CHAPTER 19 CPA/IMA Question Review

Spiceland 1. On January 1, 2016, Pall Corp. granted stock options to key employees for the
purchase of 40,000 shares of the company’s common stock at $25 per share. The options are
intended to compensate employees for the next two years. The options are exercisable
within a four-year period beginning January 1, 2018, by the grantees still in the employ of the
company. No options were terminated during 2016, but the company does have an
experience of 4% forfeitures over the life of the stock options. The market price of the
common stock was$32 per share at the date of the grant. Pall Corp. used the binomial pricing
model and estimated the fair value of each of the options at $10.

What amount should Pall charge to compensation expense for the year ended December 31,
2016?

a.$153,600
b. $160,000
c.$192,000
d. $200,000

Roger 219. On December 29, year 7, Kolek Company granted 100,000 stock options to a
group of 100 employees, enabling each employee to buy 1,000 shares for $20 per share. On
the grant date, the options had a fair value of $3 per option. The options vest over a 3-year
period and become exercisable on January 1, year 11. Compensation expense will be
recognized uniformly over the vesting period.

Assuming all 100,000 options are exercised, what will be the net increase or decrease in total
stockholders’ equity as a result of exercising the options.

a. A decrease of $300,000
b. An increase of $2,000,000
c. An increase of $1,700,000
d. An increase of $2,300,000

** Hint – write the journal entry for the stock option exercise and determine the net effect on
equity.
Spiceland 3. The following information pertains to Jet Corp.’s outstanding stock for 2016:

Common stock, $5 par value

Shares outstanding, 1/1/2016 20,000
2-for-1 stock split, 4/1/2016
Shares issued, 7/1/2016 10,000

Preferred stock, $10 par value, 5% cumulative

Shares outstanding, 1/1/2016 4,000

What is the number of shares Jet should use to calculate 2016 basic earnings per share?

a. 40,000
b. 45,000
c. 50,000
d. 54,000
e. 60,000

Roger 220. Caspela Corporation had the same capital structure in year 7 and year 8,
consisting of the following:

Preferred stock, $12 par, 5% cumulative, 20,000 shares issued and outstanding $240,000
Common stock, $6 par, 250,000 shares issued and outstanding 1,500,000

Caspela reported net income of $600,000 for year 8. No preferred dividends were paid during
year 7, but Caspela paid $20,000 in preferred dividends in year 8.

In its year 8 income statement what amount should Caspela report as basic earnings per
share?
a. $2.30
b. $2.32
c. $2.35
d. $2.37
Roger 220A. Caspela Corporation had the same capital structure in year 7 and year 8,
consisting of the following:

Preferred stock, $12 par, 5% convertible & cumulative, 20,000 shares outstanding $240,000
Common stock, $6 par, 250,000 shares issued and outstanding 1,500,000

Caspela reported net income of $600,000 for year 8. No preferred dividends were paid during
year 7, but Caspela paid $20,000 in preferred dividends in year 8.

In its year 8 income statement what amount should Caspela report as dilutive earnings per
share?

__________________

Spiceland 5. On January 1, 20x6, Hage Corporation granted options to purchase 9,000 of its
ordinary shares at $7 each. The market price was $10.50 per ordinary share on March 31,
20x6, and averaged $9 per share during the quarter then ended. There was no change in the
50,000 shares of outstanding common stock during the quarter ended March 31, 20x6. Profit
for the quarter was 8,268.

The number of shares to be used in computing diluted earnings per share for the quarter is:

a. 50,000
b. 52,000
c. 53,000
d. 59,000

Spiceland 7. On January 2, 2016, Lang Co. issued at par $10,000 of 4% bonds convertible in
total into 1,000 shares of Lang’s common stock. No bonds were converted during 2016.
Throughout 2016, Lang had 1,000 shares of common stock outstanding. Lang’s 2016 net
income was $1,000. Lang’s income tax rate is 50%.

No potential common shares other than the convertible bonds were outstanding during 2016.
Lang’s diluted earnings per share for 2016 would be
a. $50
b. $60
c. $.70
d. $1.00