On January 1, 2014, a company granted Mark Gotti, an employee, an option to buy

Question

On January 1, 2014, a company granted Mark Gotti, an employee, an option to buy 400 shares of the company stock for $30 per share, the option exercisable for 5 years from date of grant. Using a fair value option pricing model, total compensation expense is determined to be $3,600. Gotti exercised his option on September 1, 2014, and sold his 400 shares on December 1, 2014. Quoted market prices of the company's stock during 2014 were:

January 1                  $30 per share
September 1             $36 per share
December 1              $40 per share

The service period is for two years beginning January 1, 2014. As a result of the option granted to Gotti, using the fair value method, the company should recognize compensation expense for 2014 on its books in the amount of

$3,600.

$0.

none of these answers are correct

$1,600.

$4,000.

2

A company had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $500,000 of 10% convertible bonds outstanding during 2015. The preferred stock is convertible into 40,000 shares of common stock. During 2015, the company paid dividends of $.45 per share on the common stock and $1.50 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2015 was $300,000 and the income tax rate was 30%.

Diluted earnings per share for 2015 is (rounded to the nearest penny)

$1.28

$1.16

none of these answers are correct

$1.14

$1.33

3

A company had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 5% convertible bonds outstanding during 2015. The preferred stock is convertible into 40,000 shares of common stock. During 2015, the company paid dividends of $.60 per share on the common stock and $2 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2015 was $400,000 and the income tax rate was 30%.

Diluted earnings per share for 2015 is (rounded to the nearest penny)

$1.39

$1.67

$1.41

none of these answers are correct

$1.53

4

Accountants must handle the accounting for debt issued with warrants differently depending on the situation. For example, proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when

the warrants issued with the debt securities are nondetachable.

the allocation would result in a discount on the debt security.

exercise of the warrants within the next few fiscal periods seems remote.

none of these answers are correct

the market value of the warrants is not readily available.

5

A Company issues stock appreciation rights to its key executives. With respect to the accounting for stock appreciation rights, the measurement date for computing compensation is the date

none of these answers are correct

of record.

the stock's price reaches a predetermined amount.

the rights mature.

of exercise.

Explanation / Answer

1) As a result of the option granted to Gotti, using the fair value method, the company should recognize compensation expense for 2014 on its books in the amount of 3600.

2)

Diluted earnings per share for 2015 =(net income for 2015+after tax interest on convertible Bond+Convertible preferred Dividends)/(common shares+All dilutive potential stock)

after tax interest on convertible Bond=10%*500,000 *(1-.30)=35000

Convertible preferred Dividends=1.5*20,000 =30,000

All dilutive potential stock=Total Convertible bonds*shares convertible +no of shares convertible preferred stock convertible=(500,000 /1000)*45 + 40,000 =62500

Thus Diluted earnings per share for 2015 =(300,000 +35000+30,000)/(200,000 +62500)=365000/262500= $1.39

Thus Diluted earnings per share for 2015 is  $1.39.Thus none of these answers are correct.

3) Diluted earnings per share for 2015 =(net income for 2015+after tax interest on convertible Bond+Convertible preferred Dividends)/(common shares+All dilutive potential stock)

after tax interest on convertible Bond=5%*1,000,000*(1-.30)=35000

Convertible preferred Dividends=2*20,000 =40,000

All dilutive potential stock=Total Convertible bonds*shares convertible +no of shares convertible preferred stock convertible=(1,000,000/1000)*45 + 40,000 =85000

Thus Diluted earnings per share for 2015 =(400,000 +35000+40,000)/(200,000 +85000)=475000/285000= $1.67

Thus Diluted earnings per share for 2015 is  $1.67.

4)proceeds from an issue of debt securities having stock warrants should not be allocated between debt and equity features when the warrants issued with the debt securities are nondetachable.

5)of exercise

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