chapter 19 quiz

chapter 19 quiz1. FX Services granted 15 million of its $1 par common shares to executives, subject to forfeiture if

employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

A. $0.

B. $15 million.

C. $40 million.

D. $120 million.

2. The compensation associated with restricted stock under a stock award plan is:

A. The book value of an unrestricted share of the same stock times the number of shares.B. The estimated fair value of a share of similar stock times the number of shares.

C. Allocated to expense over the service period which usually is the vesting period.

D. The book value of a share of similar stock times the number of shares.

On January 1, 2013, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2015, and expire on January 1, 2019. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant.

3. What amount should M recognize as compensation expense for 2013?

A. $30,000.

B. $60,000.

C. $120,000.D. $150,000.

4. If unexpected turnover in 2014 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2014?

A. $30,000.

B. $60,000.

C. $120,000.D. $150,000.

5. Under its executive stock option plan, N Corporation granted options on January 1, 2013, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2015 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?

A. $0.

B. $20 million.C. $60 million.D. $90 million.

6. On January 1, 2013, Red Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is compensation expense for 2013?

A. $0.

B. $200,000.

C. $400,000.

D. $1,200,000.

Wilson Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2013, 20 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2017. They cannot be exercised before that date and will expire on December 31, 2019. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $40 per option. Ignore income tax.

7. On March 1, 2017, when the market price of Wilson's stock was $14 per share, 3 million of the options were exercised. The journal entry to record this would include:

A. A debit to paid-in capital—stock options for $42 million.

B. A credit to paid-in capital—excess of par for $255 million.C. A credit to common stock for $75 million.

D. All of these are correct.

Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2013, options were granted for 60,000 $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2016, and expire December 31, 2017. Each option has a fair value of $1 based on an option pricing model.

8. Which is the correct entry to record the exercise of 90% the options on April 15, 2016, when the market price of the stock was $8?

A.

B.

C.

D.


9. What is the total compensation cost for this plan?

A. $0.

B. $60,000.

C. $240,000.D. $300,000.

10. Which is the correct entry to record compensation expense for the year 2013?

A.

B.

C.

D.

11. What is the entry to record the expiration of 10% of the options on December 31, 2017?

A.

B.

C.

D.

12. A simple capital structure might include:

A. Stock rights.

B. Convertible bonds.

C. Nonconvertible preferred stock.D. Stock purchase warrants.

13. Nonconvertible bonds affect the calculation of:

A. Basic earnings per share.

B. Diluted earnings per share.C. Both A and B.

D. None of these is correct.

During 2013, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2013.

On January 1, 2012, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.

Angel's net income for the year ended December 31, 2013, was $6 million. The income tax rate is 20%.

14. What is Angel's basic earnings per share for 2013, rounded to the nearest cent?

A. $5.29.

B. $5.57.

C. $6.50.


15. What will Angel report as diluted earnings per share for 2013, rounded to the nearest cent?

A. $6.43.

B. $6.25.

C. $6.22.


16. The result of a stock split is:

A. A larger number of more valuable shares.B. An increase in corporate assets.

C. An increase in shareholders' equity.

D. A larger number of less valuable shares.

17. The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to buy treasury stock at:

A. The average market price for the reporting period.B. The market price at the end of the period.

C. The purchase price stated on the options.

D. The stock's par value.

18. The following information pertains to J Company's outstanding stock for 2013:

What is the number of shares J should use to calculate 2013 basic earnings per share?

A. 20,000.B. 22,500.C. 25,000.D. 27,000.

During 2013, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2013.

Falwell's net income for the year ended December 31, 2013, was $2.5 million. The income tax rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2013.

19. What is Falwell's basic earnings per share for 2013, rounded to the nearest cent?

A. $3.14.

B. $4.40.

C. $5.00.


20. What is Falwell's diluted earnings per share for 2013, rounded to the nearest cent?

A. $3.14.

B. $4.90.

C. $4.34.

D. Cannot determine from the given information.

chapter 19 quiz Key

1. FX Services granted 15 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?

A. $0.

B. $15 million.

C. $40 million.

D. $120 million.

The $120 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $40 million each year.

AACSB: Analytic

AICPA FN: MeasurementBlooms: Apply

Difficulty: 1 EasyLearning Objective: 19-01 Explain and implement the accounting for stock award plans.

Spiceland - Chapter 19 #11Topic: Stock award plans

2. The compensation associated with restricted stock under a stock award plan is:

A. The book value of an unrestricted share of the same stock times the number of shares.B. The estimated fair value of a share of similar stock times the number of shares.

C. Allocated to expense over the service period which usually is the vesting period.

D. The book value of a share of similar stock times the number of shares.

AACSB: Reflective Thinking

AICPA FN: MeasurementBlooms: Remember

Difficulty: 1 EasyLearning Objective: 19-01 Explain and implement the accounting for stock award plans.

Spiceland - Chapter 19 #12Topic: Stock award plans

On January 1, 2013, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2015, and expire on January 1, 2019. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant.

Spiceland - Chapter 19

3. What amount should M recognize as compensation expense for 2013?

A. $30,000.

B. $60,000.

C. $120,000.D. $150,000.

(90,000 5 = $450,000; $450,000/3 yrs. = $150,000)

AACSB: Analytic


Difficulty: 1 EasyLearning Objective: 19-02 Explain and implement the accounting for stock options.

Spiceland - Chapter 19 #14Topic: Stock option plans

4. If unexpected turnover in 2014 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2014?

A. $30,000.

B. $60,000.

C. $120,000.D. $150,000.

(90,000 5 = $450,000; $450,000 90% = $405,000 2/3 = $270,000; $270,000 - 150,000 = $120,000)

AACSB: Analytic


Difficulty: 2 MediumLearning Objective: 19-02 Explain and implement the accounting for stock options.


5. Under its executive stock option plan, N Corporation granted options on January 1, 2013, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December 31, 2015 (the vesting date). The exercise price is the market price of the shares on the date of grant, $18 per share. The fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No forfeitures are anticipated. Ignoring taxes, what is the effect on earnings in the year after the options are granted to executives?

A. $0.

B. $20 million.C. $60 million.D. $90 million.

The $60 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $20 million each year.

AACSB: Analytic




6. On January 1, 2013, Red Inc. issued stock options for 200,000 shares to a division manager. The options have an estimated fair value of $6 each. To provide additional incentive for managerial achievement, the options are not exercisable unless divisional revenue increases by 6% in three years. Red initially estimates that it is probable the goal will be achieved. Ignoring taxes, what is compensation expense for 2013?

A. $0.

B. $200,000.

C. $400,000.

D. $1,200,000.

The estimate of the total compensation would be:200,000 $6 = $1,200,000One-third of that amount, or $400,000, will be recorded in each of the three years.

AACSB: Analytic



Spiceland - Chapter 19 #20Topic: Stock option plans: performance or market conditions

Wilson Inc. developed a business strategy that uses stock options as a major compensation incentive for its top executives. On January 1, 2013, 20 million options were granted, each giving the executive owning them the right to acquire five $1 par common shares. The exercise price is the market price on the grant date—$10 per share. Options vest on January 1, 2017. They cannot be exercised before that date and will expire on December 31, 2019. The fair value of the 20 million options, estimated by an appropriate option pricing model, is $40 per option. Ignore income tax.


7. On March 1, 2017, when the market price of Wilson's stock was $14 per share, 3 million of the options were exercised. The journal entry to record this would include:

A. A debit to paid-in capital—stock options for $42 million.

B. A credit to paid-in capital—excess of par for $255 million.C. A credit to common stock for $75 million.

D. All of these are correct.

The computation is as follows:

Cash: 3 million options 5 shares/option $10/share = $150 millionPaid-in capital-stock options: 3 million options $40/option) = $120 millionCommon stock: 15 million shares $1 par/share = $15 millionPaid-in capital in excess of par (to balance) = $255 million

AACSB: Analytic

AICPA FN: MeasurementBlooms: Analyze

Difficulty: 3 HardLearning Objective: 19-02 Explain and implement the accounting for stock options.




8. Which is the correct entry to record the exercise of 90% the options on April 15, 2016, when the market price of the stock was $8?

A.

B.

C.

D.

AACSB: Analytic


Difficulty: 3 HardLearning Objective: 19-02 Explain and implement the accounting for stock options.




9. What is the total compensation cost for this plan?

A. $0.

B. $60,000.

C. $240,000.D. $300,000.

60,000 $1 = $60,000

AACSB: Analytic




10. Which is the correct entry to record compensation expense for the year 2013?

A.

B.

C.

D.

(60,000 $1)/3 = $20,000

AACSB: Analytic




11. What is the entry to record the expiration of 10% of the options on December 31, 2017?

A.

B.

C.

D.

60,000 $1 10% = $6,000When unexercised options expire, the paid-in capital is renamed.

AACSB: Analytic




12. A simple capital structure might include:

A. Stock rights.

B. Convertible bonds.

C. Nonconvertible preferred stock.D. Stock purchase warrants.


AICPA BB: Resource managementBlooms: Understand

Difficulty: 1 EasyLearning Objective: 19-04 Distinguish between a simple and a complex capital structure.

Spiceland - Chapter 19 #48Topic: Capital structure

13. Nonconvertible bonds affect the calculation of:

A. Basic earnings per share.

B. Diluted earnings per share.C. Both A and B.




Difficulty: 2 MediumLearning Objective: 19-04 Distinguish between a simple and a complex capital structure.

Spiceland - Chapter 19 #52Topic: Capital structure

During 2013, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2013.

On January 1, 2012, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares.

Angel's net income for the year ended December 31, 2013, was $6 million. The income tax rate is 20%.


14. What is Angel's basic earnings per share for 2013, rounded to the nearest cent?

A. $5.29.

B. $5.57.

C. $6.50.


The basic EPS is $6.50.The computation is as follows:

AACSB: Analytic


Difficulty: 2 MediumLearning Objective: 19-04 Distinguish between a simple and a complex capital structure.

Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.Spiceland - Chapter 19 #53

Topic: Basic EPSTopic: Earnings available to common shareholders

15. What will Angel report as diluted earnings per share for 2013, rounded to the nearest cent?

A. $6.43.

B. $6.25.

C. $6.22.


* (2,000,000 5%) = $100,000 in interest; $100,000 20% = $20,000 in tax savingsSo, after-tax interest cost = $80,000.** Because this increases EPS, it is antidilutive. Only $6.50 basic EPS will be reported.

AACSB: Analytic


Difficulty: 3 HardLearning Objective: 19-10 Determine whether potential common shares are antidilutive.

Spiceland - Chapter 19 #54Topic: Antidilutive securities

16. The result of a stock split is:

A. A larger number of more valuable shares.B. An increase in corporate assets.

C. An increase in shareholders' equity.

D. A larger number of less valuable shares.



Difficulty: 1 EasyLearning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares; a stock dividend or stock split; and the reacquisition of shares.

Spiceland - Chapter 19 #61Topic: Basic EPS: stock dividends, stock splits, reacquired shares

17. The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to buy treasury stock at:

A. The average market price for the reporting period.B. The market price at the end of the period.

C. The purchase price stated on the options.

D. The stock's par value.



Difficulty: 1 EasyLearning Objective: 19-08 Describe how options; rights; and warrants are incorporated in the calculation of EPS.

Spiceland - Chapter 19 #64Topic: Diluted EPS: options, warrants, rights

18. The following information pertains to J Company's outstanding stock for 2013:

What is the number of shares J should use to calculate 2013 basic earnings per share?

A. 20,000.B. 22,500.C. 25,000.D. 27,000.

The key point is that the stock split is retroactive to the beginning of the year.10,000 (2.0) + 5,000 (6/12) = 22,500

AACSB: Analytic


Difficulty: 2 MediumLearning Objective: 19-05 Describe what is meant by the weighted-average number of common shares.

Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares; a stock dividend or stock split; and the reacquisition of shares.Spiceland - Chapter 19 #67

Topic: Basic EPS: new sharesTopic: Basic EPS: stock dividends, stock splits, reacquired shares

Topic: Weighted average shares

During 2013, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not declare or pay any dividends during 2013.

Falwell's net income for the year ended December 31, 2013, was $2.5 million. The income tax rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options vest after one year. The market price of the common stock averaged $30 per share during 2013.


19. What is Falwell's basic earnings per share for 2013, rounded to the nearest cent?

A. $3.14.

B. $4.40.

C. $5.00.


AACSB: Analytic


Difficulty: 2 MediumLearning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.

Spiceland - Chapter 19 #74Topic: Basic EPS

Topic: Earnings available to common shareholders

20. What is Falwell's diluted earnings per share for 2013, rounded to the nearest cent?

A. $3.14.

B. $4.90.

C. $4.34.

D. Cannot determine from the given information.

The computation ($ in 000s) is as follows:

* 10,000 options 20 shares/option = 200,000 shares;Proceeds = 200,000 $29 = $5,800,000$5,800,000/$30 per share = 193,333 shares of treasury stockNet shares added = 200,000 - 193,333 = 6,667

AACSB: Analytic


Difficulty: 3 HardLearning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS.

Learning Objective: 19-08 Describe how options; rights; and warrants are incorporated in the calculation of EPS.Spiceland - Chapter 19 #75

Topic: Diluted EPS: options, warrants, rightsTopic: Earnings available to common shareholders

chapter 19 quiz Summary

Category # of Questio ns

AACSB: Analytic 15

AACSB: Reflective Thinking 5

AICPA BB: Resource management 1

AICPA FN: Measurement 19

Blooms: Analyze 4

Blooms: Apply 11

Blooms: Remember 4

Blooms: Understand 1

Difficulty: 1 Easy 8

Difficulty: 2 Medium 8

Difficulty: 3 Hard 4

Learning Objective: 19-01 Explain and implement the accounting for stock award plans. 2

Learning Objective: 19-02 Explain and implement the accounting for stock options. 9

Learning Objective: 19-04 Distinguish between a simple and a complex capital structure. 3

Learning Objective: 19-05 Describe what is meant by the weighted-average number of common shares. 1

Learning Objective: 19-06 Differentiate the effect on EPS of the sale of new shares; a stock dividend or stock split; and the reacquisition of shares.

2

Learning Objective: 19-07 Describe how preferred dividends affect the calculation of EPS. 3

Learning Objective: 19-08 Describe how options; rights; and warrants are incorporated in the calculation of EPS. 2

Learning Objective: 19-10 Determine whether potential common shares are antidilutive. 1

Spiceland - Chapter 19 26

Topic: Antidilutive securities 1

Topic: Basic EPS 2

Topic: Basic EPS: new shares 1

Topic: Basic EPS: stock dividends, stock splits, reacquired shares 2

Topic: Capital structure 2

Topic: Diluted EPS: options, warrants, rights 2

Topic: Earnings available to common shareholders 3

Topic: Stock award plans 2

Topic: Stock option plans 8

Topic: Stock option plans: performance or market conditions 1

Topic: Weighted average shares 1