CHAPTER 16

DILUTIVE SECURITIES AND EARNINGS PER SHARE

IFRS questions are availa le at t!e en" o# t!is $!a%ter&

TRUE'FALSE(Dilutive Se$urities(Con$e%tual
Ans)er
T F T F F T F T F T F F T F T F T. F. T F

No&
1. 2. 3. 4. ". $. '. (. *. 1+. 11. 12. 13. 14. 1". 1$. 1'. 1(. 1*. 2+.

Des$ri%tion
Accounting for convertible bond issue. Reporting gain/loss on convertible debt retirement. Reporting additional payment to encourage conversion. E ercise of convertible preferred stoc!. #onvertible preferred stoc! e ercise. Allocating proceeds bet%een debt and detac&able %arrants. Allocating proceeds from nondetac&able %arrants. )ntrinsic value of a stoc! option. #ompensation e pense in fair value met&od. ,ervice period in stoc! option plans. Accounting for none ercise of stoc! options. Accounting for stoc! option forfeiture. #umulative preferred stoc! and E-,. Restating s&ares for stoc! dividends and stoc! splits. ,toc! dividend and %eig&ted.average s&ares outstanding. -referred dividends and income before e traordinary items. Reporting E-, in comple capital structure. /ilutive stoc! options. #ontingent issue s&ares. Reporting E-, for income from continuing operations.

*ULTIPLE CH+ICE(Dilutive Se$urities, Con$e%tual

Ans)er
d d b c a d b d d d d c b c a c a d a

No&
21. 22. 23. , 24. , 2". , 2$. 2'. 2(. 2*. 3+. 31. 32. , 33. , 34. 3". 3$. 3'. 3(. 43*.

Des$ri%tion
0ature of convertible bonds. Recording conversion of bonds. #lassification of early e tinguis&ment of convertible bonds. Reasons for issuing convertible debt. Reporting gain/loss on conversion of bonds. Accounting for conversion of preferred stoc!. Recording conversion of preferred stoc!. 1onds issued %it& detac&able stoc! %arrants. /ebt e2uity features of debt issued %it& stoc! %arrants. #lassification of stoc! %arrants outstanding. 1onds issued %it& detac&able stoc! %arrants. /istribution of stoc! rig&ts. /ifference bet%een convertible debt and stoc! %arrants. #&aracteristics of noncompensatory stoc! option plan. 3easurement of compensation in stoc! option. Recognition of compensation e pense in a stoc! option plan. #ompensation e pense in a stoc! option plan. #&aracteristics of noncompensatory stoc! purc&ase plan. #ompensation e pense in an incentive stoc! option plan.

16 ' 3

Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition

*ULTIPLE CH+ICE(Dilutive Se$urities, Con$e%tual 1$ont&2

Ans)er
d b b

No&
44+. 441. 442.

Des$ri%tion
,toc! appreciation rig&ts plan. )ncentive stoc! option plan. ,&are.based liability a%ards.

*ULTIPLE CH+ICE(Dilutive Se$urities, Co/%utational

Ans)er
a b a c b b b d b c c c c b b b c b b c c b b d d c c c c b a c b b a
,

No&
43. 44. 4". 4$. 4'. 4(. 4*. "+. "1. "2. "3. "4. "". "$. "'. "(. "*. $+. $1. $2. $3. $4. $". $$. $'. $(. $*. '+. '1. '2. '3. '4. 4'". 4'$. 4''.

Des$ri%tion
#onversion of convertible bonds. #onversion of convertible bonds. E ercise of stoc! purc&ase rig&ts. #onversion of convertible bonds. Amorti5ation of bond discount. 6namorti5ed bond discount related to converted bonds. #onversion of convertible bonds. #onversion of convertible preferred stoc!. 1onds issued %it& detac&able stoc! %arrants. 1onds issued %it& detac&able stoc! %arrants. 1onds issued %it& detac&able stoc! %arrants. 1onds issued %it& detac&able stoc! %arrants. Recording paid.in capital from stoc! %arrants. 1onds issued %it& detac&able stoc! %arrants. E ercise of stoc! purc&ase rig&ts. 1onds issued %it& detac&able stoc! %arrants. 1onds issued %it& detac&able stoc! %arrants. Recording paid.in capital from stoc! %arrants. /etermine compensation e pense in a stoc! option plan. /etermine compensation e pense in a stoc! option plan. )mpact of stoc! options on net income. /etermine compensation e pense in a stoc! option plan. /etermine compensation e pense in a stoc! option plan. /etermine compensation e pense in a stoc! option plan. /etermine paid.in capital amount in a stoc! option plan. /etermine compensation e pense in a stoc! option plan. 0et income effect in a stoc! option plan. /etermine compensation e pense in a stoc! option plan. )mpact of stoc! options on stoc!&olders7 e2uity. /etermine compensation e pense in a stoc! option plan. /etermine compensation e pense in a stoc! option plan. )ssuance of treasury stoc! in a stoc! option plan. #ompensation e pense recogni5ed in first year in an ,AR plan. #ompensation e pense recogni5ed in second year in an ,AR plan. #ompensation e pense recogni5ed in t&ird year in an ,AR plan.

T&ese 2uestions also appear in t&e -roblem.,olving ,urvival 8uide. T&ese 2uestions also appear in t&e ,tudy 8uide. 4T&is topic is dealt %it& in an Appendi to t&e c&apter.

/ilutive ,ecurities and Earnings per ,&are

16 ' 4

*ULTIPLE CH+ICE(Dilutive Se$urities, CPA A"a%te"

Ans)er
d a c c

No&
'(. '*. (+. 4(1.

Des$ri%tion
#as& proceeds from issuance of convertible bonds. 1ond issue %it& detac&able stoc! %arrants. #ompensation e pense in a stoc! option plan. #ompensation e pense recogni5ed in an ,AR plan.

*ULTIPLE CH+ICE(Earnin0s Per S!are, Con$e%tual

Ans)er
c d d c b b d b a d a b d d

No&
(2. (3. (4. (". , ($. ('. ((. (*. *+. *1. *2. *3. *4. 4*".

Des$ri%tion
,imple capital structure. #omputing E-, for a simple capital structure. #omputation of %eig&ted.average s&ares outstanding. Effect of treasury stoc! on E-,. Reporting E-, by companies. /iluted E-, and conversion of bonds. /iluted E-,. /ilutive convertible securities. #umulative convertible preferred stoc! income ad9ustment. Treasury stoc! met&od. Treasury stoc! met&od. Treasury stoc! met&od. Antidilutive securities. E-, calculation %it& t%o dilutive convertible securities.

*ULTIPLE CH+ICE(Earnin0s Per S!are, Co/%utational

Ans)er
c c b b c a c c d b b c d c d c c b c b b d

No&
*$. *'. *(. **. 1++. 1+1. 1+2. 1+3. 1+4. 1+". 1+$. 1+'. 1+(. 1+*. 11+. 111. 112. 113. 114. 11". 11$. 11'.

Des$ri%tion
:eig&ted average number of common s&ares outstanding. :eig&ted average number of common s&ares outstanding. :eig&ted average number of common s&ares outstanding. :eig&ted average number of s&ares outstanding. /etermination of s&ares used in computing E-,. #omputation of earnings per s&are. 1asic E-, %it& convertible preferred stoc!. E-, and a stoc! split. :eig&ted average number of common s&ares outstanding. /iluted E-, and t&e treasury stoc! met&od. /iluted E-, %it& convertible bonds. /iluted E-, and contingent issuances. 1asic E-,. /iluted E-, %it& convertible bonds and preferred stoc!. 0umber of s&ares in computing diluted E-,. /iluted E-,. E-, and contingent issuances. /iluted E-, %it& convertible bonds. /iluted E-, %it& convertible bonds. /iluted E-, %it& convertible bonds. /iluted E-,. 1asic E-, %it& convertible bonds and convertible preferred stoc!.

16 ' 6

Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition

*ULTIPLE CH+ICE(Earnin0s Per S!are, Co/%utational 1$ont&2

Ans)er
c b b b c a c b c d

No&
11(. 11*. 12+. 121. 122. 123. 124. 12". 12$. 12'.

Des$ri%tion
/iluted E-,. /enominator in computing basic E-, and /E-, %it& convertible bonds. ,&ares outstanding for basic E-, and /E-,. 1asic E-, %it& convertible preferred stoc!. /iluted E-, %it& convertible bonds. 1asic E-, and /E-, %it& convertible bonds issued during year. 1asic E-, %it& convertible preferred stoc! and convertible bonds. /E-, %it& convertible preferred stoc! and convertible bonds. /E-, and t&e treasury stoc! met&od. /E-, using t&e treasury stoc! met&od.

*ULTIPLE CH+ICE(Earnin0s Per S!are, CPA A"a%te"

Ans)er
b b d b b d a

No&
12(. 12*. 13+. 131. 132. 133. 134.

Des$ri%tion
/etermine earnings per common s&are. /etermine earnings per common s&are. /etermine diluted E-,. 0umber of s&ares to calculate diluted E-,. /E-, %it& convertible securities. Effect of dividends on nonconvertible preferred stoc!. ;)f converted; met&od.

E5ERCISES
Ite/
E1$.13" E1$.13$ E1$.13' E1$.13( E1$.13* E1$.14+ E1$.141 E1$.142 4E1$.143

Des$ri%tion
#onvertible bonds. #onvertible bonds <essay=. #onvertible debt and debt %it& %arrants <essay=. ,toc! options. :eig&ted average s&ares outstanding. Earnings per s&are <essay=. Earnings per s&are. /iluted earnings per s&are. ,toc! appreciation rig&ts.

PR+-LE*S
Ite/
-1$.144 -1$.14" -1$.14$ -1$.14' -1$.14(

Des$ri%tion
#onvertible bonds and stoc! %arrants. Earnings per s&are. 1asic and diluted earnings per s&are. 1asic and diluted earnings per s&are. 1asic and diluted earnings per s&are.

/ilutive ,ecurities and Earnings per ,&are

16 ' 8

CHAPTER LEARNING +-7ECTIVES

1. 2. 3. 4. ". $. '. 4(. 4*. /escribe t&e accounting for t&e issuance> conversion> and retirement of convertible securities. E plain t&e accounting for convertible preferred stoc!. #ontrast t&e accounting for stoc! %arrants and stoc! %arrants issued %it& ot&er securities. /escribe t&e accounting for stoc! compensation plans under generally accepted accounting principles. /iscuss t&e controversy involving stoc! compensation plans. #ompute earnings per s&are in a simple capital structure. #ompute earnings per s&are in a comple capital structure. E plain t&e accounting for stoc!.appreciation rig&ts plans. #ompute earnings per s&are in a comple situation.

16 ' 6

Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition

SU**AR9 +F LEARNING +-7ECTIVES -9 :UESTI+NS

Ite Typ Ite Typ Ite Typ Ite Typ Item Typ Ite Typ Ite Typ Learnin0 + ;e$tive 1 3# 44. 3# 4'. 3# 4". 3# 4(. 3# 4$. 3# 4*. Learnin0 + ;e$tive 3 3# 2'. 3# "+. Learnin0 + ;e$tive 4 3# "4. 3# "(. 3# "". 3# "*. 3# "$. 3# $+. 3# "'. 3# '*. Learnin0 + ;e$tive 6 3# $4. 3# $(. 3# $". 3# $*. 3# $$. 3# '+. 3# $'. 3# '1. Learnin0 + ;e$tive 6 3# **. 3# 1+3. 3# 1++. 3# 12(. 3# 1+1. 3# 12*. 3# 1+2. 3# 13+. Learnin0 + ;e$tive < 3# 113. 3# 12+. 3# 114. 3# 121. 3# 11". 3# 122. 3# 11$. 3# 123. 3# 11'. 3# 124. 3# 11(. 3# 12". 3# 11*. 3# 12$. Learnin0 + ;e$tive => 3# ''. 3# 143. 3# (1. 3# Learnin0 + ;e$tive ?>

1. 2. 3. 4. $. '. (. 2(. *. 1+. 11. 12. 13. 14. 1". 1$. 1'. 1(. 1*. 2+. ('. ((. (*. 3*. 4+. *".

TF TF TF TF TF TF TF 3# TF TF TF TF TF TF TF TF TF TF TF TF 3# 3# 3# 3# 3# 3#

21. 22. 23. ". 2*. 3+. 31. 32.

,

3# 3# 3# TF 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3#

, ,

24. 2". 43. 2$. 33. "1. "2. "3. 3(. $1. $2. $3.

3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# 3# E

'(. 13". 13$.

3# E E

144.

13'. 144.

E -

34. 3". 3$. 3'. (2. (3. (4. (".

'2. '3. '4. (+. 13*. 14+. 14$. 14'. 12'. 131. 132. 133. 134. 14+. 141.

3# 3# 3# 3# E E 3# 3# 3# 3# 3# E E

13(.

($. *$. *'. *(.

*+. *1. *2. *3. *4. 1+4. 1+". 41. 42.

1+$. 1+'. 1+(. 1+*. 11+. 111. 112. '". '$.

142. 14". 14$. 14'. 14(.

E -

0ote? TF @ True.False 3# @ 3ultiple #&oice E @ E ercise - @ -roblem

/ilutive ,ecurities and Earnings per ,&are

16 ' <

TRUE'FALSE(Con$e%tual
1. 2. 3. 4. ". $. '. (. *. 1+. 11. 12. 13. 14. T&e recording of convertible bonds at t&e date of issue is t&e same as t&e recording of straig&t debt issues. #ompanies recogni5e t&e gain or loss on retiring convertible debt as an e traordinary item. T&e FA,1 states t&at %&en an issuer ma!es an additional payment to encourage conversion> t&e payment s&ould be reported as an e pense. T&e mar!et value met&od is used to account for t&e e ercise of convertible preferred stoc!. #ompanies recogni5e a gain or loss %&en stoc!&olders e ercise convertible preferred stoc!. A company s&ould allocate t&e proceeds from t&e sale of debt %it& detac&able stoc! %arrants bet%een t&e t%o securities based on t&eir mar!et values. 0ondetac&able %arrants> as %it& detac&able %arrants> re2uire an allocation of t&e proceeds bet%een t&e bonds and t&e %arrants. T&e intrinsic value of a stoc! option is t&e difference bet%een t&e mar!et price of t&e stoc! and t&e e ercise price of t&e options at t&e grant date. 6nder t&e fair value met&od> companies compute total compensation e pense based on t&e fair value of options on t&e date of e ercise. T&e service period in stoc! option plans is t&e time bet%een t&e grant date and t&e vesting date. )f an employee fails to e ercise a stoc! option before its e piration date> t&e company s&ould decrease compensation e pense. )f an employee forfeits a stoc! option because of failure to satisfy a service re2uirement> t&e company s&ould record paid.in capital from e pired options. )f preferred stoc! is cumulative and no dividends are declared> t&e company subtracts t&e current year preferred dividend in computing earnings per s&are. :&en stoc! dividends or stoc! splits occur> companies must restate t&e s&ares outstand. ing after t&e stoc! dividend or split> in order to compute t&e %eig&ted.average number of s&ares. )f a stoc! dividend occurs after year.end> but before issuing t&e financial statements> a company must restate t&e %eig&ted.average number of s&ares outstanding for t&e year. -referred dividends are subtracted from net income but not income before e traordinary items in computing earnings per s&are.

1". 1$.

16 ' = 1'. 1(. 1*.

Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition :&en a company &as a comple capital structure> it must report bot& basic and diluted earnings per s&are. )n computing diluted earnings per s&are> stoc! options are considered dilutive %&en t&eir option price is greater t&an t&e mar!et price. )n a contingent issue agreement> t&e contingent s&ares are considered outstanding for computing diluted E-, %&en t&e earnings or mar!et price level is met by t&e end of t&e year. A company s&ould report per s&are amounts for income before e traordinary items> but not for income from continuing operations.

2+.

True'False Ans)ers(Con$e%tual
Ite/ 1. 2. 3. 4. ". Ans& T F T F F Ite/ $. '. (. *. 1+. Ans& T F T F T Ite/ 11. 12. 13. 14. 1". Ans& F F T F T Ite/ 1$. 1'. 1(. 1*. 2+. Ans& F T F T F

*ULTIPLE CH+ICE(Dilutive Se$urities, Con$e%tual

21. #onvertible bonds a. &ave priority over ot&er indebtedness. b. are usually secured by a first or second mortgage. c. pay interest only in t&e event earnings are sufficient to cover t&e interest. d. may be e c&anged for e2uity securities. T&e conversion of bonds is most commonly recorded by t&e a. incremental met&od. b. proportional met&od. c. mar!et value met&od. d. boo! value met&od. :&en a bond issuer offers some form of additional consideration <a As%eetenerB= to induce conversion> t&e s%eetener is accounted for as a<n= a. e traordinary item. b. e pense. c. loss. d. none of t&ese. #orporations issue convertible debt for t%o main reasons. Cne is t&e desire to raise e2uity capital t&at> assuming conversion> %ill arise %&en t&e original debt is converted. T&e ot&er is a. t&e ease %it& %&ic& convertible debt is sold even if t&e company &as a poor credit rating. b. t&e fact t&at e2uity capital &as issue costs t&at convertible debt does not. c. t&at many corporations can obtain financing at lo%er rates. d. t&at convertible bonds %ill al%ays sell at a premium.

22.

23.

24.

/ilutive ,ecurities and Earnings per ,&are

,

16 ' ?

2".

:&en convertible debt is retired by t&e issuer> any material difference bet%een t&e cas& ac2uisition price and t&e carrying amount of t&e debt s&ould be a. reflected currently in income> but not as an e traordinary item. b. reflected currently in income as an e traordinary item. c. treated as a prior period ad9ustment. d. treated as an ad9ustment of additional paid.in capital. T&e conversion of preferred stoc! into common re2uires t&at any e cess of t&e par value of t&e common s&ares issued over t&e carrying amount of t&e preferred being converted s&ould be a. reflected currently in income> but not as an e traordinary item. b. reflected currently in income as an e traordinary item. c. treated as a prior period ad9ustment. d. treated as a direct reduction of retained earnings. T&e conversion of preferred stoc! may be recorded by t&e a. incremental met&od. b. boo! value met&od. c. mar!et value met&od. d. par value met&od. :&en t&e cas& proceeds from a bond issued %it& detac&able stoc! %arrants e ceed t&e sum of t&e par value of t&e bonds and t&e fair mar!et value of t&e %arrants> t&e e cess s&ould be credited to a. additional paid.in capital from stoc! %arrants. b. retained earnings. c. a liability account. d. premium on bonds payable. -roceeds from an issue of debt securities &aving stoc! %arrants s&ould not be allocated bet%een debt and e2uity features %&en a. t&e mar!et value of t&e %arrants is not readily available. b. e ercise of t&e %arrants %it&in t&e ne t fe% fiscal periods seems remote. c. t&e allocation %ould result in a discount on t&e debt security. d. t&e %arrants issued %it& t&e debt securities are nondetac&able. ,toc! %arrants outstanding s&ould be classified as a. liabilities. b. reductions of capital contributed in e cess of par value. c. assets. d. none of t&ese. A corporation issues bonds %it& detac&able %arrants. T&e amount to be recorded as paid. in capital is preferably a. 5ero. b. calculated by t&e e cess of t&e proceeds over t&e face amount of t&e bonds. c. e2ual to t&e mar!et value of t&e %arrants. d. based on t&e relative mar!et values of t&e t%o securities involved.

2$.

2'.

2(.

2*.

3+.

31.

16 ' 1@ Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition

-

32.

T&e distribution of stoc! rig&ts to e isting common stoc!&olders %ill increase paid.in capital at t&e /ate of )ssuance of t&e Rig&ts Des Des 0o 0o /ate of E ercise of t&e Rig&ts Des 0o Des 0o

a. b. c. d.
,

33.

T&e ma9or difference bet%een convertible debt and stoc! %arrants is t&at upon e ercise of t&e %arrants a. t&e stoc! is &eld by t&e company for a defined period of time before t&ey are issued to t&e %arrant &older. b. t&e &older &as to pay a certain amount of cas& to obtain t&e s&ares. c. t&e stoc! involved is restricted and can only be sold by t&e recipient after a set period of time. d. no paid.in capital in e cess of par can be a part of t&e transaction. :&ic& of t&e follo%ing is not a c&aracteristic of a noncompensatory stoc! option planE a. ,ubstantially all full.time employees may participate on an e2uitable basis. b. T&e plan offers no substantive option feature. c. 6nlimited time period permitted for e ercise of an option as long as t&e &older is still employed by t&e company. d. /iscount from t&e mar!et price of t&e stoc! no greater t&an %ould be reasonable in an offer of stoc! to stoc!&olders or ot&ers. T&e date on %&ic& to measure t&e compensation element in a stoc! option granted to a corporate employee ordinarily is t&e date on %&ic& t&e employee a. is granted t&e option. b. &as performed all conditions precedent to e ercising t&e option. c. may first e ercise t&e option. d. e ercises t&e option. #ompensation e pense resulting from a compensatory stoc! option plan is generally a. recogni5ed in t&e period of e ercise. b. recogni5ed in t&e period of t&e grant. c. allocated to t&e periods benefited by t&e employeeFs re2uired service. d. allocated over t&e periods of t&e employeeFs service life to retirement. T&e date on %&ic& total compensation e pense is computed in a stoc! option plan is t&e date a. of grant. b. of e ercise. c. t&at t&e mar!et price coincides %it& t&e option price. c. t&at t&e mar!et price e ceeds t&e option price. :&ic& of t&e follo%ing is not a c&aracteristic of a noncompensatory stoc! purc&ase planE a. )t is open to almost all full.time employees. b. T&e discount from mar!et price is small. c. T&e plan offers no substantive option feature. d. All of t&ese are c&aracteristics.

34.

3".

3$.

3'.

3(.

/ilutive ,ecurities and Earnings per ,&are 43*.

16 ' 11

6nder t&e intrinsic value met&od> compensation e pense resulting from an incentive stoc! option is generally a. not recogni5ed because no e cess of mar!et price over t&e option price e ists at t&e date of grant. b. recogni5ed in t&e period of t&e grant. c. allocated to t&e periods benefited by t&e employeeFs re2uired service. d. recogni5ed in t&e period of e ercise. For stoc! appreciation rig&ts> t&e measurement date for computing compensation is t&e date a. t&e rig&ts mature. b. t&e stoc!7s price reac&es a predetermined amount. c. of grant. d. of e ercise. An e ecutive pays no ta es at time of e ercise in a<an= a. stoc! appreciation rig&ts plan. b. incentive stoc! option plan. c. non2ualified stoc! option plan. d. Ta es %ould be paid in all of t&ese. A company estimates t&e fair value of ,ARs> using an option.pricing model> for a. s&are.based e2uity a%ards. b. s&are.based liability a%ards. c. bot& e2uity a%ards and liability a%ards. d. neit&er e2uity a%ards or liability a%ards.

44+.

441.

442.

*ulti%le C!oi$e Ans)ers(Dilutive Se$urities, Con$e%tual

Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans&

21. 22. 23. 24.

d d b c

2". 2$. 2'. 2(.

a d b d

2*. 3+. 31. 32.

d d d c

33. 34. 3". 3$.

b c a c

3'. 3(. 43*. 44+.

a d c d

441. 442.

b b

,olutions to t&ose 3ultiple #&oice 2uestions for %&ic& t&e ans%er is Anone of t&ese.B 3+. additions to contributed capital.

*ULTIPLE CH+ICE(Dilutive Se$urities, Co/%utational

43. Fogel #o. &as G2>"++>+++ of (H convertible bonds outstanding. Eac& G1>+++ bond is convertible into 3+ s&ares of G3+ par value common stoc!. T&e bonds pay interest on Ianuary 31 and Iuly 31. Cn Iuly 31> 2+1+> t&e &olders of G(++>+++ bonds e ercised t&e conversion privilege. Cn t&at date t&e mar!et price of t&e bonds %as 1+" and t&e mar!et price of t&e common stoc! %as G3$. T&e total unamorti5ed bond premium at t&e date of conversion %as G1'">+++. Fogel s&ould record> as a result of t&is conversion> a a. credit of G13$>+++ to -aid.in #apital in E cess of -ar. b. credit of G12+>+++ to -aid.in #apital in E cess of -ar. c. credit of G"$>+++ to -remium on 1onds -ayable. d. loss of G(>+++.

16 ' 13 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition 44. Cn Iuly 1> 2+1+> an interest payment date> G$+>+++ of -ar!s #o. bonds %ere converted into 1>2++ s&ares of -ar!s #o. common stoc! eac& &aving a par value of G4" and a mar!et value of G"4. T&ere is G2>4++ unamorti5ed discount on t&e bonds. 6sing t&e boo! value met&od> -ar!s %ould record a. no c&ange in paid.in capital in e cess of par. b. a G3>$++ increase in paid.in capital in e cess of par. c. a G'>2++ increase in paid.in capital in e cess of par. d. a G4>(++ increase in paid.in capital in e cess of par. 3organ #orporation &ad t%o issues of securities outstanding? common stoc! and an (H convertible bond issue in t&e face amount of G1$>+++>+++. )nterest payment dates of t&e bond issue are Iune 3+t& and /ecember 31st. T&e conversion clause in t&e bond indenture entitles t&e bond&olders to receive forty s&ares of G2+ par value common stoc! in e c&ange for eac& G1>+++ bond. Cn Iune 3+> 2+1+> t&e &olders of G2>4++>+++ face value bonds e ercised t&e conversion privilege. T&e mar!et price of t&e bonds on t&at date %as G1>1++ per bond and t&e mar!et price of t&e common stoc! %as G3". T&e total unamorti5ed bond discount at t&e date of conversion %as G1>+++>+++. )n applying t&e boo! value met&od> %&at amount s&ould 3organ credit to t&e account ;paid.in capital in e cess of par>; as a result of t&is conversionE a. G33+>+++. b. G1$+>+++. c. G1>44+>+++. d. G'2+>+++.

4".

6se t&e follo%ing information for 2uestions 4$ t&roug& 4(. #&ang #orporation issued G3>+++>+++ of *H> ten.year convertible bonds on Iuly 1> 2+1+ at *$.1 plus accrued interest. T&e bonds %ere dated April 1> 2+1+ %it& interest payable April 1 and Cctober 1. 1ond discount is amorti5ed semiannually on a straig&t.line basis. Cn April 1> 2+11> G$++>+++ of t&ese bonds %ere converted into "++ s&ares of G2+ par value common stoc!. Accrued interest %as paid in cas& at t&e time of conversion. 4$. )f ;interest payable; %ere credited %&en t&e bonds %ere issued> %&at s&ould be t&e amount of t&e debit to ;interest e pense; on Cctober 1> 2+1+E a. G$4>"++. b. G$'>"++. c. G'+>"++. d. G13">+++. :&at s&ould be t&e amount of t&e unamorti5ed bond discount on April 1> 2+11 relating to t&e bonds convertedE a. G23>4++. b. G21>$++. c. G11>'++. d. G22>2++. :&at %as t&e effective interest rate on t&e bonds %&en t&ey %ere issuedE a. *H b. Above *H c. 1elo% *H d. #annot determine from t&e information given.

4'.

4(.

/ilutive ,ecurities and Earnings per ,&are 4*.

16 ' 14

Jit!e #orporation issued at a premium of G">+++ a G1++>+++ bond issue convertible into 2>+++ s&ares of common stoc! <par value G4+=. At t&e time of t&e conversion> t&e unamorti5ed premium is G2>+++> t&e mar!et value of t&e bonds is G11+>+++> and t&e stoc! is 2uoted on t&e mar!et at G$+ per s&are. )f t&e bonds are converted into common> %&at is t&e amount of paid.in capital in e cess of par to be recorded on t&e conversion of t&e bondsE a. G2">+++ b. G22>+++ c. G32>+++ d. G4+>+++ )n 2+1+> E!lund> )nc.> issued for G1+3 per s&are> $+>+++ s&ares of G1++ par value convertible preferred stoc!. Cne s&are of preferred stoc! can be converted into t&ree s&ares of E!lundFs G2" par value common stoc! at t&e option of t&e preferred stoc!&older. )n August 2+11> all of t&e preferred stoc! %as converted into common stoc!. T&e mar!et value of t&e common stoc! at t&e date of t&e conversion %as G3+ per s&are. :&at total amount s&ould be credited to additional paid.in capital from common stoc! as a result of t&e conversion of t&e preferred stoc! into common stoc!E a. G1>+2+>+++. b. G'(+>+++. c. G1>"++>+++. d. G1>$(+>+++. Cn /ecember 1> 2+1+> Jester #ompany issued at 1+3> t%o &undred of its *H> G1>+++ bonds. Attac&ed to eac& bond %as one detac&able stoc! %arrant entitling t&e &older to purc&ase 1+ s&ares of JesterFs common stoc!. Cn /ecember 1> 2+1+> t&e mar!et value of t&e bonds> %it&out t&e stoc! %arrants> %as *"> and t&e mar!et value of eac& stoc! purc&ase %arrant %as G"+. T&e amount of t&e proceeds from t&e issuance t&at s&ould be accounted for as t&e initial carrying value of t&e bonds payable %ould be a. G1*3>$4+. b. G1*">'++. c. G2++>+++. d. G2+$>+++. Cn 3arc& 1> 2+1+> Rui5 #orporation issued G(++>+++ of (H nonconvertible bonds at 1+4> %&ic& are due on February 2(> 2+3+. )n addition> eac& G1>+++ bond %as issued %it& 2" detac&able stoc! %arrants> eac& of %&ic& entitled t&e bond&older to purc&ase for G"+ one s&are of Rui5 common stoc!> par value G2". T&e bonds %it&out t&e %arrants %ould normally sell at *". Cn 3arc& 1> 2+1+> t&e fair mar!et value of Rui57s common stoc! %as G4+ per s&are and t&e fair mar!et value of t&e %arrants %as G2.++. :&at amount s&ould Rui5 record on 3arc& 1> 2+1+ as paid.in capital from stoc! %arrantsE a. G2(>(++ b. G33>$++ c. G41>$++ d. G4+>+++

"+.

"1.

"2.

16 ' 16 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition "3. /uring 2+1+> 8ordon #ompany issued at 1+4 t&ree &undred> G1>+++ bonds due in ten years. Cne detac&able stoc! %arrant entitling t&e &older to purc&ase 1" s&ares of 8ordon7s common stoc! %as attac&ed to eac& bond. At t&e date of issuance> t&e mar!et value of t&e bonds> %it&out t&e stoc! %arrants> %as 2uoted at *$. T&e mar!et value of eac& detac&able %arrant %as 2uoted at G4+. :&at amount> if any> of t&e proceeds from t&e issuance s&ould be accounted for as part of 8ordon7s stoc!&oldersF e2uityE a. G+ b. G12>+++ c. G12>4(+ d. G11>("$ Cn April '> 2+1+> Kegin #orporation sold a G2>+++>+++> t%enty.year> ( percent bond issue for G2>12+>+++. Eac& G1>+++ bond &as t%o detac&able %arrants> eac& of %&ic& permits t&e purc&ase of one s&are of t&e corporationFs common stoc! for G3+. T&e stoc! &as a par value of G2" per s&are. )mmediately after t&e sale of t&e bonds> t&e corporationFs securities &ad t&e follo%ing mar!et values? (H bond %it&out %arrants :arrants #ommon stoc! G1>++( 21 2(

"4.

:&at accounts s&ould Kegin credit to record t&e sale of t&e bondsE a. 1onds -ayable G2>+++>+++ -remium on 1onds -ayable ''>$++ -aid.in #apitalL,toc! :arrants 42>4++ b. 1onds -ayable G2>+++>+++ -remium on 1onds -ayable 1$>+++ -aid.in #apitalL,toc! :arrants (4>+++ c. 1onds -ayable G2>+++>+++ -remium on 1onds -ayable 3">2++ -aid.in #apitalL,toc! :arrants (4>(++ d. 1onds -ayable G2>+++>+++ -remiums on 1onds -ayable 12+>+++ 6se t&e follo%ing information for 2uestions "" and "$. Cn 3ay 1> 2+1+> -ayne #o. issued G3++>+++ of 'H bonds at 1+3> %&ic& are due on April 3+> 2+2+. T%enty detac&able stoc! %arrants entitling t&e &older to purc&ase for G4+ one s&are of -ayne7s common stoc!> G1" par value> %ere attac&ed to eac& G1>+++ bond. T&e bonds %it&out t&e %arrants %ould sell at *$. Cn 3ay 1> 2+1+> t&e fair value of -ayne7s common stoc! %as G3" per s&are and of t&e %arrants %as G2. "". Cn 3ay 1> 2+1+> -ayne s&ould credit -aid.in #apital from ,toc! :arrants for a. G11>"2+. b. G12>+++. c. G12>3$+. d. G21>+++. Cn 3ay 1> 2+1+> -ayne s&ould record t&e bonds %it& a a. discount of G12>+++. b. discount of G3>3$+. c. discount of G3>+++. d. premium of G*>+++.

"$.

/ilutive ,ecurities and Earnings per ,&are "'.

16 ' 18

Cn Iuly 4> 2+1+> #&en #ompany issued for G4>2++>+++ a total of 4+>+++ s&ares of G1++ par value> 'H noncumulative preferred stoc! along %it& one detac&able %arrant for eac& s&are issued. Eac& %arrant contains a rig&t to purc&ase one s&are of #&en G1+ par value common stoc! for G1" per s&are. T&e stoc! %it&out t&e %arrants %ould normally sell for G4>1++>+++. T&e mar!et price of t&e rig&ts on Iuly 1> 2+1+> %as G2."+ per rig&t. Cn Cctober 31> 2+1+> %&en t&e mar!et price of t&e common stoc! %as G1* per s&are and t&e mar!et value of t&e rig&ts %as G3.++ per rig&t> 1$>+++ rig&ts %ere e ercised. As a result of t&e e ercise of t&e 1$>+++ rig&ts and t&e issuance of t&e related common stoc!> %&at 9ournal entry %ould #&en ma!eE a. #as&.................................................................................... 24+>+++ #ommon ,toc! ........................................................ 1$+>+++ -aid.in #apital in E cess of -ar .............................. (+>+++ b. #as&.................................................................................... 24+>+++ -aid.in #apitalL,toc! :arrants ......................................... 4+>+++ #ommon ,toc! ........................................................ 1$+>+++ -aid.in #apital in E cess of -ar .............................. 12+>+++ c. #as&.................................................................................... 24+>+++ -aid.in #apitalL,toc! :arrants ......................................... 1++>+++ #ommon ,toc! ........................................................ 1$+>+++ -aid.in #apital in E cess of -ar .............................. 1(+>+++ d. #as&.................................................................................... 24+>+++ -aid.in #apitalL,toc! :arrants ......................................... $+>+++ #ommon ,toc! ........................................................ 1$+>+++ -aid.in #apital in E cess of -ar .............................. 14+>+++ Mernon #orporation offered detac&able ".year %arrants to buy one s&are of common stoc! <par value G"= at G2+ <at a time %&en t&e stoc! %as selling for G32=. T&e price paid for 2>+++> G1>+++ bonds %it& t&e %arrants attac&ed %as G2+">+++. T&e mar!et price of t&e Mernon bonds %it&out t&e %arrants %as G1(+>+++> and t&e mar!et price of t&e %arrants %it&out t&e bonds %as G2+>+++. :&at amount s&ould be allocated to t&e %arrantsE a. G2+>+++ b. G2+>"++ c. G24>+++ d. G2">+++

"(.

6se t&e follo%ing information for 2uestions "* and $+. Cn 3ay 1> 2+1+> 3arly #o. issued G"++>+++ of 'H bonds at 1+3> %&ic& are due on April 3+> 2+2+. T%enty detac&able stoc! %arrants entitling t&e &older to purc&ase for G4+ one s&are of 3arly7s common stoc!> G1" par value> %ere attac&ed to eac& G1>+++ bond. T&e bonds %it&out t&e %arrants %ould sell at *$. Cn 3ay 1> 2+1+> t&e fair value of 3arly7s common stoc! %as G3" per s&are and of t&e %arrants %as G2. "*. Cn 3ay 1> 2+1+> 3arly s&ould record t&e bonds %it& a a. discount of G2+>+++. b. discount of G">+++. c. discount of G">$++. d. premium of G1">+++.

16 ' 16 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition $+. Cn 3ay 1> 2+1+> 3arly s&ould credit -aid.in #apital from ,toc! :arrants for a. G3">+++ b. G2+>$++ c. G2+>+++ d. G1*>2++ Cn Iuly 1> 2+1+> Ellison #ompany granted ,am :ine> an employee> an option to buy 4++ s&ares of Ellison #o. stoc! for G3+ per s&are> t&e option e ercisable for " years from date of grant. 6sing a fair value option pricing model> total compensation e pense is determined to be G1>(++. :ine e ercised &is option on Cctober 1> 2+1+ and sold &is 4++ s&ares on /ecember 1> 2+1+. Nuoted mar!et prices of Ellison #o. stoc! in 2+1+ %ere? Iuly 1 G3+ per s&are Cctober 1 G3$ per s&are /ecember 1 G4+ per s&are T&e service period is for t&ree years beginning Ianuary 1> 2+1+. As a result of t&e option granted to :ine> using t&e fair value met&od> Ellison s&ould recogni5e compensation e pense on its boo!s in t&e amount of a. G1>(++. b. G$++. c. G4"+. d. G+. $2. Cn Ianuary 1> 2+1+> Trent #ompany granted /ic! :illiams> an employee> an option to buy 1++ s&ares of Trent #o. stoc! for G3+ per s&are> t&e option e ercisable for " years from date of grant. 6sing a fair value option pricing model> total compensation e pense is determined to be G*++. :illiams e ercised &is option on ,eptember 1> 2+1+> and sold &is 1++ s&ares on /ecember 1> 2+1+. Nuoted mar!et prices of Trent #o. stoc! during 2+1+ %ere? Ianuary 1 G3+ per s&are ,eptember 1 G3$ per s&are /ecember 1 G4+ per s&are T&e service period is for t%o years beginning Ianuary 1>2+1+. As a result of t&e option granted to :illiams> using t&e fair value met&od> Trent s&ould recogni5e compensation e pense for 2+1+ on its boo!s in t&e amount of a. G1>+++. b. G*++. c. G4"+. d. G+. $3. Cn /ecember 31> 2+1+> 8on5ale5 #ompany granted some of its e ecutives options to purc&ase 1++>+++ s&ares of t&e company7s G1+ par common stoc! at an option price of G"+ per s&are. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G'"+>+++. T&e options become e ercisable on Ianuary 1> 2+11> and represent compensation for e ecutives7 services over a t&ree.year period beginning Ianuary 1> 2+11. At /ecember 31> 2+11 none of t&e e ecutives &ad e ercised t&eir options. :&at is t&e impact on 8on5ale57s net income for t&e year ended /ecember 31> 2+11 as a result of t&is transaction under t&e fair value met&odE a. G2"+>+++ increase. b. G'"+>+++ decrease. c. G2"+>+++ decrease. d. G+.

$1.

/ilutive ,ecurities and Earnings per ,&are $4.

16 ' 1<

Cn Ianuary 1> 2+11 Reese #ompany granted Iac! 1uc&anan> an employee> an option to buy 1++ s&ares of Reese #o. stoc! for G4+ per s&are> t&e option e ercisable for " years from date of grant. 6sing a fair value option pricing model> total compensation e pense is determined to be G1>2++. 1uc&anan e ercised &is option on ,eptember 1> 2+11> and sold &is 1++ s&ares on /ecember 1> 2+11. Nuoted mar!et prices of Reese #o. stoc! during 2+11 %ere? Ianuary 1 G4+ per s&are ,eptember 1 G4( per s&are /ecember 1 G"4 per s&are T&e service period is for t%o years beginning Ianuary 1> 2+11. As a result of t&e option granted to 1uc&anan> using t&e fair value met&od> Reese s&ould recogni5e compensation e pense for 2+11 on its boo!s in t&e amount of a. G+. b. G$++. c. G1>2++ d. G1>4++

$".

Cn Iune 3+> 2+1+> Dang #orporation granted compensatory stoc! options for 2+>+++ s&ares of its G24 par value common stoc! to certain of its !ey employees. T&e mar!et price of t&e common stoc! on t&at date %as G31 per s&are and t&e option price %as G2(. 6sing a fair value option pricing model> total compensation e pense is determined to be G$4>+++. T&e options are e ercisable beginning Ianuary 1> 2+12> providing t&ose !ey employees are still in t&e employ of t&e company at t&e time t&e options are e ercised. T&e options e pire on Iune 3+> 2+13. Cn Ianuary 4> 2+12> %&en t&e mar!et price of t&e stoc! %as G3$ per s&are> all options for t&e 2+>+++ s&ares %ere e ercised. T&e service period is for t%o years beginning Ianuary 1> 2+1+. 6sing t&e fair value met&od> %&at s&ould be t&e amount of compensation e pense recorded by Dang #orporation for t&ese options on /ecember 31> 2+1+E a. G$4>+++ b. G32>+++ c. G1">+++ d. G+

$$.

)n order to retain certain !ey e ecutives> ,miley #orporation granted t&em incentive stoc! options on /ecember 31> 2++*. (+>+++ options %ere granted at an option price of G3" per s&are. 3ar!et prices of t&e stoc! %ere as follo%s? /ecember 31> 2+1+ G4$ per s&are /ecember 31> 2+11 "1 per s&are T&e options %ere granted as compensation for e ecutives7 services to be rendered over a t%o.year period beginning Ianuary 1> 2+1+. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G(++>+++. :&at amount of compensation e pense s&ould ,miley recogni5e as a result of t&is plan for t&e year ended /ecember 31> 2+1+ under t&e fair value met&odE a. G1>4++>+++. b. G((+>+++. c. G(++>+++. d. G4++>+++.

16 ' 1= Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition $'. Cn Ianuary 1> 2+11> Ritter #ompany granted stoc! options to officers and !ey employees for t&e purc&ase of 1+>+++ s&ares of t&e companyFs G1 par common stoc! at G2+ per s&are as additional compensation for services to be rendered over t&e ne t t&ree years. T&e options are e ercisable during a five.year period beginning Ianuary 1> 2+14 by grantees still employed by Ritter. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G*+>+++. T&e mar!et price of common stoc! %as G2$ per s&are at t&e date of grant. T&e 9ournal entry to record t&e compensation e pense related to t&ese options for 2+11 %ould include a credit to t&e -aid.in #apitalL,toc! Cptions account for a. G+. b. G1(>+++. c. G2+>+++. d. G3+>+++. Cn Ianuary 1> 2+11> Evans #ompany granted Tim Telfer> an employee> an option to buy 1>+++ s&ares of Evans #o. stoc! for G2" per s&are> t&e option e ercisable for " years from date of grant. 6sing a fair value option pricing model> total compensation e pense is determined to be G'>"++. Telfer e ercised &is option on ,eptember 1> 2+11> and sold &is 1>+++ s&ares on /ecember 1> 2+11. Nuoted mar!et prices of Evans #o. stoc! during 2+11 %ere Ianuary 1 G2" per s&are ,eptember 1 G3+ per s&are /ecember 1 G34 per s&are T&e service period is for t&ree years beginning Ianuary 1> 2+11. As a result of t&e option granted to Telfer> using t&e fair value met&od> Evans s&ould recogni5e compensation e pense for 2+11 on its boo!s in t&e amount of a. G*>+++. b. G'>"++. c. G2>"++. d. G1>"++. $*. Cn /ecember 31> 2+1+> Kessler #ompany granted some of its e ecutives options to purc&ase "+>+++ s&ares of t&e companyFs G1+ par common stoc! at an option price of G"+ per s&are. T&e options become e ercisable on Ianuary 1> 2+11> and represent compensation for e ecutivesF services over a t&ree.year period beginning Ianuary 1> 2+11. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G3++>+++. At /ecember 31> 2+11> none of t&e e ecutives &ad e ercised t&eir options. :&at is t&e impact on KesslerFs net income for t&e year ended /ecember 31> 2+11 as a result of t&is transaction under t&e fair value met&odE a. G1++>+++ increase b. G+ c. G1++>+++ decrease d. G3++>+++ decrease

$(.

/ilutive ,ecurities and Earnings per ,&are '+.

16 ' 1?

:eiser #orp. on Ianuary 1> 2++'> granted stoc! options for 4+>+++ s&ares of its G1+ par value common stoc! to its !ey employees. T&e mar!et price of t&e common stoc! on t&at date %as G23 per s&are and t&e option price %as G2+. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G24+>+++. T&e options are e ercisable beginning Ianuary 1> 2+1+> provided t&ose !ey employees are still in :eiser7s employ at t&e time t&e options are e ercised. T&e options e pire on Ianuary 1> 2+11. Cn Ianuary 1> 2+1+> %&en t&e mar!et price of t&e stoc! %as G2* per s&are> all 4+>+++ options %ere e ercised. T&e amount of compensation e pense :eiser s&ould record for 2++* under t&e fair value met&od is a. G+. b. G4+>+++. c. G(+>+++. d. G12+>+++.

'1.

Cn /ecember 31> 2+1+> Oouser #ompany granted some of its e ecutives options to purc&ase 4">+++ s&ares of t&e companyFs G"+ par common stoc! at an option price of G$+ per s&are. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G*++>+++. T&e options become e ercisable on Ianuary 1> 2+11> and represent compensation for e ecutivesF past and future services over a t&ree.year period beginning Ianuary 1> 2+11. :&at is t&e impact on OouserFs total stoc!&oldersF e2uity for t&e year ended /ecember 31> 2+1+> as a result of t&is transaction under t&e fair value met&odE a. G*++>+++ decrease b. G3++>+++ decrease c. G+ d. G3++>+++ increase Cn Iune 3+> 2++(> 0orman #orporation granted compensatory stoc! options for 3+>+++ s&ares of its G2+ par value common stoc! to certain of its !ey employees. T&e mar!et price of t&e common stoc! on t&at date %as G3$ per s&are and t&e option price %as G3+. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G3$+>+++. T&e options are e ercisable beginning Ianuary 1> 2+11> provided t&ose !ey employees are still in 0orman7s employ at t&e time t&e options are e ercised. T&e options e pire on Iune 3+> 2+12. Cn Ianuary 4> 2+11> %&en t&e mar!et price of t&e stoc! %as G42 per s&are> all 3+>+++ options %ere e ercised. :&at s&ould be t&e amount of compensation e pense recorded by 0orman #orporation for t&e calendar year 2+1+ using t&e fair value met&odE a. G+. b. G144>+++. c. G1(+>+++. d. G3$+>+++.

'2.

16 ' 3@ Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition '3. )n order to retain certain !ey e ecutives> Iensen #orporation granted t&em incentive stoc! options on /ecember 31> 2++*. "+>+++ options %ere granted at an option price of G3" per s&are. 3ar!et prices of t&e stoc! %ere as follo%s? /ecember 31> 2+1+ /ecember 31> 2+11 G4$ per s&are "1 per s&are

T&e options %ere granted as compensation for e ecutivesF services to be rendered over a t%o.year period beginning Ianuary 1> 2+1+. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G"++>+++. :&at amount of compensation e pense s&ould Iensen recogni5e as a result of t&is plan for t&e year ended /ecember 31> 2+1+ under t&e fair value met&odE a. G2"+>+++. b. G"++>+++. c. G""+>+++. d. G1>'"+>+++. '4. 8rant> )nc. &ad 4+>+++ s&ares of treasury stoc! <G1+ par value= at /ecember 31> 2+1+> %&ic& it ac2uired at G11 per s&are. Cn Iune 4> 2+11> 8rant issued 2+>+++ treasury s&ares to employees %&o e ercised options under 8rantFs employee stoc! option plan. T&e mar!et value per s&are %as G13 at /ecember 31> 2+1+> G1" at Iune 4> 2+11> and G1( at /ecember 31> 2+11. T&e stoc! options &ad been granted for G12 per s&are. T&e cost met&od is used. :&at is t&e balance of t&e treasury stoc! on 8rantFs balance s&eet at /ecember 31> 2+11E a. G14+>+++. b. G1(+>+++. c. G22+>+++. d. G24+>+++.

6se t&e follo%ing information for 2uestions '" t&roug& ''. Cn Ianuary 1> 2+1+> Korsa!> )nc. establis&ed a stoc! appreciation rig&ts plan for its e ecutives. )t entitled t&em to receive cas& at any time during t&e ne t four years for t&e difference bet%een t&e mar!et price of its common stoc! and a pre.establis&ed price of G2+ on $+>+++ ,ARs. #urrent mar!et prices of t&e stoc! are as follo%s? Ianuary 1> 2+1+ /ecember 31> 2+1+ /ecember 31> 2+11 /ecember 31> 2+12 G3" per s&are 3( per s&are 3+ per s&are 33 per s&are

#ompensation e pense relating to t&e plan is to be recorded over a four.year period beginning Ianuary 1> 2+1+. 4'". :&at amount of compensation e pense s&ould Korsa! recogni5e for t&e year ended /ecember 31> 2+1+E a. G1(+>+++ b. G2'+>+++ c. G22">+++ d. G1>+(+>+++

/ilutive ,ecurities and Earnings per ,&are 4'$.

16 ' 31

:&at amount of compensation e pense s&ould Korsa! recogni5e for t&e year ended /ecember 31> 2+11E a. G+ b. G3+>+++ c. G3++>+++ d. G1"+>+++ Cn /ecember 31> 2+12> 1$>+++ ,ARs are e ercised by e ecutives. :&at amount of compensation e pense s&ould Korsa! recogni5e for t&e year ended /ecember 31> 2+12E a. G2(">+++ b. G1*">+++ c. G"(">+++ d. G'(>+++

4''.

*ulti%le C!oi$e Ans)ers(Dilutive Se$urities, Co/%utational

Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans&

43. 44. 4". 4$. 4'.

a b a c b

4(. 4*. "+. "1. "2.

b b d b c

"3. "4. "". "$. "'.

c c c b b

"(. "*. $+. $1. $2.

b c b b c

$3. $4. $". $$. $'.

c b b d d

$(. $*. '+. '1. '2.

c c c c b

'3. '4. 4'". 4'$. 4''.

a c b b a

*ULTIPLE CH+ICE(Dilutive Se$urities, CPA A"a%te"

'(. Cn Ianuary 2> 2+1+> Farr #o. issued 1+.year convertible bonds at 1+". /uring 2+12> t&ese bonds %ere converted into common stoc! &aving an aggregate par value e2ual to t&e total face amount of t&e bonds. At conversion> t&e mar!et price of Farr7s common stoc! %as "+ percent above its par value. Cn Ianuary 2> 2+1+> cas& proceeds from t&e issuance of t&e convertible bonds s&ould be reported as a. paid.in capital for t&e entire proceeds. b. paid.in capital for t&e portion of t&e proceeds attributable to t&e conversion feature and as a liability for t&e balance. c. a liability for t&e face amount of t&e bonds and paid.in capital for t&e premium over t&e face amount. d. a liability for t&e entire proceeds. Jang #o. issued bonds %it& detac&able common stoc! %arrants. Cnly t&e %arrants &ad a !no%n mar!et value. T&e sum of t&e fair value of t&e %arrants and t&e face amount of t&e bonds e ceeds t&e cas& proceeds. T&is e cess is reported as a. /iscount on 1onds -ayable. b. -remium on 1onds -ayable. c. #ommon ,toc! ,ubscribed. d. -aid.in #apital in E cess of -arL,toc! :arrants.

'*.

16 ' 33 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition (+. Cn Ianuary 1> 2+1+> ,&arp #orp. granted an employee an option to purc&ase $>+++ s&ares of ,&arpFs G" par value common stoc! at G2+ per s&are. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G14+>+++. T&e option became e ercisable on /ecember 31> 2+11> after t&e employee completed t%o years of service. T&e mar!et prices of ,&arpFs stoc! %ere as follo%s? Ianuary 1> 2+1+ /ecember 31> 2+11 G3+ "+

For 2+11> s&ould recogni5e compensation e pense under t&e fair value met&od of a. G*+>+++. b. G3+>+++. c. G'+>+++. d. G+. 4(1. Cn Ianuary 2> 2+1+> for past services> Rosen #orp. granted 0enn -ine> its president> 1$>+++ stoc! appreciation rig&ts t&at are e ercisable immediately and e pire on Ianuary 2> 2+11. Cn e ercise> 0enn is entitled to receive cas& for t&e e cess of t&e mar!et price of t&e stoc! on t&e e ercise date over t&e mar!et price on t&e grant date. 0enn did not e ercise any of t&e rig&ts during 2+1+. T&e mar!et price of RosenFs stoc! %as G3+ on Ianuary 2> 2+1+> and G4" on /ecember 31> 2+1+. As a result of t&e stoc! appreciation rig&ts> Rosen s&ould recogni5e compensation e pense for 2+1+ of a. G+. b. G(+>+++. c. G24+>+++. d. G4(+>+++.

*ulti%le C!oi$e Ans)ers(Dilutive Se$urities, CPA A"a%te"

Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans&

'(.

'*.

(+.

4(1.

*ULTIPLE CH+ICE(Earnin0s Per S!are(Con$e%tual

(2. :it& respect to t&e computation of earnings per s&are> %&ic& of t&e follo%ing %ould be most indicative of a simple capital structureE a. #ommon stoc!> preferred stoc!> and convertible securities outstanding in lots of even t&ousands b. Earnings derived from one primary line of business c. C%ners&ip interest consisting solely of common stoc! d. 0one of t&ese )n computing earnings per s&are for a simple capital structure> if t&e preferred stoc! is cumulative> t&e amount t&at s&ould be deducted as an ad9ustment to t&e numerator <earnings= is t&e a. preferred dividends in arrears. b. preferred dividends in arrears times <one minus t&e income ta rate=. c. annual preferred dividend times <one minus t&e income ta rate=. d. none of t&ese.

(3.

/ilutive ,ecurities and Earnings per ,&are (4.

16 ' 34

)n computations of %eig&ted average of s&ares outstanding> %&en a stoc! dividend or stoc! split occurs> t&e additional s&ares are a. %eig&ted by t&e number of days outstanding. b. %eig&ted by t&e number of mont&s outstanding. c. considered outstanding at t&e beginning of t&e year. d. considered outstanding at t&e beginning of t&e earliest year reported. :&at effect %ill t&e ac2uisition of treasury stoc! &ave on stoc!&oldersF e2uity and earnings per s&are> respectivelyE a. /ecrease and no effect b. )ncrease and no effect c. /ecrease and increase d. )ncrease and decrease /ue to t&e importance of earnings per s&are information> it is re2uired to be reported by all -ublic #ompanies 0onpublic #ompanies a. Des Des b. Des 0o c. 0o 0o d. 0o Des A convertible bond issue s&ould be included in t&e diluted earnings per s&are computation as if t&e bonds &ad been converted into common stoc!> if t&e effect of its inclusion is a. b. c. d. /ilutive Des Des 0o 0o Antidilutive Des 0o Des 0o

(".

($.

('.

((.

:&en computing diluted earnings per s&are> convertible bonds are a. ignored. b. assumed converted %&et&er t&ey are dilutive or antidilutive. c. assumed converted only if t&ey are antidilutive. d. assumed converted only if t&ey are dilutive. /ilutive convertible securities must be used in t&e computation of a. basic earnings per s&are only. b. diluted earnings per s&are only. c. diluted and basic earnings per s&are. d. none of t&ese. )n computing earnings per s&are> t&e e2uivalent number of s&ares of convertible preferred stoc! are added as an ad9ustment to t&e denominator <number of s&ares outstanding=. )f t&e preferred stoc! is cumulative> %&ic& amount s&ould t&en be added as an ad9ustment to t&e numerator <net earnings=E a. Annual preferred dividend b. Annual preferred dividend times <one minus t&e income ta rate= c. Annual preferred dividend times t&e income ta rate d. Annual preferred dividend divided by t&e income ta rate

(*.

*+.

16 ' 36 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition *1. )n t&e diluted earnings per s&are computation> t&e treasury stoc! met&od is used for options and %arrants to reflect assumed reac2uisition of common stoc! at t&e average mar!et price during t&e period. )f t&e e ercise price of t&e options or %arrants e ceeds t&e average mar!et price> t&e computation %ould a. fairly present diluted earnings per s&are on a prospective basis. b. fairly present t&e ma imum potential dilution of diluted earnings per s&are on a prospective basis. c. reflect t&e e cess of t&e number of s&ares assumed issued over t&e number of s&ares assumed reac2uired as t&e potential dilution of earnings per s&are. d. be antidilutive. )n applying t&e treasury stoc! met&od to determine t&e dilutive effect of stoc! options and %arrants> t&e proceeds assumed to be received upon e ercise of t&e options and %arrants a. are used to calculate t&e number of common s&ares repurc&ased at t&e average mar!et price> %&en computing diluted earnings per s&are. b. are added> net of ta > to t&e numerator of t&e calculation for diluted earnings per s&are. c. are disregarded in t&e computation of earnings per s&are if t&e e ercise price of t&e options and %arrants is less t&an t&e ending mar!et price of common stoc!. d. none of t&ese. :&en applying t&e treasury stoc! met&od for diluted earnings per s&are> t&e mar!et price of t&e common stoc! used for t&e repurc&ase is t&e a. price at t&e end of t&e year. b. average mar!et price. c. price at t&e beginning of t&e year. d. none of t&ese. Antidilutive securities a. s&ould be included in t&e computation of diluted earnings per s&are but not basic earnings per s&are. b. are t&ose %&ose inclusion in earnings per s&are computations %ould cause basic earnings per s&are to e ceed diluted earnings per s&are. c. include stoc! options and %arrants %&ose e ercise price is less t&an t&e average mar!et price of common stoc!. d. s&ould be ignored in all earnings per s&are calculations. Assume t&ere are t%o dilutive convertible securities. T&e one t&at s&ould be used first to recalculate earnings per s&are is t&e security %it& t&e a. greater earnings ad9ustment. b. greater earnings per s&are ad9ustment. c. smaller earnings ad9ustment. d. smaller earnings per s&are ad9ustment.

*2.

*3.

*4.

4*".

*ulti%le C!oi$e Ans)ers(Earnin0s Per S!are(Con$e%tual

Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans&

(2. (3.

c d

(4. (".

d c

($. ('.

b b

((. (*.

d b

*+. *1.

a d

*2. *3.

a b

*4. 4*".

d d

,olution to 3ultiple #&oice 2uestion for %&ic& t&e ans%er is Anone of t&ese.B (3. annual preferred dividend.

/ilutive ,ecurities and Earnings per ,&are

16 ' 38

*ULTIPLE CH+ICE(Earnin0s Per S!are(Co/%utational

*$. Oill #orp. &ad $++>+++ s&ares of common stoc! outstanding on Ianuary 1> issued *++>+++ s&ares on Iuly 1> and &ad income applicable to common stoc! of G1>+"+>+++ for t&e year ending /ecember 31> 2+1+. Earnings per s&are of common stoc! for 2+1+ %ould be a. G1.'". b. G.(3. c. G1.++. d. G1.1'. At /ecember 31> 2+1+> Oancoc! #ompany &ad "++>+++ s&ares of common stoc! issued and outstanding> 4++>+++ of %&ic& &ad been issued and outstanding t&roug&out t&e year and 1++>+++ of %&ic& %ere issued on Cctober 1> 2+1+. 0et income for t&e year ended /ecember 31> 2+1+> %as G1>+2+>+++. :&at s&ould be Oancoc!Fs 2+1+ earnings per common s&are> rounded to t&e nearest pennyE a. G2.+2 b. G2."" c. G2.4+ d. G2.2' 3ilo #o. &ad $++>+++ s&ares of common stoc! outstanding on Ianuary 1> issued 12$>+++ s&ares on 3ay 1> purc&ased $3>+++ s&ares of treasury stoc! on ,eptember 1> and issued "4>+++ s&ares on 0ovember 1. T&e %eig&ted average s&ares outstanding for t&e year is a. $"1>+++. b. $'2>+++. c. $*3>+++. d. '14>+++. Cn Ianuary 1> 2+11> 8ridley #orporation &ad 12">+++ s&ares of its G2 par value common stoc! outstanding. Cn 3arc& 1> 8ridley sold an additional 2"+>+++ s&ares on t&e open mar!et at G2+ per s&are. 8ridley issued a 2+H stoc! dividend on 3ay 1. Cn August 1> 8ridley purc&ased 14+>+++ s&ares and immediately retired t&e stoc!. Cn 0ovember 1> 2++>+++ s&ares %ere sold for G2" per s&are. :&at is t&e %eig&ted.average number of s&ares outstanding for 2+11E a. "1+>+++ b. 3'">+++ c. 3"(>333 d. 2"(>333 T&e follo%ing information is available for 1arone #orporation? Ianuary 1> 2+11 April 1> 2+11 Iuly 1> 2+11 Cctober 1> 2+11 ,&ares outstanding ,&ares issued Treasury s&ares purc&ased ,&ares issued in a 1++H stoc! dividend 1>2"+>+++ 2++>+++ '">+++ 1>3'">+++

*'.

*(.

**.

1++.

T&e number of s&ares to be used in computing earnings per common s&are for 2+11 is a. 2>(2">"++. b. 2>'3'>"++. c. 2>'2">+++. d. 1>'+$>2"+.

16 ' 36 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition 1+1. At /ecember 31> 2+1+ Rice #ompany &ad 3++>+++ s&ares of common stoc! and 1+>+++ s&ares of "H> G1++ par value cumulative preferred stoc! outstanding. 0o dividends %ere declared on eit&er t&e preferred or common stoc! in 2+1+ or 2+11. Cn Ianuary 3+> 2+12> prior to t&e issuance of its financial statements for t&e year ended /ecember 31> 2+11> Rice declared a 1++H stoc! dividend on its common stoc!. 0et income for 2+11 %as G*"+>+++. )n its 2+11 financial statements> RiceFs 2+11 earnings per common s&are s&ould be a. G1."+. b. G1."(. c. G3.++. d. G3.1'. Fult5 #ompany &ad 3++>+++ s&ares of common stoc! issued and outstanding at /ecember 31> 2+1+. /uring 2+11> no additional common stoc! %as issued. Cn Ianuary 1> 2+11> Fult5 issued 4++>+++ s&ares of nonconvertible preferred stoc!. /uring 2+11> Fult5 declared and paid G1(+>+++ cas& dividends on t&e common stoc! and G1"+>+++ on t&e nonconvertible preferred stoc!. 0et income for t&e year ended /ecember 31> 2+11> %as G*$+>+++. :&at s&ould be Fult5Fs 2+11 earnings per common s&are> rounded to t&e nearest pennyE a. G1.1$ b. G2.1+ c. G2.'+ d. G3.2+ At /ecember 31> 2+1+ -ine #ompany &ad 2++>+++ s&ares of common stoc! and 1+>+++ s&ares of 4H> G1++ par value cumulative preferred stoc! outstanding. 0o dividends %ere declared on eit&er t&e preferred or common stoc! in 2+1+ or 2+11. Cn February 1+> 2+12> prior to t&e issuance of its financial statements for t&e year ended /ecember 31> 2+11> -ine declared a 1++H stoc! split on its common stoc!. 0et income for 2+11 %as G'2+>+++. )n its 2+11 financial statements> -ine7s 2+11 earnings per common s&are s&ould be a. G3.4+. b. G3.2+. c. G1.'+. d. G1.++. ,tine )nc. &ad 3++>+++ s&ares of common stoc! issued and outstanding at /ecember 31> 2+1+. Cn Iuly 1> 2+11 an additional 3++>+++ s&ares %ere issued for cas&. ,tine also &ad stoc! options outstanding at t&e beginning and end of 2+11 %&ic& allo% t&e &olders to purc&ase *+>+++ s&ares of common stoc! at G2( per s&are. T&e average mar!et price of ,tine7s common stoc! %as G3" during 2+11. T&e number of s&ares to be used in computing diluted earnings per s&are for 2+11 is a. $'2>+++ b. $1(>+++ c. "22>+++ d. 4$(>+++

1+2.

1+3.

1+4.

/ilutive ,ecurities and Earnings per ,&are 1+".

16 ' 3<

Kasravi #o. &ad net income for 2+11 of G3++>+++. T&e average number of s&ares outstanding for t&e period %as 2++>+++ s&ares. T&e average number of s&ares under outstanding options> at an option price of G3+ per s&are is 12>+++ s&ares. T&e average mar!et price of t&e common stoc! during t&e year %as G3$. :&at s&ould Kasravi #o. report for diluted earnings per s&are for t&e year ended 2+11E a. G1."+ b. G1.4* c. G1.43 d. G1.42 Cn Ianuary 2> 2+11> :ort& #o. issued at par G2>+++>+++ of 'H convertible bonds. Eac& G1>+++ bond is convertible into 1+ s&ares of common stoc!. 0o bonds %ere converted during 2+11. :ort& &ad 2++>+++ s&ares of common stoc! outstanding during 2+11. :ort&7s 2+11 net income %as G$++>+++ and t&e income ta rate %as 3+H. :ort&7s diluted earnings per s&are for 2+11 %ould be <rounded to t&e nearest penny=? a. G3.4*. b. G3.1'. c. G3.++. d. G3.3$. 1eaty )nc. purc&ased /unbar #o. and agreed to give stoc!&olders of /unbar #o. 1+>+++ additional s&ares in 2+12 if /unbar #o.7s net income in 2+11 is G"++>+++P in 2+1+ /unbar #o.7s net income is G"2+>+++. 1eaty )nc. &as net income for 2+1+ of G2++>+++ and &as an average number of common s&ares outstanding for 2+1+ of 1++>+++ s&ares. :&at s&ould 1eaty report as diluted earnings per s&are for 2+1+E a. G2.22 b. G2.++ c. G1.(2 d. G1.$'

1+$.

1+'.

6se t&e follo%ing information for 2uestions 1+( and 1+*. Oanson #o. &ad 2++>+++ s&ares of common stoc!> 2+>+++ s&ares of convertible preferred stoc!> and G1>+++>+++ of 1+H convertible bonds outstanding during 2+11. T&e preferred stoc! is convertible into 4+>+++ s&ares of common stoc!. /uring 2+11> Oanson paid dividends of G1.2+ per s&are on t&e common stoc! and G4 per s&are on t&e preferred stoc!. Eac& G1>+++ bond is convertible into 4" s&ares of common stoc!. T&e net income for 2+11 %as G(++>+++ and t&e income ta rate %as 3+H. 1+(. 1asic earnings per s&are for 2+11 is <rounded to t&e nearest penny= a. G2.*4. b. G3.22. c. G3.3". d. G3.$+. /iluted earnings per s&are for 2+11 is <rounded to t&e nearest penny= a. G2.''. b. G2.(1. c. G3.+". d. G3.33.

1+*.

16 ' 3= Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition 11+. Fugate #ompany &ad "++>+++ s&ares of common stoc! issued and outstanding at /ecember 31> 2+1+. Cn Iuly 1> 2+11 an additional "++>+++ s&ares %ere issued for cas&. Fugate also &ad stoc! options outstanding at t&e beginning and end of 2+11 %&ic& allo% t&e &olders to purc&ase 1"+>+++ s&ares of common stoc! at G2+ per s&are. T&e average mar!et price of FugateFs common stoc! %as G2" during 2+11. :&at is t&e number of s&ares t&at s&ould be used in computing diluted earnings per s&are for t&e year ended /ecember 31> 2+11E a. 1>+3+>+++ b. ('+>+++ c. '('>"++ d. '(+>+++ ,&ipley #orporation &ad net income for t&e year of G4(+>+++ and a %eig&ted average number of common s&ares outstanding during t&e period of 2++>+++ s&ares. T&e company &as a convertible bond issue outstanding. T&e bonds %ere issued four years ago at par <G2>+++>+++=> carry a 'H interest rate> and are convertible into 4+>+++ s&ares of common stoc!. T&e company &as a 4+H ta rate. /iluted earnings per s&are are a. G1.$" b. G2.23. c. G2.3". d. G2."(. #olt #orporation purc&ased 3assey )nc. and agreed to give stoc!&olders of 3assey )nc. "+>+++ additional s&ares in 2+12 if 3assey )nc.7s net income in 2+11 is G4++>+++ or moreP in 2+1+ 3assey )nc.7s net income is G41+>+++. #olt &as net income for 2+1+ of G(++>+++ and &as an average number of common s&ares outstanding for 2+1+ of "++>+++ s&ares. :&at s&ould #olt report as earnings per s&are for 2+1+E 1asic Earnings -er ,&are G1.$+ G1.4" G1.$+ G1.4" /iluted Earnings -er ,&are G1.$+ G1.$+ G1.4" G1.4"

111.

112.

a. b. c. d. 113.

Cn Ianuary 2> 2+1+> -ere5 #o. issued at par G1+>+++ of $H bonds convertible in total into 1>+++ s&ares of -ere5Fs common stoc!. 0o bonds %ere converted during 2+1+. T&roug&out 2+1+> -ere5 &ad 1>+++ s&ares of common stoc! outstanding. -ere5Fs 2+1+ net income %as G3>+++> and its income ta rate is 3+H. 0o potentially dilutive securities ot&er t&an t&e convertible bonds %ere outstanding during 2+1+. -ere5Fs diluted earnings per s&are for 2+1+ %ould be <rounded to t&e nearest penny= a. G1."+. b. G1.'1. c. G1.(+. d. G3.42.

/ilutive ,ecurities and Earnings per ,&are 114.

16 ' 3?

At /ecember 31> 2+1+> Kifer #ompany &ad "++>+++ s&ares of common stoc! outstanding. Cn Cctober 1> 2+11> an additional 1++>+++ s&ares of common stoc! %ere issued. )n addition> Kifer &ad G1+>+++>+++ of $H convertible bonds outstanding at /ecember 31> 2+1+> %&ic& are convertible into 22">+++ s&ares of common stoc!. 0o bonds %ere converted into common stoc! in 2+11. T&e net income for t&e year ended /ecember 31> 2+11> %as G3>+++>+++. Assuming t&e income ta rate %as 3+H> t&e diluted earnings per s&are for t&e year ended /ecember 31> 2+11> s&ould be <rounded to t&e nearest penny= a. G$."2. b. G4.(+. c. G4."$. d. G4.++. Cn Ianuary 2> 2+11> 3i5e #o. issued at par G3++>+++ of *H convertible bonds. Eac& G1>+++ bond is convertible into 3+ s&ares. 0o bonds %ere converted during 2++'. 3i5e &ad "+>+++ s&ares of common stoc! outstanding during 2+11. 3i5e Fs 2+11 net income %as G1$+>+++ and t&e income ta rate %as 3+H. 3i5eFs diluted earnings per s&are for 2+11 %ould be <rounded to t&e nearest penny= a. G2.'1. b. G3.+3. c. G3.2+. d. G3."(. At /ecember 31> 2+1+> ,ager #o. &ad 1>2++>+++ s&ares of common stoc! outstanding. )n addition> ,ager &ad 4"+>+++ s&ares of preferred stoc! %&ic& %ere convertible into '"+>+++ s&ares of common stoc!. /uring 2+11> ,ager paid G$++>+++ cas& dividends on t&e common stoc! and G4++>+++ cas& dividends on t&e preferred stoc!. 0et income for 2+11 %as G3>4++>+++ and t&e income ta rate %as 4+H. T&e diluted earnings per s&are for 2+11 is <rounded to t&e nearest penny= a. G1.24. b. G1.'4. c. G2."1. d. G2.(4.

11".

11$.

6se t&e follo%ing information for 2uestions 11' and 11(. Jerner #o. &ad 2++>+++ s&ares of common stoc!> 2+>+++ s&ares of convertible preferred stoc!> and G1>+++>+++ of 1+H convertible bonds outstanding during 2+11. T&e preferred stoc! is convertible into 4+>+++ s&ares of common stoc!. /uring 2+11> Jerner paid dividends of G.*+ per s&are on t&e common stoc! and G3.++ per s&are on t&e preferred stoc!. Eac& G1>+++ bond is convertible into 4" s&ares of common stoc!. T&e net income for 2+11 %as G$++>+++ and t&e income ta rate %as 3+H. 11'. 1asic earnings per s&are for 2+11 is <rounded to t&e nearest penny= a. G2.21. b. G2.42. c. G2."1. d. G2.'+. /iluted earnings per s&are for 2+11 is <rounded to t&e nearest penny= a. G2.14. b. G2.2". c. G2.3". d. G2.4$.

11(.

16 ' 4@ Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition 11*. Doder> )ncorporated> &as 3>2++>+++ s&ares of common stoc! outstanding on /ecember 31> 2+1+. An additional (++>+++ s&ares of common stoc! %ere issued on April 1> 2+11> and 4++>+++ more on Iuly 1> 2+11. Cn Cctober 1> 2+11> Doder issued 2+>+++> G1>+++ face value> (H convertible bonds. Eac& bond is convertible into 2+ s&ares of common stoc!. 0o bonds %ere converted into common stoc! in 2+11. :&at is t&e number of s&ares to be used in computing basic earnings per s&are and diluted earnings per s&are> respectivelyE a. 4>+++>+++ and 4>+++>+++ b. 4>+++>+++ and 4>1++>+++ c. 4>+++>+++ and 4>4++>+++ d. 4>4++>+++ and ">2++>+++ 0olte #o. &as 4>+++>+++ s&ares of common stoc! outstanding on /ecember 31> 2+1+. An additional 2++>+++ s&ares are issued on April 1> 2+11> and 4(+>+++ more on ,eptember 1. Cn Cctober 1> 0olte issued G$>+++>+++ of *H convertible bonds. Eac& G1>+++ bond is convertible into 4+ s&ares of common stoc!. 0o bonds &ave been converted. T&e number of s&ares to be used in computing basic earnings per s&are and diluted earnings per s&are on /ecember 31> 2+11 is a. 4>31+>+++ and 4>31+>+++. b. 4>31+>+++ and 4>3'+>+++. c. 4>31+>+++ and 4>""+>+++. d. ">+(+>+++ and ">32+>+++. At /ecember 31> 2+1+> Tatum #ompany &ad 2>+++>+++ s&ares of common stoc! outstanding. Cn Ianuary 1> 2+11> Tatum issued "++>+++ s&ares of preferred stoc! %&ic& %ere convertible into 1>+++>+++ s&ares of common stoc!. /uring 2+11> Tatum declared and paid G1>"++>+++ cas& dividends on t&e common stoc! and G"++>+++ cas& dividends on t&e preferred stoc!. 0et income for t&e year ended /ecember 31> 2+11> %as G">+++>+++. Assuming an income ta rate of 3+H> %&at s&ould be diluted earnings per s&are for t&e year ended /ecember 31> 2+11E <Round to t&e nearest penny.= a. G1."+ b. G1.$' c. G2."+ d. G2.+( At /ecember 31> 2+1+> Emley #ompany &ad 1>2++>+++ s&ares of common stoc! outstanding. Cn ,eptember 1> 2+11> an additional 4++>+++ s&ares of common stoc! %ere issued. )n addition> Emley &ad G12>+++>+++ of $H convertible bonds outstanding at /ecember 31> 2+1+> %&ic& are convertible into (++>+++ s&ares of common stoc!. 0o bonds %ere converted into common stoc! in 2+11. T&e net income for t&e year ended /ecember 31> 2+11> %as G4>"++>+++. Assuming t&e income ta rate %as 3+H> %&at s&ould be t&e diluted earnings per s&are for t&e year ended /ecember 31> 2+11> rounded to t&e nearest pennyE a. G2.11 b. G3.3( c. G2.3" d. G2.4"

12+.

121.

122.

/ilutive ,ecurities and Earnings per ,&are 123.

16 ' 41

8rimm #ompany &as 1>(++>+++ s&ares of common stoc! outstanding on /ecember 31> 2+1+. An additional 1"+>+++ s&ares of common stoc! %ere issued on Iuly 1> 2+11> and 3++>+++ more on Cctober 1> 2+11. Cn April 1> 2+11> 8rimm issued $>+++> G1>+++ face value> (H convertible bonds. Eac& bond is convertible into 4+ s&ares of common stoc!. 0o bonds %ere converted into common stoc! in 2+11. :&at is t&e number of s&ares to be used in computing basic earnings per s&are and diluted earnings per s&are> respectively> for t&e year ended /ecember 31> 2+11E a. 1>*"+>+++ and 2>13+>+++ b. 1>*"+>+++ and 1>*"+>+++ c. 1>*"+>+++ and 2>1*+>+++ d. 2>2"+>+++ and 2>43+>+++

6se t&e follo%ing information for 2uestions 124 and 12". )nformation concerning t&e capital structure of -iper #orporation is as follo%s? /ecember 31> 2+11 2+1+ #ommon stoc! 1"+>+++ s&ares 1"+>+++ s&ares #onvertible preferred stoc! 1">+++ s&ares 1">+++ s&ares *H convertible bonds G2>4++>+++ G2>4++>+++ /uring 2+11> -iper paid dividends of G1.2+ per s&are on its common stoc! and G3.++ per s&are on its preferred stoc!. T&e preferred stoc! is convertible into 3+>+++ s&ares of common stoc!. T&e *H convertible bonds are convertible into '">+++ s&ares of common stoc!. T&e net income for t&e year ended /ecember 31> 2+11> %as G$++>+++. Assume t&at t&e income ta rate %as 3+H. 124. :&at s&ould be t&e basic earnings per s&are for t&e year ended /ecember 31> 2+11> rounded to t&e nearest pennyE a. G2.$$ b. G2.*2 c. G3.'+ d. G4.++ :&at s&ould be t&e diluted earnings per s&are for t&e year ended /ecember 31> 2+11> rounded to t&e nearest pennyE a. G3.2+ b. G2.*" c. G2.(3 d. G2.3" :arrants e ercisable at G2+ eac& to obtain 3+>+++ s&ares of common stoc! %ere outstanding during a period %&en t&e average mar!et price of t&e common stoc! %as G2". Application of t&e treasury stoc! met&od for t&e assumed e ercise of t&ese %arrants in computing diluted earnings per s&are %ill increase t&e %eig&ted average number of outstanding s&ares by a. 3+>+++. b. 24>+++. c. $>+++. d. '>"++.

12".

12$.

16 ' 43 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition 12'. Terry #orporation &ad 3++>+++ s&ares of common stoc! outstanding at /ecember 31> 2+1+. )n addition> it &ad *+>+++ stoc! options outstanding> %&ic& &ad been granted to certain e ecutives> and %&ic& gave t&em t&e rig&t to purc&ase s&ares of TerryFs stoc! at an option price of G3' per s&are. T&e average mar!et price of TerryFs common stoc! for 2+1+ %as G"+. :&at is t&e number of s&ares t&at s&ould be used in computing diluted earnings per s&are for t&e year ended /ecember 31> 2+1+E a. 3++>+++ b. 331>$22 c. 3$$>$++ d. 323>4++

*ulti%le C!oi$e Ans)ers(Earnin0s Per S!are(Co/%utational

Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans&

*$. *'. *(. **. 1++.

c c b b c

1+1. 1+2. 1+3. 1+4. 1+".

a c c d b

1+$. 1+'. 1+(. 1+*. 11+.

b c d c d

111. 112. 113. 114. 11".

c c b c b

11$. 11'. 11(. 11*. 12+.

b d c b b

121. 122. 123. 124. 12".

b c a c b

12$. 12'.

c d

*ULTIPLE CH+ICE(Earnin0s Per S!are(CPA A"a%te"

12(. /idde #o. &ad 3++>+++ s&ares of common stoc! issued and outstanding at /ecember 31> 2+1+. 0o common stoc! %as issued during 2+11. Cn Ianuary 1> 2+11> /idde issued 2++>+++ s&ares of nonconvertible preferred stoc!. /uring 2+11> /idde declared and paid G1++>+++ cas& dividends on t&e common stoc! and G(+>+++ on t&e preferred stoc!. 0et income for t&e year ended /ecember 31> 2+11 %as G$2+>+++. :&at s&ould be /iddeFs 2+11 earnings per common s&areE a. G2.+' b. G1.(+ c. G1.'3 d. G1.4' At /ecember 31> 2+11 and 2+1+> 3iley #orp. &ad 1(+>+++ s&ares of common stoc! and 1+>+++ s&ares of "H> G1++ par value cumulative preferred stoc! outstanding. 0o dividends %ere declared on eit&er t&e preferred or common stoc! in 2+11 or 2+1+. 0et income for 2+11 %as G4++>+++. For 2+11> earnings per common s&are amounted to a. G2.22. b. G1.*4. c. G1.$'. d. G1.11.

12*.

/ilutive ,ecurities and Earnings per ,&are 13+.

16 ' 44

3ars& #o. &ad 2>4++>+++ s&ares of common stoc! outstanding on Ianuary 1 and /ecember 31> 2+11. )n connection %it& t&e ac2uisition of a subsidiary company in Iune 2+1+> 3ars& is re2uired to issue 1++>+++ additional s&ares of its common stoc! on Iuly 1> 2+12> to t&e former o%ners of t&e subsidiary. 3ars& paid G2++>+++ in preferred stoc! dividends in 2+11> and reported net income of G3>4++>+++ for t&e year. 3ars&Fs diluted earnings per s&are for 2+11 s&ould be a. G1.42. b. G1.3$. c. G1.33. d. G1.2(. Foyle> )nc.> &ad "$+>+++ s&ares of common stoc! issued and outstanding at /ecember 31> 2+1+. Cn Iuly 1> 2+11> an additional 4+>+++ s&ares of common stoc! %ere issued for cas&. Foyle also &ad une ercised stoc! options to purc&ase 32>+++ s&ares of common stoc! at G1" per s&are outstanding at t&e beginning and end of 2+11. T&e average mar!et price of FoyleFs common stoc! %as G2+ during 2+11. :&at is t&e number of s&ares t&at s&ould be used in computing diluted earnings per s&are for t&e year ended /ecember 31> 2+11E a. "(+>+++ b. "((>+++ c. $+(>+++ d. $12>+++ :&en computing diluted earnings per s&are> convertible securities are a. ignored. b. recogni5ed only if t&ey are dilutive. c. recogni5ed only if t&ey are antidilutive. d. recogni5ed %&et&er t&ey are dilutive or antidilutive. )n determining diluted earnings per s&are> dividends on nonconvertible cumulative preferred stoc! s&ould be a. disregarded. b. added bac! to net income %&et&er declared or not. c. deducted from net income only if declared. d. deducted from net income %&et&er declared or not. T&e if.converted met&od of computing earnings per s&are data assumes conversion of convertible securities as of t&e a. beginning of t&e earliest period reported <or at time of issuance> if later=. b. beginning of t&e earliest period reported <regardless of time of issuance=. c. middle of t&e earliest period reported <regardless of time of issuance=. d. ending of t&e earliest period reported <regardless of time of issuance=.

131.

132.

133.

134.

*ulti%le C!oi$e Ans)ers(Earnin0s Per S!are(CPA A"a%te"

Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans& Ite/ Ans&

12(.

12*.

13+.

131.

132.

133.

134.

16 ' 46 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition

DERIVATI+NS ( Dilutive Se$urities, Co/%utational

No& Ans)er
43. 44. 4". a b a

Derivation
G(++>+++ Q <G1'">+++ R .32= S <(++ R 3+ R G3+= @ G13$>+++. G$+>+++ S <1>2++ R G4"= S G2>4++ @ G3>$++. <G2>4++>+++ T G1>+++= R 4+ R G2+ @ G1>*2+>+++ <common stoc!= <G2>4++>+++ T G1$>+++>+++= R G1>+++>+++ @ G1"+>+++ <unamorti5ed discount= G2>4++>+++ S G1>*2+>+++ S G1"+>+++ @ G33+>+++. <G3>+++>+++ S G2>((3>+++= T 11' @ G1>+++/mont& <G3>+++>+++ R .+* R 3/12= Q <G1>+++ R 3= @ G'+>"++. G11'>+++ T 11' @ G1>+++/mont& G$++>+++ G11'>+++ S U<G1>+++ R 3= Q <G1>+++ R $V R LLLLL @ G21>$++ G3>+++>+++

4$. 4'.

c b

4(. 4*. "+. "1.

b b d b

1onds issued at a discount> mar!et rate W coupon rate. G1++>+++ Q G2>+++ S <2>+++ R G4+= @ G22>+++. G$>1(+>+++ S <$+>+++ R 3 R G2"= @ G1>$(+>+++. <G2++>+++ R .*"= Q <2++ R G"+= @ G2++>+++P G2++>+++ R 1.+3 @ G2+$>+++ G1*+>+++ LLLL R G2+$>+++ @ G1*">'++. G2++>+++

"2.

<G(++>+++ R .*"= Q <(++ R 2" R G2= @ G(++>+++P G(++>+++ R 1.+4 @ G(32>+++ G4+>+++ LLLL R G(32>+++ @ G41>$++. G(++>+++

"3.

<G3++>+++ R .*$= Q <3++ R G4+= @ G3++>+++P G3++>+++ R 1.+4 @ G312>+++ G12>+++ LLLL R G312>+++ @ G12>4(+. G3++>+++

"4.

<2>+++ R G1>++(= Q <4>+++ R G21= @ G2>1++>+++ G2>+1$>+++ LLLLL R G2>12+>+++ @ G2>+3">2++> bonds? G2>+++>+++ G2>1++>+++ G(4>+++ -remium? G3">2++P LLLLL R G2>12+>+++ @ G(4>(++. G2>1++>+++

/ilutive ,ecurities and Earnings per ,&are

16 ' 48

DERIVATI+NS ( Dilutive Se$urities, Co/%utational 1$ont&2

No& Ans)er
"". c

Derivation
<G3++>+++ R .*$= Q <$>+++ R G2= @ G3++>+++P G3++>+++ R 1.+3 @ G3+*>+++ G12>+++ LLLL R G3+*>+++ @ G12>3$+. G3++>+++

"$. "'.

b b

G3++>+++ S

$288,000 $309,000 @ G3>3$+. $300,000

/r. #as&? 1$>+++ R G1" @ G24+>+++ /r. -aid.in #apitalL,toc! :arrants? G1++>+++ R 1$/4+ @ G4+>+++ #r. #ommon ,toc!? 1$>+++ R G1+ @ G1$+>+++ #r. -aid.in #apital in E cess of -ar? <G" Q G2."+= R 1$>+++ @ G12+>+++. UG2+>+++ T <G2+>+++ Q G1(+>+++=V R G2+">+++ @ G2+>"++. <G"++>+++ .*$= Q <"++ 2+ G2= @ G"++>+++ <G4(+>+++ G"++>+++= <G"++>+++ 1.+3= @ G4*4>4++ G"++>+++ S G4*4>4++ @ G">$++. "++ 2+ G2 @ G2+>+++ <G2+>+++ G"++>+++= G"1">+++ @ G2+>$++. G1>(++ 3 @ G$++. G*++ 2 @ G4"+. G'"+>+++ 3 @ G2"+>+++ decrease. G1>2++ 2 @ G$++. G$4>+++ 2 @ G32>+++. G(++>+++ 2 @ G4++>+++. G*+>+++ T 3 @ G3+>+++. G'>"++ T 3 @ G2>"++. G3++>+++ T 3 @ G1++>+++. G24+>+++ T 3 @ G(+>+++/year.

"(. "*.

b c

$+.

$1. $2. $3. $4. $". $$. $'. $(. $*. '+.

b c c b b d d c c c

16 ' 46 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition

DERIVATI+NS ( Dilutive Se$urities, Co/%utational 1$ont&2

No& Ans)er
'1. c

Derivation
G*++>+++ S $900,000 @ G3++>+++ increase <from t&e credit to -aid.in #apitalL,toc! Cptions=. Cffset by G3++>+++ decrease <from t&e debit to #ompensation E pense=.

2 3

'2. '3. '4. 4'". 4'$. 4''.

b a c b b a

12 $360,000 @ G144>+++. 30
G"++>+++ T 2 @ G2"+>+++. 2+>+++ R G11 @ G22+>+++. <G3( S G2+= R $+>+++ R .2" @ G2'+>+++. <G3+ S G2+= R $+>+++ R ." @ G3++>+++ G3++>+++ S G2'+>+++ @ G3+>+++. <G33 S G2+= R $+>+++ R .'" @ G"(">+++ G"(">+++ S G3++>+++ @ G2(">+++.

DERIVATI+NS ( Dilutive Se$urities, CPA A"a%te"

No& Ans)er
'(. '*. (+. 4(1. d a c c

Derivation
#onceptual. #onceptual. G14+>+++ T 2 @ G'+>+++. <G4" S G3+= R 1$>+++ @ G24+>+++.

DERIVATI+NS ( Earnin0s Per S!are, Co/%utational

No& Ans)er
*$. c

Derivation
G1>+"+>+++ LLLLLLLLLLLL @ G1.++. $ $++>+++ Q <*++>+++ R L = 12 G1>+2+>+++ LLLLLLLLLLLL @ G2.4+. 3 4++>+++ Q <1++>+++ R L. = 12

*'.

/ilutive ,ecurities and Earnings per ,&are

16 ' 4<

DERIVATI+NS ( Earnin0s Per S!are, Co/%utational 1$ont&2

No& Ans)er
*(. **. 1++. 1+1. 1+2. 1+3. 1+4 1+". b b c a c c d b

Derivation
$++>+++ Q <12$>+++ R (/12= S <$3>+++ R 4/12= Q <"4>+++ R 2/12= @ $'2>+++. U<12">+++ R 2 R 1.2+= Q <3'">+++ R 2 R 1.2+= Q <4"+>+++ R 3= Q <31+>+++ R 3= Q <"1+>+++ R 2=V T 12 @ 3'">+++. U<1>2"+>+++ R 3 R 2= Q <1>4"+>+++ R 3 R 2= Q <1>3'">+++ R 3 R 2= Q <2>'"+>+++ R 3=V T 12 @ 2>'2">+++. UG*"+>+++ S <1+>+++ R G1++ R .+"=V T <3++>+++ R 2= @ G1."+. G*$+>+++ S G1"+>+++ LLLLLLLLLL @ G2.'+. 3++>+++ UG'2+>+++ S <1+>+++ G1++ .+4=V <2++>+++ 2= @ G1.'+. <3++>+++ $/12= Q <$++>+++ $/12= Q U<<3" S 2(= 3"= *+>+++V @ 4$(>+++. U<G3$ S G3+= G3$V 12>+++ @ 2>+++ G3++>+++ <2++>+++ Q 2>+++= @ G1.4*. <G2>+++>+++ G1>+++= 1+ @ 2+>+++ G2>+++>+++ .+' <1 S .3+= @ G*(>+++ <G$++>+++ Q G*(>+++= <2++>+++ Q 2+>+++= @ G3.1'. ,ince G"2+>+++ > G"++>+++ include 1+>+++ s&ares in /E-, G2++>+++ <1++>+++ Q 1+>+++= @ G1.(2. UG(++>+++ S <2+>+++ G4V 2++>+++ @ G3.$+. UG(++>+++ Q <G1>+++>+++ .1+ .'=V U2++>+++ Q 4+>+++ Q <1>+++ 4"=V @ G3.+". "++>+++ Q <"++>+++ R $/12= Q U<2" S 2+=/2" R 1"+>+++V @ '(+>+++. UG4(+>+++ Q <G2>+++>+++ R .+' R .$+=V T <2++>+++ Q 4+>+++= @ G2.3". 1asis? /iluted? G(++>+++ T "++>+++ @ G1.$+. G(++>+++ T <"++>+++ Q "+>+++= @ G1.4"

1+$.

1+'.

1+(. 1+*. 11+. 111. 112.

d c d c c

113.

G3>+++ Q <G1+>+++ R .+$ R .'+= LLLLLLLLLLLLLL @ G1.'1. 1>+++ Q 1>+++

16 ' 4= Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition

DERIVATI+NS ( Earnin0s Per S!are, Co/%utational 1$ont&2

No& Ans)er
114. c

Derivation
G3>+++>+++ Q <G1+>+++>+++ R .+$ R .'= LLLLLLLLLLLLLLLLL @ G4."$. 3 "++>+++ Q <1++>+++ R L. = Q 22">+++ 12 G1$+>+++ Q <G3++>+++ R .+* R .'= LLLLLLLLLLLLLLLLL @ G3.+3. "+>+++ Q U<G3++>+++ T G1>+++= R 3+=V G3>4++>+++ LLLLLLLLLL @ G1.'4. 1>2++>+++ Q '"+>+++ G$++>+++ S <2+>+++ R G3= LLLLLLLLLLL @ G2.'+. 2++>+++ G$++>+++ Q <G1>+++>+++ R .1+ R .'= LLLLLLLLLLLLLLLL @ G2.3". 2++>+++ Q 4">+++ Q 4+>+++ 3>2++>+++ Q <(++>+++ R */12= Q <4++>+++ R $/12= @ 4>+++>+++ <1E-,= 4>+++>+++ Q <2+>+++ R 2+ R 3/12= @ 4>1++>+++ </E-,=. 4>+++>+++ Q <2++>+++ R */12= Q <4(+>+++ R 4/12= @ 4>31+>+++. 4>31+>+++ Q U<G$>+++>+++ T G1>+++= R 4+ R 3/12V @ 4>3'+>+++. G">+++>+++ LLLLLLLLLL @ G1.$'. 2>+++>+++ Q 1>+++>+++ G4>"++>+++ Q <G12>+++>+++ R .+$ R .'= LLLLLLLLLLLLLLLLLL @ G2.3". 1>2++>+++ Q <4++>+++ 4/12= Q (++>+++ 1>(++>+++ Q <1"+>+++ R $/12= Q <3++>+++ R 3/12= @ 1>*"+>+++ 1>*"+>+++ Q <$>+++ R 4+ R */12= @ 2>13+>+++. G$++>+++ S <1">+++ R G3.++= LLLLLLLLLLLLL @ G3.'+. 1"+>+++

11".

11$.

11'.

11(. 11*. 12+.

c b b

121.

122.

123.

124.

/ilutive ,ecurities and Earnings per ,&are

16 ' 4?

DERIVATI+NS ( Earnin0s Per S!are, Co/%utational 1$ont&2

No& Ans)er
12". 12$. 12'. b c d

Derivation
G$++>+++ Q <G2>4++>+++ R .+* R .'= LLLLLLLLLLLLLLLL @ G2.*". 1"+>+++ Q '">+++ Q 3+>+++ 3+>+++ R G2+ T G2" @ 24>+++ 3+>+++ S 24>+++ @ $>+++. *+>+++ S <*+>+++ R G3' T G"+= @ 23>4++ 3++>+++ Q 23>4++ @ 323>4++.

DERIVATI+NS ( Earnin0s Per S!are, CPA A"a%te"

No&Ans)er 12(. b Derivation G$2+>+++ S G(+>+++ LLLLLLLLL @ G1.(+. 3++>+++ G4++>+++ S <1+>+++ R G1++ R .+"= LLLLLLLLLLLLLLL @ G1.*4. 1(+>+++ G3>4++>+++ S G2++>+++ LLLLLLLLLLS @ G1.2(. 2>4++>+++ Q 1++>+++ "$+>+++ Q <4+>+++ R $/12= Q U32>+++ S <32>+++ R G1" T G2+=V @ "((>+++. #onceptual. #onceptual. #onceptual.

12*.

13+.

131. 132. 133. 134.

b b d a

E5ERCISES
EA& 16'148L#onvertible 1onds. 8arr #o. issued G">+++>+++ of 12H> ".year convertible bonds on /ecember 1> 2+1+ for G">+2+>(++ plus accrued interest. T&e bonds %ere dated April 1> 2+1+ %it& interest payable April 1 and Cctober 1. 1ond premium is amorti5ed eac& interest period on a straig&t.line basis. 8arr #o. &as a fiscal year end of ,eptember 3+. Cn Cctober 1> 2+11> G2>"++>+++ of t&ese bonds %ere converted into 3">+++ s&ares of G1" par common stoc!. Accrued interest %as paid in cas& at t&e time of conversion.

16 ' 6@ Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition Instru$tions <a= -repare t&e entry to record t&e interest e pense at April 1> 2+11. Assume t&at interest payable %as credited %&en t&e bonds %ere issued <round to nearest dollar=. <b= -repare t&e entry to record t&e conversion on Cctober 1> 2+11. Assume t&at t&e entry to record amorti5ation of t&e bond premium and interest payment &as been made. Solution 16'148 <a= )nterest -ayable........................................................................... )nterest E pense.......................................................................... -remium on 1onds -ayable......................................................... #as&................................................................................. #alculations? )ssuance price -ar value Total premium 3ont&s remaining -remium per mont& -remium amorti5ed <4 R G4++= <b= G">+2+>(++ ">+++>+++ G 2+>(++ "2 G4++ G1>$++ 1++>+++ 1*(>4++ 1>$++ 3++>+++

1onds -ayable............................................................................. 2>"++>+++ -remium on 1onds -ayable......................................................... (>4++ #ommon ,toc! <3">+++ R G1"=......................................... -aid.in #apital in E cess of -ar........................................ #alculations? -remium related to 1/2 of t&e bonds Jess premium amorti5ed -remium remaining

"2">+++ 1>*(3>4++

G1+>4++ <G2+>(++ T 2= 2>+++ U<G1+>4++ T "2= R 1+V G (>4++

EA& 16'146L#onvertible 1onds. Koc& #o. sold convertible bonds at a premium. )nterest is paid on 3ay 31 and 0ovember 3+. Cn 3ay 31> after interest %as paid> 1++> G1>+++ bonds are tendered for conversion into 3>+++ s&ares of G1+ par value common stoc! t&at &ad a mar!et price of G4+ per s&are. Oo% s&ould Koc& #o. account for t&e conversion of t&e bonds into common stoc! under t&e boo! value met&odE /iscuss t&e rationale for t&is met&od.

/ilutive ,ecurities and Earnings per ,&are Solution 16'146

16 ' 61

To account for t&e conversion of bonds under t&e boo! value met&od> 1onds -ayable s&ould be debited for t&e face value> -remium on 1onds -ayable s&ould be debited> and #ommon ,toc! s&ould be credited at par for t&e s&ares issued. 6sing t&e boo! value met&od> no gain <loss= on conversion is recorded. T&e amount to be recorded for t&e stoc! is e2ual to t&e boo! <carrying= value <face value plus unamorti5ed premium= of t&e bonds. -aid.in #apital in E cess of -ar %ould be credited for t&e difference bet%een t&e boo! value of t&e bonds and t&e par value of t&e stoc! issued. T&e rationale for t&e boo! value met&od is t&at t&e conversion is t&e completion of t&e transaction initiated %&en t&e bonds %ere issued. ,ince t&is is vie%ed as a transaction %it& stoc!&olders> no gain <loss= s&ould be recogni5ed.

EA& 16'14<L#onvertible /ebt and /ebt %it& :arrants <Essay=. :&at accounting treatment is re2uired for convertible debtE :&yE :&at accounting treatment is re2uired for debt issued %it& stoc! %arrantsE :&yE Solution 16'14< #onvertible debt is treated solely as debt. Cne reason is t&at t&e debt and conversion option are inseparable. T&e &older cannot sell one and retain t&e ot&er. T&e t%o c&oices are mutually e clusive. Anot&er reason is t&at t&e valuation of t&e conversion option or t&e debt security %it&out t&e conversion option is sub9ective because t&ese values are not establis&ed separately in t&e mar!etplace. :&en debt is issued %it& stoc! %arrants> t&e %arrants are given separate recognition. After issue> t&e debt and t&e detac&able %arrants trade separately. T&e proceeds may be allocated to t&e t%o elements based on t&e relative fair values of t&e debt security %it&out t&e %arrants and t&e %arrants at t&e time of issuance. T&e proceeds allocated to t&e %arrants s&ould be accounted for as paid.in capital.

EA& 16'14=L,toc! options. -repare t&e necessary entries from 1/1/1+.2/1/12 for t&e follo%ing events using t&e fair value met&od. )f no entry is needed> %rite ;0o Entry 0ecessary.; 1. Cn 1/1/1+> t&e stoc!&olders adopted a stoc! option plan for top e ecutives %&ereby eac& mig&t receive rig&ts to purc&ase up to 12>+++ s&ares of common stoc! at G4+ per s&are. T&e par value is G1+ per s&are. 2. Cn 2/1/1+> options %ere granted to eac& of five e ecutives to purc&ase 12>+++ s&ares. T&e options %ere non.transferable and t&e e ecutive &ad to remain an employee of t&e company to e ercise t&e option. T&e options e pire on 2/1/12. )t is assumed t&at t&e options %ere for services performed e2ually in 2+1+ and 2+11. T&e 1lac!.,c&oles option pricing model determines total compensation e pense to be G1>3++>+++. 3. At 2/1/12> four e ecutives e ercised t&eir options. T&e fift& e ecutive c&ose not to e ercise &is options> %&ic& t&erefore %ere forfeited.

16 ' 63 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition Solution 16'14= 1. 0o entry necessary. 2. 0o entry necessary. 12/31/1+ #ompensation E pense............................................................... -aid.in #apitalL,toc! Cptions......................................... 12/31/11 #ompensation E pense............................................................... -aid.in #apitalL,toc! Cptions......................................... 3. $"+>+++ $"+>+++ $"+>+++ $"+>+++ 2/1/1+ 1/1/1+

2/1/12 #as& <4 R 12>+++ R G4+= .............................................................. 1>*2+>+++ -aid.in #apitalL,toc! Cptions <G1>3++>+++ R 4/"= ..................... 1>+4+>+++ #ommon ,toc!................................................................. -aid.in #apital in E cess of -ar........................................ -aid.in #apitalL,toc! Cptions.................................................... -aid.in #apital from E pired ,toc! Cptions...................... 2$+>+++

4(+>+++ 2>4(+>+++ 2$+>+++

EA& 16'14?L:eig&ted average s&ares outstanding. Cn Ianuary 1> 2+1+> :arren #orporation &ad 1>+++>+++ s&ares of common stoc! outstanding. Cn 3arc& 1> t&e corporation issued 1"+>+++ ne% s&ares to raise additional capital. Cn Iuly 1> t&e corporation declared and issued a 2.for.1 stoc! split. Cn Cctober 1> t&e corporation purc&ased on t&e mar!et $++>+++ of its o%n outstanding s&ares and retired t&em. Instru$tions #ompute t&e %eig&ted average number of s&ares to be used in computing earnings per s&are for 2+1+. Solution 16'14? )ncrease </ecrease= L 1"+>+++ 1>1"+>+++ <$++>+++= Cutstanding 1>+++>+++ 1>1"+>+++ 2>3++>+++ 1>'++>+++ 3ont&s Cutstanding 2 4 3 3 12 <2">2++>+++ T 12= ,&are 3ont&s 4>+++>+++ *>2++>+++ $>*++>+++ ">1++>+++ 2">2++>+++ 2>1++>+++

Ian. 1 3arc& 1 Iuly 1 Cct. 1

2/1 2/1

/ilutive ,ecurities and Earnings per ,&are EA& 16'16@LEarnings -er ,&are. <Essay= /efine t&e follo%ing? <a= T&e computation of earnings per common s&are <b= #omple capital structure <c= 1asic earnings per s&are <d= /iluted earnings per s&are Solution 16'16@

16 ' 64

<a= Earnings per common s&are is computed by dividing net income less preferred dividends by t&e %eig&ted average of common s&ares outstanding. <b= A comple capital structure e ists %&en a corporation &as convertible securities> options> %arrants> or ot&er rig&ts t&at upon conversion or e ercise could dilute earnings per s&are. <c= 1asic earnings per s&are is earnings per s&are computed based on t&e common s&ares outstanding during t&e period. <d= /iluted earnings per s&are is earnings per s&are computed based on common stoc! and all potentially dilutive common s&ares t&at %ere outstanding during t&e period.

EA& 16'161LEarnings per s&are. ,antana #orporation &as 4++>+++ s&ares of common stoc! outstanding t&roug&out 2+1+. )n addition> t&e corporation &as ">+++> 2+.year> 'H bonds issued at par in 2++(. Eac& G1>+++ bond is convertible into 2+ s&ares of common stoc! after */23/11. /uring t&e year 2+1+> t&e corporation earned G$++>+++ after deducting all e penses. T&e ta rate %as 3+H. Instru$tions #ompute t&e proper earnings per s&are for 2+1+. Solution 16'161 0et income G$++>+++ Earnings per s&are? LLLLLLLLL @ LLLL @ G1."+ Cutstanding s&ares 4++>+++ 0et income Q )nterest after ta es Earnings per s&are assuming bond conversion? LLLLLLLLLLLLLLL Assumed outstanding s&ares G$++>+++ Q G24">+++ <G3"+>+++ R .' @ G24">+++=P LLLLLLLLLL @ G1.$* 4++>+++ Q 1++>+++ T&erefore t&e bonds are antidilutive> and earnings per common s&are outstanding of G1."+ s&ould be reported.

16 ' 66 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition Solution 16'161 <#ont.= 0ote t&at t&e convertible security is antidilutive? 1ond interest after ta es G24">+++ LLLLLLLLLLLLL @ LLLL @ G2.4" Assumed incremental s&ares 1++>+++

EA& 16'163L/iluted earnings per s&are. /unbar #ompany &ad 4++>+++ s&ares of common stoc! outstanding during t&e year 2+11. )n addition> at /ecember 31> 2+11> *+>+++ s&ares %ere issuable upon e ercise of e ecutive stoc! options %&ic& re2uire a G4+ cas& payment upon e ercise <options granted in 2++*=. T&e average mar!et price during 2+11 %as G"+. Instru$tions #ompute t&e number of s&ares to be used in determining diluted earnings per s&are for 2+11. Solution 16'163 ,&ares outstanding Add? Assumed issuance /educt? -roceeds/Average mar!et price <G3>$++>+++ T G"+= 0umber of s&ares 4++>+++ *+>+++ 4*+>+++ <'2>+++= 41(>+++

>EA& 16'164L,toc! appreciation rig&ts. Cn Ianuary 1> 2++*> Crr #o. establis&ed a stoc! appreciation rig&ts plan for its e ecutives. T&ey could receive cas& at any time during t&e ne t four years e2ual to t&e difference bet%een t&e mar!et price of t&e common stoc! and a preestablis&ed price of G1$ on 3++>+++ ,ARs. T&e mar!et price is as follo%s? 12/31/+*LG21P 12/31/1+LG1(P 12/31/11LG1*P 12/31/12LG2+. Cn /ecember 31> 2+11> "+>+++ ,ARs are e ercised> and t&e remaining ,ARs are e ercised on /ecember 31> 2+12. Instru$tions <a= -repare a sc&edule t&at s&o%s t&e amount of compensation e pense for eac& of t&e four years starting %it& 2++*. <b= -repare t&e 9ournal entry at 12/31/1+ to record compensation e pense. <c= -repare t&e 9ournal entry at 12/31/12 to record t&e e ercise of t&e remaining ,ARs.

/ilutive ,ecurities and Earnings per ,&are >Solution 16'164 <a= 3ar!et -rice G21 1( 1* 2+ ,c&edule of #ompensation E pense 3++>+++ ,ARs ,et -rice G1$ 1$ 1$ 1$ Malue of ,ARs G1>"++>+++ $++>+++ *++>+++ 1>+++>+++ <G4 R 2"+>+++= -ercent Accrued 2"H "+H '"H 1++H Accrued to /ate G3'">+++ <'">+++= 3++>+++ 3'">+++ $'">+++ 32">+++ 1>+++>+++ '">+++

16 ' 68

/ate 12/31/+* 12/31/1+ 12/31/11 12/31/12

E pense G3'">+++ <'">+++= 3'">+++ 32">+++

<b= Jiability 6nder ,toc! Appreciation -lan........................................ #ompensation E pense.................................................... <c=

'">+++ 1>+++>+++

Jiability 6nder ,toc! Appreciation -lan........................................ 1>+++>+++ #as&.................................................................................

PR+-LE*S
Pr& 16'166L#onvertible bonds and stoc! %arrants. For eac& of t&e unrelated transactions described belo%> present t&e entry<ies= re2uired to record t&e bond transactions. 1. Cn August 1> 2+11> Jane #orporation called its 1+H convertible bonds for conversion. T&e G(>+++>+++ par bonds %ere converted into 32+>+++ s&ares of G2+ par common stoc!. Cn August 1> t&ere %as G'++>+++ of unamorti5ed premium applicable to t&e bonds. T&e fair mar!et value of t&e common stoc! %as G2+ per s&are. )gnore all interest payments. 2. -ac!ard> )nc. decides to issue convertible bonds instead of common stoc!. T&e company issues 1+H convertible bonds> par G3>+++>+++> at *'. T&e investment ban!er indicates t&at if t&e bonds &ad not been convertible t&ey %ould &ave sold at *4. 3. 8ome5 #ompany issues G">+++>+++ of bonds %it& a coupon rate of (H. To &elp t&e sale> detac&able stoc! %arrants are issued at t&e rate of ten %arrants for eac& G1>+++ bond sold. )t is estimated t&at t&e value of t&e bonds %it&out t&e %arrants is G4>*3">+++ and t&e value of t&e %arrants is G31">+++. T&e bonds %it& t&e %arrants sold at 1+1. Solution 16'166 1. 1onds -ayable................................................................................ (>+++>+++ -remium on 1onds -ayable............................................................ '++>+++ #ommon ,toc!.................................................................... -aid.in #apital in E cess of -ar...........................................

$>4++>+++ 2>3++>+++

16 ' 66 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition Solution 16'166 <#ont.= 2. #as&................................................................................................ 2>*1+>+++ /iscount on 1onds -ayable............................................................ *+>+++ 1onds -ayable..................................................................... 3. #as&................................................................................................ ">+"+>+++ /iscount on 1onds -ayable............................................................ 2"3>+++ 1onds -ayable..................................................................... -aid.in #apitalL,toc! :arrants.......................................... <G31">+++ T G">2"+>+++ R G">+"+>+++ @ G3+3>+++=

3>+++>+++

">+++>+++ 3+3>+++

Pr& 16'168LEarnings per s&are. #olson #orp. &ad G"++>+++ net income in 2+11. Cn Ianuary 1> 2++' t&ere %ere 2++>+++ s&ares of common stoc! outstanding. Cn April 1> 2+>+++ s&ares %ere issued and on ,eptember 1> Adcoc! boug&t 3+>+++ s&ares of treasury stoc!. T&ere are 3+>+++ options to buy common stoc! at G4+ a s&are outstanding. T&e mar!et price of t&e common stoc! averaged G"+ during 2+11. T&e ta rate is 4+H. /uring 2+11> t&ere %ere 4+>+++ s&ares of convertible preferred stoc! outstanding. T&e preferred is G1++ par> pays G3."+ a year dividend> and is convertible into t&ree s&ares of common stoc!. #olson issued G2>+++>+++ of (H convertible bonds at face value during 2+1+. Eac& G1>+++ bond is convertible into 3+ s&ares of common stoc!. Instru$tions #ompute diluted earnings per s&are for 2+11. #omplete t&e sc&edule and s&o% all computations. ,ecurity 0et )ncome Ad9ust. ment Ad9usted 0et )ncome ,&ares Ad9ust. ment Ad9usted ,&ares E-,

Solution 16'168 ,ecurity

#om. ,toc! Cptions 1onds -referred
a

0et )ncome
G"++>+++ 3$+>+++ 4"$>+++

Ad9ust. ment
G<14+>+++= *$>+++c 14+>+++

Ad9usted 0et )ncome

G3$+>+++ 3$+>+++ 4"$>+++ "*$>+++

,&ares
2++>+++ 2+">+++ 211>+++ 2'1>+++

Ad9ust. ment
">+++ $>+++b $+>+++ 12+>+++
a

Ad9usted ,&ares
2+">+++ 211>+++ 2'1>+++ 3*1>+++

E-,
G1.'$ 1.'1 1.$( 1."2

2+>+++ R 3/4 @ 3+>+++ R 1/3 @

1">+++ <1+>+++= ">+++ ,A

/ilutive ,ecurities and Earnings per ,&are Solution 16'168 <#ont.=

b

16 ' 6<

3+>+++ G1>2++>+++ T G"+ @ <24>+++= $>+++ ,A

c

<or= U<"+ S 4+= T "+V R 3+>+++ @ $>+++ ,A G*$>+++ LLLL @ G1.$+ $+>+++ G14+>+++ LLLL @ G1.1' 12+>+++

G2>+++>+++ R .+( R .$ @ G*$>+++

Pr& 16'166L1asic and diluted E-,. Assume t&at t&e follo%ing data relative to Kane #ompany for 2+1+ is available? 0et )ncome Transactions in #ommon ,&ares Ian. 1> 2+1+> 1eginning number 3ar. 1> 2+1+> -urc&ase of treasury s&ares Iune 1> 2+1+> ,toc! split 2.1 0ov. 1> 2+1+> )ssuance of s&ares (H #umulative #onvertible -referred ,toc! ,old at par> convertible into 2++>+++ s&ares of common <ad9usted for split=. ,toc! Cptions E ercisable at t&e option price of G2" per s&are. Average mar!et price in 2+1+> G3+ <mar!et price and option price ad9usted for split=. #&ange <$+>+++= $4+>+++ 12+>+++ G2>1++>+++ #umulative '++>+++ $4+>+++ 1>2(+>+++ 1>4++>+++

G1>+++>+++

$+>+++ s&ares

Instru$tions <a= #ompute t&e basic earnings per s&are for 2+1+. <Round to t&e nearest penny.= <b= #ompute t&e diluted earnings per s&are for 2+1+. <Round to t&e nearest penny.=

Solution 16'166 #omputation of %eig&ted average s&ares outstanding during t&e year? Ianuary 1 3arc& 1 Iune 1 0ovember 1 Cutstanding Repurc&ase <"/$ R $+>+++= 2.for.1 split )ssued <1/$ R 12+>+++= '++>+++ <"+>+++= $"+>+++ 1>3++>+++ 2+>+++ 1>32+>+++

16 ' 6= Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition Solution 16'166 <#ont.= Additional s&ares for purposes of diluted earnings per s&are? -otentially dilutive securities (H convertible preferred stoc! ,toc! options -roceeds from e ercise of $+>+++ options <$+>+++ R G2"= ,&ares issued upon e ercise of options Jess? treasury stoc! purc&asable %it& proceeds <G1>"++>+++ T G3+= /ilutive securitiesLadditional s&ares G2>1++>+++ S G(+>+++ <a= 1asic earnings per s&are? LLLLLLLLLL @ G1."3 1>32+>+++ <b= /iluted earnings per s&are? G2>1++>+++ LLLSLLLLLL @ G1.3' 1>32+>+++ Q 21+>+++ 2++>+++ G1>"++>+++ $+>+++ "+>+++ 1+>+++ 21+>+++

Pr& 16'16<L1asic and diluted E-,. -resented belo% is information related to ,tarr #ompany. 1. 0et )ncome Uincluding an e traordinary gain <net of ta = of G'+>+++V 2. #apital ,tructure a. #umulative (H preferred stoc!> G1++ par> $>+++ s&ares issued and outstanding b. G1+ par common stoc!> '4>+++ s&ares outstanding on Ianuary 1. Cn April 1> 4+>+++ s&ares %ere issued for cas&. Cn Cctober 1> 1$>+++ s&ares %ere purc&ased and retired. c. Cn Ianuary 2 of t&e current year> ,tarr purc&ased Cslo #orporation. Cne of t&e terms of t&e purc&ase %as t&at if ,tarrFs net income for t&e follo%ing year is G2>4++>+++ or more> "+>+++ additional s&ares %ould be issued to Cslo stoc!&olders ne t year. 3. Ct&er )nformation a. Average mar!et price per s&are of common stoc! during entire year b. )ncome ta rate Instru$tions #ompute earnings per s&are for t&e current year. G3+ 3+H G23+>+++

G$++>+++

G1>+++>+++

/ilutive ,ecurities and Earnings per ,&are Solution 16'16< )ncome before e traordinary item Jess preferred dividends Available to common before e traordinary item Add e traordinary gain <net of ta = )ncome available to common :eig&ted average s&ares outstanding? Ianuary 1 3/4 R 4+>+++ 1/4 R 1$>+++ 1asic earnings per s&are? )ncome before e traordinary item E traordinary item <net of ta = 0et income #alculations? <a= G112>+++ LLLL 1++>+++ <b= G'+>+++ LLLL 1++>+++ <c= G1(2>+++ LLLL 1++>+++ G1$+>+++ <4(>+++= 112>+++ '+>+++ G1(2>+++ '4>+++ 3+>+++ <4>+++= 1++>+++ G1.12 .'+ G1.(2 <a= <b= <c=

16 ' 6?

/iluted earnings per s&are? )ncome before e traordinary item E traordinary item <net of ta = 0et )ncome #alculations? <a= G112>+++ LLLLLLLL 1++>+++ Q "+>+++ <b= G'+>+++ LLLL 1"+>+++

G .'" .4$ G1.21

<a= <b= <c= G1(2>+++ LLLLLLLL 1++>+++ Q "+>+++

<c=

Pr& 16'16=L1asic and diluted E-,. T&e follo%ing information %as ta!en from t&e boo!s and records of Jud%ic!> )nc.? 1. 0et income 2. #apital structure? a. #onvertible $H bonds. Eac& of t&e 3++> G1>+++ bonds is convertible into "+ s&ares of common stoc! at t&e present date and for t&e ne t 1+ years. b. G1+ par common stoc!> 2++>+++ s&ares issued and outstanding during t&e entire year. c. ,toc! %arrants outstanding to buy 1$>+++ s&ares of common stoc! at G2+ per s&are. G 2(+>+++

3++>+++ 2>+++>+++

16 ' 8@ Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition Pr& 16'16= <#ont.= 3. Ct&er information? a. 1onds converted during t&e year b. )ncome ta rate c. #onvertible debt %as outstanding t&e entire year d. Average mar!et price per s&are of common stoc! during t&e year e. :arrants %ere outstanding t&e entire year f. :arrants e ercised during t&e year Instru$tions #ompute basic and diluted earnings per s&are. Solution 16'16= 1asic E-, @ G2(+>+++ T 2++>+++ s&. @ G1.4+
0et ,ecurity )ncome #om. ,toc! G2(+>+++ :arrants 2(+>+++ #onv. 1onds 2(+>+++ Ad9ust. ment L L G12>$++2 Ad9usted 0et )ncome G2(+>+++ 2(+>+++ 2*2>$++ ,&ares 2++>+++ 2++>+++ 2+$>+++ Ad9ust. ment L $>+++1 1">+++ Ad9usted ,&ares 2++>+++ 2+$>+++ 221>+++ /iluted E-, G1.4+ 1.3$ 1.32

0one 3+H G32 0one

1$>+++
1

32+>+++ LLLL @ <1+>+++= 32 $>+++

,A G12>$++ LLLL @ G.(4 1">+++

G3++>+++ .+$ .' @ G12>$++

/ilutive ,ecurities and Earnings per ,&are

16 ' 81

IFRS :UESTI+NS
TrueBFalse 1. i8AA- and 6.,. 8AA- &ave significant differences in t&e reporting of securities %it& c&aracteristics of debt and e2uity> suc& as convertible debt. 2. 6nder i8AA-> all of t&e proceeds of convertible debt are recorded as long.term debt. 3. 6nder i8AA-> convertible bonds are AbifurcatedB Lseparated into t&e e2uity component <t&e value of t&e conversion option= of t&e bond issue and t&e debt component. 4. 6nder bot& 6.,. 8AA- and i8AA-> t&e calculation of basic and diluted earnings per s&are is identical. ". 6nder i8AA- recording for t&e issuance of 1onds -ayable> t&e /iscount on 1onds -ayable and t&e -aid.in #apital.#onvertible 1onds could be utili5ed. Ans)ers to TrueBFalseC 1. True 2. False 3. True 4. False ". True *ulti%le C!oi$eC 1. :it& regard to recogni5ing stoc!.based compensation a. i8AA- and 6.,. 8AA- follo% t&e same model. b. i8AA- and 6.,. 8AA- standards are undergoing ma9or reform on valuation issues. c. it &as been agreed t&at t&ese standards %ill not be merged due to t&e differences in currencies. d. t&e reform of 6.,. 8AA- standards %ill not be addressed until i8AA- standards &ave been finali5ed. 2. T&e primary i8AA- reporting standards related to financial instruments> including dilutive securities> is a. )A, 33. b. )A, 3*. c. )FR, 2. d. )A, 2.

16 ' 83 Test -an. #or Inter/e"iate A$$ountin0, T!irteent! E"ition 3. :&en G">+++>+++ in convertible bonds are issued at par %it& G(++>+++ in value of t&e e2uity option embedded in t&e bond> t&e i8AA- 9ournal entry %ill include a debit of a. G(++>+++ to -aid.in #apital L #onvertible 1onds and a credit to -remium on 1onds -ayable. b. G(++>+++ to -remium on 1onds -ayable and a credit to -aid.in #apital L #onvertible 1onds. c. G(++>+++ to /iscount on 1onds -ayable and a credit to -aid.in #apital L #onvertible 1onds. d. G4>2++>+++ to #as& along %it& a debit of G(++>+++ to /iscount on 1onds -ayable and a credit to 1onds -ayable and a credit to -aid.in #apital L #onvertible 1onds. 4. :it& regard to contracts t&at can be settled in eit&er cas& or s&ares a. i8AA- re2uires t&at s&are settlement must be used. b. i8AA- gives companies a c&oice of eit&er cas& or s&ares. c. 6.,. 8AA- re2uires t&at s&are settlement must be used. d. t&e FA,1 pro9ect proposes t&at t&e )A,1 adopt t&e 6.,. 8AA- approac&> re2uiring t&at s&are settlement must be used. ". :it& regard to recogni5ing stoc!.based compensation under i8AA- t&e fair value of s&ares and options a%arded to employees is recogni5ed a. in t&e first fiscal period of t&e employees7 service. b. over t&e fiscal periods to %&ic& t&e employees7 services relate. c.in t&e last fiscal period of t&e employees7 service %&en t&e total value can be calculated. d. after last fiscal period of t&e employees7 service %&en t&e total value can be calculated. Ans)ers to *ulti%le C!oi$eC 1. a 2. b 3. c 4. a ". b ,&ort Ans%er 1. 1riefly describe some of t&e similarities and differences bet%een 6.,. 8AA- and i8AA%it& respect to t&e accounting for dilutive securities> stoc!.based compensation> and earnings per s&are.

/ilutive ,ecurities and Earnings per ,&are

16 ' 84

1. i8AA- and 6.,. 8AA- are substantially t&e same in t&e accounting for dilutive securities> stoc!.based compensation> and earnings per s&are. For e ample> bot& i8AA- and 6.,. 8AA- follo% t&e same model for recogni5ing stoc!.based compensation. T&at is> t&e fair value of s&ares and options a%arded to employees is recogni5ed over t&e period to %&ic& t&e employees7 services relate. T&e main differences concern <1= t&e accounting for convertible debt. 6nder 6.,. 8AAall of t&e proceeds of convertible debt are recorded as long term debt. 6nder i8AA-> convertible bonds are AbifurcatedB> or separated into t&e e2uity component S t&e value of t&e conversion option S of t&e bond issue and t&e debt componentP <2= a minor difference in E-, reporting S t&e FA,1 allo%s companies to rebut t&e presumption t&at contracts t&at can be settled in eit&er cas& or s&ares %ill be settled in s&ares. i8AA- re2uires t&at s&are settlement must be used in t&is situationP <3= ot&er E-, differences relate to t&e treasury stoc! met&od and &o% t&e proceeds from e tinguis&ment of a liability s&ould be accounted for and &o% to ma!e t&e computation for t&e %eig&ted.average of contingently issuable s&ares. 2. 1riefly discuss t&e convergence efforts t&at are under %ay by t&e )A,1 and FA,1 in t&e area of dilutive securities and earnings per s&are. 2. T&e FA,1 &as been %or!ing on a standard t&at %ill li!ely converge to i8AA- in t&e accounting for convertible debt. ,imilar to t&e FA,1> t&e )A,1 is e amining t&e classification of &ybrid securitiesP t&e )A,1 is see!ing comment on a discussion document similar to t&e FA,1 -reliminary Mie%s document? AFinancial Instruments with Characteristics of Equity A. )t is &oped t&at t&e boards %ill develop a converged standard in t&is area. :&ile 6.,. 8AA- and i8AA- are similar as to t&e presentation of E-,> t&e 1oards &ave been %or!ing toget&er to resolve remaining differences related to earnings per s&are computations.