CHAPTER 15 Financial Reporting for Owners’ Equity
What is the weighted average number of shares to be used in the calculation of basic earnings per
share for 2018?
a. 268,500
b. 243,500
c. 248,000
d. 278,000
58. The following information has been obtained from the Mastic Corporation:
• 550,000 shares of common stock were outstanding on January 1, 2018.
• Bonds convertible into 50,000 shares of common stock were issued on July 1, 2018; the
bonds have been determined to be dilutive.
• 36,000 shares of common stock were issued on November 1, 2018.
• 24,000 shares of common stock were purchased on December 1, 2018.
What is the weighted average number of shares to be used in the calculation of diluted earnings
per share for 2018?
a. 612,000
b. 587,000
c. 604,000
d. 579,000
59. The following information has been obtained from the Myers Corporation:
• 300,000 shares of common stock were outstanding on January 1, 2018.
• 50,000 stock options were outstanding on January 1, 2018; each option allows the holder
to acquire one share of common stock for $20 per share. The average market price of
the common stock during 2018 was $25 per share.
• 48,000 shares of common stock were issued on February 1, 2018.
• 18,000 shares of common stock were purchased on August 1, 2018.
CHAPTER 15 Financial Reporting for Owners’ Equity
What is the weighted average number of shares to be used in the calculation of diluted earnings
per share for 2018?
a. 380,000
b. 326,500
c. 346,500
d. 386,500
60. The following information has been provided to you by the Smith Corporation for the year
ending December 31, 2018:
• The numerator used in the calculation of basic earnings per share was $797,000.
• Cash dividends were paid to the common shareholders.
• 8% convertible bonds with a par value of $1,000,000 were issued on July 1, 2018.
• The corporation’s marginal income tax rate is 40%.
• 6% convertible preferred stock with a par value of $800,000 were outstanding during the
entire year.
Assuming that both the bonds and preferred stock are dilutive, what is the numerator that should
be used in the calculation of diluted earnings per share?
a. $893,000
b. $869,000
c. $773,000
d. $821,000
61. The following information has been provided to you by the Rae Corporation for the year
ending December 31, 2018:
• Net income was $979,000.
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• Cash dividends totaling $120,000 were paid to the common shareholders.
• 6% convertible bonds with a par value of $2,000,000 were issued on February 1, 2018.
• The corporation’s marginal income tax rate is 40%.
• 6% convertible preferred stock with a par value of $800,000 was outstanding during the
entire year.
Assuming that both the bonds and preferred stock are dilutive, what is the numerator that should
be used in the calculation of basic earnings per share and diluted earnings per share?
Basic EPS Diluted EPS
a. $811,000 $1,051,000
b. $931,000 $1,045,000
c. $979,000 $1,147,000
d. $931,000 $1,099,000
62. Which of the following is not a reason companies use stock options as a form of employee
compensation?
a. As a means of attracting talented employees while attempting to conserve cash.
b. To ensure compliance with laws governing executive compensation.
c. To align employee’s interests with the interest of the owners.
d. To provide tax savings.
63. In the debate regarding whether stock options should be an expense, which of the following
was not a reason supporting such an expense?
a. Expensing stock options would yield more accurate earnings measurement and restore
investor confidence.
b. Expensing stock options would reduce the dilution effect caused by the issuance of excessive
grants to top executives.
c. Expensing stock options would spur risk-taking and entrepreneurship that are crucial to
innovation.
CHAPTER 15 Financial Reporting for Owners’ Equity
d. Expensing stock options would reduce the incentive managers have to pump-up short term
earnings for market price gains.
64. The exercise price for stock option plans on the grant date is
a. always higher than the market price of the underlying shares.
b. always lower than the market price of the underlying shares.
c. usually lower than the market price of the underlying shares.
d. usually equal to or higher than the market price of the underlying shares.
Use the following to answer questions 65 and 66:
REFERENCE: Ref. 15_06
On January 1, 2018, Waddle Company adopted a compensatory stock option plan and granted its
managers 10,000 options to buy shares of common stock; each option can be used to acquire a
share of common stock at a price of $25 a share. The fair value of each option was $7.50 on
January 1, 2018. The options can be converted into common stock after July 1, 2018. The
required service period is three years.
[QUESTION]
REFER TO: Ref. 15_06
65. How much compensation expense will be recorded for the year ending December 31, 2020
using the fair value approach to accounting for stock options?
a. $ 75,000
b $175,000
c. $ 50,000
d. $ 25,000
66. What is the balance in paid-in capital-stock options as of December 31, 2019 assuming that
the fair value approach to accounting for stock options is used?
a. $0
b. $25,000
c. $50,000
d. $100,000
67. Which of the following arguments was not used to support the continuation of the accounting
for stock-based compensation plans as allowed under APB Opinion No. 25?
a. Stock options do not involve a cash flow; therefore, the recording of an expense would
violate appropriate income measurement.
b. The Black-Scholes method of valuing stock options has not been widely accepted and is
arbitrary.
c. The fair value approach could jeopardize compliance with contract terms and conditions.
d. The fair value approach would increase expenses and lower net income which would result
in lower stock prices.
68. An argument raised by opponents to the FASB’s proposal that employee stock options
should be recognized as an expense was that it could
a. violate the historical cost principle.
b. violate the cost-benefit rule.
c. violate materiality concepts.
d. jeopardize compliance with contract terms and conditions.
69. SFAS No. 123 was issued as a compromise to the FASB’s original position regarding stock
options as it
a. required companies to continue following the approach used in APB No. 25.
b. required companies to measure the fair value of stock options and charge this to expense.
c. allowed companies to choose either the APB No. 25 approach or expense the fair value of
the options.
d. abandoned any reference to recognition of expense for options.
70. Stock options are granted to the employees of Young Company on March 10, 2018. The
employees must wait until March 10, 2022 to exercise the options. The four-year waiting period
is the
a. expected life of the options.
b. grant period.
c. vesting period.
d. holding period
71. According to current GAAP, the date when the terms for stock options are mutually agreed-
upon and the stock options are awarded to employees is the
a. vesting date.
b. grant date.
c. exercise date.
d. payment date.
72. Current GAAP specifies that the compensation costs for stock options are measured
a. at the grant date only.
b. at the grant date and again at the vesting date.
c. at the vesting date only.
d. at the grant date and again at the exercise date.
73. Over the vesting period for employee stock options, current GAAP requires that the entire
compensation expense be recognized
a. in the first year of the vesting period.
b. in the last year of the vesting period.
c. equally in each year of the vesting period.
d. only if the options are exercised.
74. Analysts should expect to see stock option information in
a. the auditor’s report.
b. a note to the financial statements.
c. a separate report to the SEC.
d. a separate report to shareholders.
75. Which of the following statements does not accurately reflect the financial accounting for
compensatory stock option plans?
a. Compensation expensed is allocated equally over the service (vesting) period.
b. The compensation expense is not adjusted for changes in the market value of the stock
options during the service (vesting) period.
c. The paid-in capital stock options account is credited when compensation expense is
recorded each year.
d. Total owners’ equity is increased by the par value of the common stock issued when the
options are converted.
76. Which statement below does not represent the taxation of stock option plans?
a. Incentive Stock Options (ISO) provide tax benefits to employees.
b. Nonqualified stock option plans provide tax benefits to employers.
c. Tax law does not restrict the number of options that an employee can classify as ISOs in a
given year.
d. Employers do not receive a tax deduction for ISOs.
77. Which item below is not one of the criteria used to qualify as an ISO?
a. The option is transferable.
b. The exercise price cannot be less than the fair value of the stock at the grant date.
c. The option is granted within 10 years from the date the plan is adopted.
d. The option cannot be exercised after 10 years from the date of the grant.
78. Accounting for nonqualified stock option plans results in all of the following except:
a. Nonqualified stock option accounting results in a temporary tax difference.
b. Nonqualified stock option accounting results in a deferred tax asset based on compensation
expense for the year.
c. Accounting for nonqualified stock options provides the employer a tax deduction for the
intrinsic value of the options at the date of exercise.
d. The tax deduction for the options exercised will match the amount of the GAAP
compensation expense for those options exercised.
79. The presentation of the excess tax benefits related to stock options includes all of the
following except:
a. Excess tax benefits are shown as a reduction of income tax expense.
b. Excess tax benefits are reflected in the cash from financing activities section of the statement
of cash flows.
c. Excess tax benefits must be shown in both the statement of shareholders’ equity and the
statement of cash flows.
d. Presentation of excess tax benefits is guided by ASU 2016-09.
80. Which statement reflects how an employee handles tax on ISOs?
a. Tax is due on the compensation calculated at the grant date.
b. Tax is due on the capital gain calculated at the exercise date.
c. Tax is due on the capital gain when the employee sells the stock.
d. Compensation is taxed on the fair value of the stock as measured at the exercise date.
81. Which item is not an accurate representation of the impact of convertible bonds on the
computation of EPS?
a. A convertible bond’s net-of-tax interest expense is added back to net income when
determining diluted earnings per share only if the bond is known to be dilutive.
b. Convertible bonds that were outstanding during the entire year will not have an impact on the
weighted average number of common shares outstanding used in the calculation of basic
earnings per share.
c. Current GAAP requires that convertible bonds should only be considered as-if converted for
diluted earnings per share if the share price is more than the conversion price.
d. If the convertible bonds have an antidilutive effect they are ignored in the computation of
diluted EPS.
82. A bond with a carrying value of $790,000 was converted into 100,000 shares of $5 per share
par value common stock at a time when the market value per share was $9.00 per share. Which
of the following statements does not accurately describe the financial accounting for the
conversion?
a. A loss of $110,000 will be recognized if the market value method of recording the
conversion is used.
b. Total owners’ equity increases $790,000 if the market value method of recording the
conversion is used.
c. Total owners’ equity increases $790,000 if the book value method of recording the
conversion is used.
d. Total owners’ equity increases $900,000 if the market value method of recording the
conversion is used.
83. Convertible bonds are usually
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a. mortgage bonds.
b. senior bonds.
c. callable.
d. participating.
84. Call provisions on convertible bonds protect the
a. investor against extreme stock price increases.
b. company against extreme stock price increases.
c. bank against extreme stock price decreases.
d. company against extreme stock price decreases.
85. With the development of modern option pricing methods, prior accounting standards setters
would probably have reached the conclusion today that the conversion feature of convertible
bonds
a. has no value.
b. has value.
c. has value, but should be ignored.
d. does not lend itself to these option pricing models.
86. To record newly issued stock shares upon conversion of debt, managers most often choose
the method known as the
a. market value method.
b. book value method.