-established price of $20 on 5,000 SARs.
The required service period is 2 years. The fair value of the SARs are determined to be $4 on
December 31, 2019, and $9 on December 31, 2020. Compute Ferraro's compensation expense
for 2019 and 2020.

Exercises
E16.1 (LO1) (Issuance and Repurchase of Convertible Bonds) Angela AG issues 2,000
convertible bonds at January 1, 2019. The bonds have a 3-year life and are issued at par with a
face value of €1,000 per bond, giving total proceeds of €2,000,000. Interest is payable annually
at 6%. Each bond is convertible into 250 ordinary shares (par value of €1). When the bonds are
issued, the market rate of interest for similar debt without the conversion option is 8%.
Instructions

a. Compute the liability and equity component of the convertible bond on January 1, 2019.
b. Prepare the journal entry to record the issuance of the convertible bond on January 1,
2019.
c. Prepare the journal entry to record the repurchase of the convertible bond for cash at
January 1, 2022, its maturity date.
E16.2 (LO1) (Issuance and Repurchase of Convertible Bonds) Assume the same information
in E16.1, except that Angela AG converts its convertible bonds on January 1, 2020.
Instructions

a. Compute the carrying value of the bond payable on January 1, 2020.

b. Prepare the journal entry to record the conversion on January 1, 2020.
c. Assume that the bonds were repurchased on January 1, 2020, for €1,940,000 cash instead
of being converted. The net present value of the liability component of the convertible
bonds on January 1, 2020, is €1,900,000. Prepare the journal entry to record the
repurchase on January 1, 2020.
E16.3 (LO1) (Issuance and Repurchase of Convertible Bonds) On January 1, 2019, Cai Ltd.
issued a 10% convertible bond at par, with a face value of ¥100,000, maturing on January 1,
2029 (amounts in thousands). The bond is convertible into ordinary shares of Cai at a
conversion price of ¥2,500 per share. Interest is payable annually. At date of issue, Cai could
have issued at par non-convertible debt with a 10-year term bearing an interest rate of 11%.
Instructions

a. Prepare the journal entry to record the issuance of the convertible debt on January 1,
2019.
b. On January 1, 2022, Cai makes a tender offer to the holder of the convertible debt to
repurchase the bond for ¥112,000, which the holder accepts. At the date of repurchase,
Cai could have issued non-convertible debt with a 7-year term at an effective-interest rate
of 8%. Prepare the journal entry to record this repurchase on January 1, 2022.
E16.4 (LO1) (Issuance, Conversion, Repurchase of Convertible Bonds) On January 1, 2019,
Lin plc issued a convertible bond with a par value of £50,000 in the market for £60,000. The
bonds are convertible into 6,000 ordinary shares of £1 per share par value. The bond has a
5-year life and has a stated interest rate of 10% payable annually. The market interest rate for a
similar non-convertible bond at January 1, 2019, is 8%. The liability component of the bond is
computed to be £53,993. The following bond amortization schedule is provided for this bond.
 Effective-Interest
Method
10% Bond Discounted
at 8%

Date Cash Interest Premium Carrying Amount of

Paid Expense Amortized Bonds
1/1/19 £53,993
12/31/19 £5,000 £4,319 £681  53,312
12/31/20  5,000  4,265  735  52,577
12/31/21  5,000  4,206  794  51,783
12/31/22  5,000  4,143  857  50,926
12/31/23  5,000  4,074  926  50,000

Instructions

a. Prepare the journal entry to record the issuance of the convertible bond on January 1,
2019.
b. Prepare the journal entry to record the payment of interest on December 31, 2020.
c. Assume that the bonds were converted on December 31, 2021. The fair value of the
liability component of the bond is determined to be £54,000 on December 31, 2021.
Prepare the journal entry to record the conversion on December 31, 2021. Assume that the
accrual of interest related to 2021 has been recorded.
d. Assume that the convertible bonds were repurchased on December 31, 2021, for £55,500
instead of being converted. As indicated, the liability component of the bond is determined
to be £54,000 on December 31, 2021. Assume that the accrual of interest related to 2021
has been recorded.
e. Assume that the bonds matured on December 31, 2023, and Lin repurchased the bonds.
Prepare the entry(ies) to record this transaction.
E16.5 (LO1) (Conversion of Bonds) Schuss SA issued €3,000,000 of 10%, 10-year convertible
bonds on April 1, 2019, at 98. The bonds were dated April 1, 2019, with interest payable April 1
and October 1. Bond discount is amortized semiannually using the effective-interest method.
The net present value of the bonds without the conversion feature discounted at 12% (its
market rate) was €2,655,888.
On April 1, 2020, €1,000,000 of these bonds were converted into 30,000 shares of €20 par value
ordinary shares. Accrued interest was paid in cash at the time of conversion.
Instructions

a. Prepare the entry to record the issuance of the convertible bond on April 1, 2019.
b. Prepare the entry to record the interest expense at October 1, 2019.
c. Prepare the entry(ies) to record the conversion on April 1, 2020. (The book value method is
used.)
E16.6 (LO1) (Conversion of Bonds) Gabel Company has bonds payable outstanding with a
carrying value of $406,000. When issued, Gabel recorded $3,500 of conversion equity. Each of
the 400 $1,000 bonds is convertible into 20 shares of preference shares with par value of $50
per share. All bonds are converted into preference shares.
Instructions

Assuming that the book value method was used, what entry would be made?
E16.7 (LO1, 2) (Issuance and Conversion of Bonds) For each of the unrelated transactions
described below, present the entry(ies) required to record each transaction.
 1. Coyle SA issued €10,000,000 par value 10% convertible bonds at 99. If the bonds had not
been convertible, the company's investment banker determines that they would have been
sold at 95.
2. Lambert AG issued €10,000,000 par value 10% bonds at 98. One share warrant was
issued with each €100 par value bond. At the time of issuance, the warrants were selling
for €4. The net present value of the bonds without the warrants was €9,600,000.
3. Sepracor, AG called its convertible debt in 2019. Assume the following related to the
transaction. The 11%, €10,000,000 par value bonds were converted into 1,000,000 shares
of €1 par value ordinary shares on July 1, 2019. The carrying amount of the debt on July 1
was €9,700,000. The Share Premium—Conversion Equity account had a balance of
€200,000, and the company paid an additional €75,000 to the bondholders to induce
conversion of all the bonds. The company records the conversion using the book value
method.
E16.8 (LO2) (Issuance of Bonds with Share Warrants) Sun Ltd. has decided to raise additional
capital by issuing HK$175,000 face value of bonds with a coupon rate of 10%. In discussions
with investment bankers, it was determined that to help the sale of the bonds, share warrants
should be issued at the rate of one warrant for each HK$100 bond sold. The fair value of the
bonds without the warrants is HK$136,000, and the estimated value of the warrants is
HK$18,000. The proceeds upon issuance of the bonds and warrants was HK$150,000.
Instructions

a. What entry should be made at the time of the issuance of the bonds and warrants?
b. If the warrants were non-detachable, would the entries be different? Discuss.
E16.9 (LO2) (Issuance of Bonds with Share Warrants) On September 1, 2019, Tokachi Group
sold at 104 (plus accrued interest) 30,000 of its 8%, 10-year, ¥10,000 face value, non-
convertible bonds with detachable share warrants. Each bond carried two detachable warrants.
Each warrant was for one ordinary share at a specified option price of ¥1,500 per share. The
net present value of bonds is determined to be ¥290,000,000. Interest is payable on December
1 and June 1.
Instructions

Prepare in general journal format the entry to record the issuance of the bonds.
E16.10 (LO3) (Issuance of Bonds with Share Warrants) On May 1, 2019, Barkley SA issued
3,000 €1,000 bonds at 102. Each bond was issued with one detachable share warrant. The fair
value of the bonds on May 1, 2019, was €2,940,000.
Instructions

a. Prepare the entry to record the issuance of the bonds and warrants.
b. Assume the same facts as part E16.10a., except that the warrants had an estimated fair
value of €20. Prepare the entry to record the issuance of the bonds and warrants.
E16.11 (LO3) (Issuance and Exercise of Share Options) On November 1, 2018, Olympic plc
adopted a share-option plan that granted options to key executives to purchase 40,000 shares
of the company's £10 par value ordinary shares. The options were granted on January 2, 2019,
and were vested 2 years after the date of grant if the grantee was still an employee of the
company. The options expired 6 years from date of grant. The option price was set at £40, and
the fair value option-pricing model determines the total compensation expense to be £600,000.
All of the options were exercised during the year 2021: 30,000 on January 3 when the market
price was £67, and 10,000 on May 1 when the market price was £77 a share.
Instructions

Prepare journal entries relating to the share-option plan for the years 2019, 2020, and 2021.
Assume that the employees perform services equally in 2019 and 2020.
E16.12 (LO3) (Issuance, Exercise, and Forfeiture of Share Options) On January 1, 2019,
Magilla SA granted share options to officers and key employees for the purchase of 20,000 of
the company's €10 par ordinary shares at €25 per share. The options were exercisable within a
5-year period beginning January 1, 2021, by grantees still in the employ of the company, and
 expiring December 31, 2025. The service period for this award is 2 years. Assume that the fair
value option-pricing model determines total compensation expense to be €400,000.
On April 1, 2020, 3,000 options were forfeited when the employees resigned from the company.
The market price of the ordinary shares was €35 per share on this date.
On March 31, 2021, 12,000 options were exercised when the market price of the ordinary shares
was €40 per share.
Instructions

Prepare journal entries to record issuance of the share options, forfeiture of the share options,
exercise of the share options, and charges to compensation expense, for the years ended
December 31, 2019, 2020, and 2021.
E16.13 (LO3) (Issuance, Exercise, and Expiration of Share Options) On January 1, 2018,
Tsang Ltd. granted 10,000 options to key executives. Each option allows the executive to
purchase one share of Tsang's HK$5 par value ordinary shares at a price of HK$20 per share.
The options were exercisable within a 2-year period beginning January 1, 2020, if the grantee is
still employed by the company at the time of the exercise. On the grant date, Tsang's shares
were trading at HK$25 per share, and a fair value option-pricing model determines total
compensation to be HK$450,000.
On May 1, 2020, 9,000 options were exercised when the market price of Tsang's shares were
HK$30 per share. The remaining options lapsed in 2022 because executives decided not to
exercise their options.
Instructions

Prepare the necessary journal entries related to the share-option plan for the years 2018 through
2022.
E16.14 (LO3) (Accounting for Restricted Shares) Derrick plc issues 4,000 restricted shares to
its CFO, Dane Yaping, on January 1, 2019. The shares have a fair value of £120,000 on this
date. The service period related to these restricted shares is 4 years. Vesting occurs if Yaping
stays with the company for 4 years. The par value of the shares is £5. At December 31, 2020,
the fair value of the shares is £145,000.
Instructions

a. Prepare the journal entries to record the restricted shares on January 1, 2019 (the date of
grant), and December 31, 2020.
b. On March 4, 2021, Yaping leaves the company. Prepare the journal entry (if any) to
account for this forfeiture.
E16.15 (LO3) (Accounting for Restricted Shares) Lopez SpA issues 10,000 restricted shares to
its CFO, Juan Carlos, on January 1, 2019. The shares have a fair value of €500,000 on this
date. The service period related to the restricted shares is 5 years. Vesting occurs if Carlos
stays with the company for 6 years. The par value of the shares is €10. At December 31, 2019,
the fair value of the shares is €450,000.
Instructions

a. Prepare the journal entries to record the restricted shares on January 1, 2019 (the date of
grant), and December 31, 2020.
b. On January 1, 2024, Carlos leaves the company. Prepare the journal entry (if any) to
account for this forfeiture.
E16.16 (LO4) (Weighted-Average Number of Shares) Portillo SA uses a calendar year for
financial reporting. The company is authorized to issue 9,000,000 R$10 par ordinary shares. At
no time has Portillo issued any potentially dilutive securities. Listed below is a summary of
Portillo's ordinary share activities.
 1. Number of ordinary shares issued and outstanding at December 31, 2018 2,400,000
2. Shares issued as a result of a 10% share dividend on September 30, 2019 240,000
3. Shares issued for cash on March 31, 2020 2,000,000
Number of ordinary shares issued and outstanding at December 31, 2020 4,640,000
4. A 2-for-1 share split of Portillo's ordinary shares took place on March 31, 2021

Instructions

a. Compute the weighted-average number of ordinary shares used in computing earnings per
ordinary share for 2019 on the 2020 comparative income statement.
b. Compute the weighted-average number of ordinary shares used in computing earnings per
ordinary share for 2020 on the 2020 comparative income statement.
c. Compute the weighted-average number of ordinary shares to be used in computing
earnings per ordinary share for 2020 on the 2021 comparative income statement.
d. Compute the weighted-average number of ordinary shares to be used in computing
earnings per ordinary share for 2021 on the 2021 comparative income statement.
E16.17 (LO4) (EPS: Simple Capital Structure) On January 1, 2019, Chang Ltd. had 480,000
ordinary shares outstanding. During 2019, it had the following transactions that affected the
ordinary share account.

February 1 Issued 120,000 shares

March 1 Issued a 20% share dividend
May 1 Acquired 100,000 treasury shares
June 1 Issued a 3-for-1 share split
October 1 Reissued 60,000 treasury shares

Instructions

a. Determine the weighted-average number of shares outstanding as of December 31, 2019.

b. Assume that Chang Ltd. earned net income of ¥3,256,000,000 during 2019. In addition, it
had 100,000 shares of 9%, ¥100 par, non-convertible, non-cumulative preference shares
outstanding for the entire year. Because of liquidity considerations, however, the company
did not declare and pay a preference dividend in 2019. Compute earnings per share for
2019, using the weighted-average ordinary shares determined in part E16.17a..
c. Assume the same facts as in part E16.17b., except that the preference shares were
cumulative. Compute earnings per share for 2019.
d. Assume the same facts as in part E16.17b., except that net income included a loss from
discontinued operations of ¥432,000,000. The loss from discontinued operations is net of
applicable income taxes. Compute earnings per share for 2019.
E16.18 (LO4) (EPS: Simple Capital Structure) Ott Company had 210,000 ordinary shares
outstanding on December 31, 2019. During the year 2020, the company issued 8,000 shares on
May 1 and retired 14,000 shares on October 31. For the year 2020, Ott Company reported net
income of £229,690 after a loss on discontinued operations of £40,600 (net of tax).
Instructions

What earnings per share data should be reported at the bottom of its income statement?
E16.19 (LO4) (EPS: Simple Capital Structure) Huang Ltd. presented the following data (yen in
thousands).
Net income ¥2,200,000
Preference shares: 50,000 shares outstanding, ¥100 par, 8% cumulative, not 5,000,000
convertible
Ordinary shares: Shares outstanding 1/1 600,000
  Issued for cash, 5/1 300,000
  Acquired treasury shares for cash, 8/1 150,000
  2-for-1 share split, 10/1

Instructions

Compute earnings per share.

E16.20 (LO4) (EPS: Simple Capital Structure) A portion of the statement of income and retained
earnings of Pierson Inc. for the current year follows.

Income from continuing operations $15,000,000

Loss on discontinued operations, net of applicable income tax   1,340,000
(Note 1)
Net income 13,660,000
Retained earnings at the beginning of the year  83,250,000
96,910,000
Dividends declared:
On preference shares—$6.00 per share $   300,000
On ordinary shares—$1.75 per share  14,875,000  15,175,000
Retained earnings at the end of the year $81,735,000
Note 1. During the year, Pierson Inc. had a loss from discontinued operations of $1,340,000 after
applicable income tax reduction of $1,200,000.

At the end of the current year, Pierson Inc. has outstanding 8,000,000 shares of $10 par ordinary
shares and 50,000 shares of 6% preference shares.
On April 1 of the current year, Pierson Inc. issued 1,000,000 ordinary shares for $32 per share to
help finance the loss on discontinued operations.
Instructions

Compute the earnings per share on ordinary shares for the current year as it should be reported
to shareholders.
E16.21 (LO4) (EPS: Simple Capital Structure) On January 1, 2019, Bailey Industries had shares
outstanding as follows.

6% cumulative preference shares, €100 par value, issued and outstanding 10,000 €1,000,000
shares
Ordinary shares €10 par value, issued and outstanding 200,000 shares 2,000,000

To acquire the net assets of three smaller companies, Bailey authorized the issuance of an
additional 170,000 ordinary shares. The acquisitions took place as shown below.

Date of Acquisition Shares Issued

Company A: April 1, 2019 60,000
Company B: July 1, 2019 80,000
Company C: October 1, 2019 30,000

On May 14, 2019, Bailey realized a €90,000 (before taxes) gain from discontinued operations. On
December 31, 2019, Bailey recorded net income of €300,000 before tax and exclusive of the gain.
Instructions
Assuming a 40% tax rate, compute the earnings per share data that should appear on the
financial statements of Bailey Industries as of December 31, 2019.
E16.22 (LO4) (EPS: Simple Capital Structure) At January 1, 2019, Cameron Company's
outstanding shares included the following.

280,000 shares of R$50 par value, 7% cumulative preference shares

800,000 shares of R$1 par value ordinary shares

Net income for 2019 was R$2,830,000. No cash dividends were declared or paid during 2019. On
February 15, 2020, however, all preference dividends in arrears were paid, together with a 5%
share dividend on ordinary shares. There were no dividends in arrears prior to 2019.
On April 1, 2019, 450,000 ordinary shares were sold for R$10 per share. On October 1, 2019,
110,000 ordinary shares were purchased for R$20 per share and held as treasury shares.
Instructions

Compute earnings per share for 2019. Assume that financial statements for 2019 were issued in
March 2020.
E16.23 (LO5) (EPS with Convertible Bonds, Various Situations) In 2019, Buraka Enterprises
issued, at par, 75 1,000, 8% bonds, each convertible into 100 ordinary shares. The liability
component of convertible bonds was 950 per bond, based on a market rate of interest of 10%.
Buraka had revenues of 17,500 and expenses other than interest and taxes of 8,400 for
2020. (Assume that the tax rate is 40%.) Throughout 2020, 2,000 ordinary shares were
outstanding; none of the bonds was converted or redeemed.
Instructions

a. Compute diluted earnings per share for 2020.

b. Assume the same facts as those assumed for part E16.23a., except that the 75 bonds
were issued on September 1, 2020 (rather than in 2019), and none have been converted or
redeemed.
c. Assume the same facts as assumed for part E16.23a., except that 25 of the 75 bonds were
actually converted on July 1, 2020.
E16.24 (LO5) (EPS with Convertible Bonds) On June 1, 2018, Bluhm Company and Amanar
Company merged to form Davenport SA. A total of 800,000 shares were issued to complete the
merger. The new company reports on a calendar-year basis.
On April 1, 2020, the company issued an additional 600,000 shares for cash. All 1,400,000 shares
were outstanding on December 31, 2020.
Davenport SA also issued €600,000 of 20-year, 8% convertible bonds at par on July 1, 2020.
Each €1,000 bond converts to 40 ordinary shares at any interest date. None of the bonds have
been converted to date. The interest expense on the liability component of convertible bonds for
2020 was €30,000.
Davenport SA is preparing its annual report for the fiscal year ending December 31, 2020. The
annual report will show earnings per share figures based upon a reported after-tax net income of
€1,540,000. (The tax rate is 40%.)
Instructions

Determine the following for 2020.

a. The number of shares to be used for calculating:
1. Basic earnings per share.
2. Diluted earnings per share.
b. The earnings figures to be used for calculating:
1. Basic earnings per share.
2. Diluted earnings per share.
E16.25 (LO5) (EPS with Convertible Bonds and Preference Shares) The Ottey Corporation
issued 10-year, $4,000,000 par, 7% callable convertible subordinated debentures on January 2,
2019. The bonds have a par value of $1,000, with interest payable annually. The interest
expense recorded on the liability component of the convertible bond for 2019 was $320,000.
The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue,
the bonds were sold at 98. Ottey's effective tax was 35%. Net income in 2019 was $7,500,000,
and the company had 2,000,000 shares outstanding during the entire year.
Instructions

a. Prepare a schedule to compute both basic and diluted earnings per share.
b. Discuss how the schedule would differ if the security was convertible preference shares.
E16.26 (LO1, 5) (EPS with Convertible Bonds and Preference Shares) On January 1, 2019,
Lund SA issued 10-year, €3,000,000 face value, 6% bonds, at par. Each €1,000 bond is
convertible into 15 ordinary shares of Lund. Lund's net income in 2020 was €240,000, and its
tax rate was 40%. Interest expense on the liability component in 2016 was €210,000. The
company had 100,000 ordinary shares outstanding throughout 2019. None of the bonds were
converted in 2019.
Instructions

a. Compute diluted earnings per share for 2019.

b. Compute diluted earnings per share for 2019, assuming the same facts as above, except
that €1,000,000 of 6% convertible preference shares were issued instead of the bonds.
Each €100 preference share is convertible into 5 ordinary shares of Lund.
E16.27 (LO5) (EPS with Options, Various Situations) Zambrano plc net income for 2019 is
£40,000. The only potentially dilutive securities outstanding were 1,000 options issued during
2018, each exercisable for one share at £8. None has been exercised, and 10,000 ordinary
shares were outstanding during 2019. The average market price of Zambrano's shares during
2019 was £20.
Instructions

a. Compute diluted earnings per share. (Round to two decimal places.)

b. Assume the same facts as those assumed for part E16.27a., except that the 1,000 options
were issued on October 1, 2019 (rather than in 2018). The average market price during the
last 3 months of 2019 was £20.
E16.28 (LO5) (EPS with Contingent Issuance Agreement) Brooks Inc. recently purchased
Donovan Corp., a large midwestern home painting company. One of the terms of the merger
was that if Donovan's income for 2020 was $110,000 or more, 10,000 additional shares would
be issued to Donovan's shareholders in 2021. Donovan's income for 2019 was $125,000.
Instructions

a. Would the contingent shares have to be considered in Brooks' 2019 earnings per share
computations?
b. Assume the same facts, except that the 10,000 shares are contingent on Donovan's
achieving a net income of $130,000 in 2020. Would the contingent shares have to be
considered in Brooks' earnings per share computations for 2019?
E16.29 (LO5) (EPS with Warrants) Werth AG earned €260,000 during a period when it had an
average of 100,000 ordinary shares outstanding. The ordinary shares sold at an average
market price of €15 per share during the period. Also outstanding were 30,000 warrants that
could be exercised to purchase one ordinary share for €10 for each warrant exercised.
Instructions

a. Are the warrants dilutive?

b. Compute basic earnings per share.
c. Compute diluted earnings per share.