Test Bank for Intermediate Accounting, Seventeenth Edition
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Solution 16-142
*Ex. 16-143—Stock appreciation rights.
On January 1, 2020, Orr Co. established a stock appreciation rights plan for its executives. They
could receive cash at any time during the next four years equal to the difference between the
market price of the common stock and a preestablished price of $16 on 600,000 SARs. The
market price is as follows: 12/31/20—$21; 12/31/21—$18; 12/31/22—$19; 12/31/23—$23. On
December 31, 2022, 95,000 SARs are exercised, and the remaining SARs are exercised on
December 31, 2023.
Instructions
(a) Prepare a schedule that shows the amount of compensation expense for each of the four
years starting with 2020.
(b) Prepare the journal entry at 12/31/21 to record compensation expense.
(c) Prepare the journal entry at 12/31/23 to record the exercise of the remaining SARs.
Dilutive Securities and Earnings per Share
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PROBLEMS
Pr. 16-144—Convertible bonds and stock warrants.
For each of the unrelated transactions described below, present the entry(ies) required to record
the bond transactions.
1. On August 1, 2021, Lane Corporation called its 10% convertible bonds for conversion. The
$8,000,000 par bonds were converted into 320,000 shares of $20 par common stock. On
August 1, there was $800,000 of unamortized premium applicable to the bonds. The fair value
of the common stock was $20 per share. Ignore all interest payments.
2. Packard, Inc. decides to issue convertible bonds instead of common stock. The company
issues 10% convertible bonds, par $4,000,000, at 97. The investment banker indicates that if
the bonds had not been convertible they would have sold at 94.
3. Gomez Company issues $9,000,000 of bonds with a coupon rate of 8%. To help the sale,
detachable stock warrants are issued at the rate of ten warrants for each $1,000 bond sold. It
is estimated that the value of the bonds without the warrants is $8,883,000 and the value of
the warrants is $567,000. The bonds with the warrants sold at 101.
Pr. 16-145—Earnings per share.
Colson Corp. had $800,000 net income in 2021. On January 1, 2021 there were 200,000 shares
of common stock outstanding. On April 1, 20,000 shares were issued and on September 1,
Colson bought 30,000 shares of treasury stock. There are 30,000 options to buy common stock
at $40 a share outstanding. The market price of the common stock averaged $50 during 2021.
The tax rate is 40%.
During 2021, there were 40,000 shares of convertible preferred stock outstanding. The preferred
is $100 par, pays $3.50 a year dividend, and is convertible into three shares of common stock.
Colson issued $2,000,000 of 8% convertible bonds at face value during 2020. Each $1,000 bond
is convertible into 30 shares of common stock.
Test Bank for Intermediate Accounting, Seventeenth Edition
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Pr. 16-145 (Cont.)
Instructions
Compute diluted earnings per share for 2021. Complete the schedule and show all computations.
Net Adjust- Adjusted Adjust- Adjusted
Security Income ment Net Income Shares ment Shares EPS
Pr. 16-146—Basic and diluted EPS.
Assume that the following data relative to Kane Company for 2021 is available:
Net Income $2,100,000
Transactions in Common Shares Change Cumulative
Jan. 1, 2021, Beginning number 700,000
Mar. 1, 2021, Purchase of treasury shares (60,000) 640,000
June 1, 2021, Stock split 2-1 640,000 1,280,000
Nov. 1, 2021, Issuance of shares 240,000 1,520,000
6% Cumulative Convertible Preferred Stock
Sold at par, convertible into 200,000 shares of common
(adjusted for split). $1,000,000
Stock Options
Exercisable at the option price of $25 per share. Average
market price in 2021, $30 (market price and option price
adjusted for split). 90,000 shares
Dilutive Securities and Earnings per Share
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Pr. 16-146 (Cont.)
Instructions
(a) Compute the basic earnings per share for 2021. (Round to the nearest penny.)
(b) Compute the diluted earnings per share for 2021. (Round to the nearest penny.)
Pr. 16-147—Basic and diluted EPS.
Presented below is information related to Starr Company.
1. Net Income [including a discontinued operations gain (net of tax) of $70,000] $220,000
2. Capital Structure
a. Cumulative 5% preferred stock, $100 par,
6,000 shares issued and outstanding $600,000
b. $10 par common stock, 74,000 shares outstanding on January 1.
On April 1, 40,000 shares were issued for cash. On October 1,
16,000 shares were purchased and retired. $1,000,000
Test Bank for Intermediate Accounting, Seventeenth Edition
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Pr. 16-147 (Cont.)
c. On January 2 of the current year, Starr purchased Oslo Corporation.
One of the terms of the purchase was that if Oslo net income for the
following year is $2,400,000 or more, 50,000 additional shares would
be issued to Oslo stockholders next year. Oslo’s net income for the current year was
$2,600,000.
3. Other Information
a. Average market price per share of common stock during entire year $30
b. Income tax rate 30%
Instructions
Compute earnings per share for the current year.
Dilutive Securities and Earnings per Share
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Pr. 16-148—Basic and diluted EPS.
The following information was taken from the books and records of Ludwick, Inc.:
1. Net income $ 480,000
2. Capital structure:
a. Convertible 6% bonds. Each of the 300, $1,000 bonds is convertible
into 50 shares of common stock at the present date and for the next
10 years. 300,000
b. $10 par common stock, 200,000 shares issued and outstanding
during the entire year. 2,000,000
c. Stock warrants outstanding to buy 16,000 shares of common stock
at $20 per share.
3. Other information:
a. Bonds converted during the year None
b. Income tax rate 30%
c. Convertible debt was outstanding the entire year
d. Average market price per share of common stock during the year $32
e. Warrants were outstanding the entire year
f. Warrants exercised during the year None
Instructions
Compute basic and diluted earnings per share.
Test Bank for Intermediate Accounting, Seventeenth Edition
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IFRS QUESTIONS
True/False
1. IFRS and GAAP have significant differences in the reporting of securities with characteristics
of debt and equity, such as convertible debt.
2. Under IFRS, employee share-purchase plans must be recorded as an expense in the year it
was issued by a company.
3. Under IFRS, convertible bonds are “bifurcated” —separated into the equity component (the
value of the conversion option) of the bond issue and the debt component.
4. Under both GAAP and IFRS, the calculation of basic and diluted earnings per share is
identical.
5. IFRS requires that compound instruments be separated into their liability and equity
components for purposes of accounting.
Answers to True/False:
Multiple Choice:
6. With regard to recognizing stock-based compensation
a. IFRS and GAAP follow the same model.
b. IFRS and GAAP standards are undergoing major reform on valuation issues.
c. it has been agreed that these standards will not be merged due to the differences in
currencies.
d. the reform of GAAP standards will not be addressed until IFRS standards have been
finalized.
Dilutive Securities and Earnings per Share
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7. Under IFRS, how are convertible debt recorded?
a. Convertible debt is separated into equity component and debt component.
b. Convertible debt is recorded under stockholders’ equity.
c. Convertible debt is recorded as long-term liability.
d. Convertible debt is added to current liability section, as it will be converted to equity.
8. Convertible bonds are separated into the equity component of the bond issue and the debt
component under
a. GAAP and IFRS.
b. Neither GAAP nor IFRS.
c. IFRS only.
d. GAAP only.
9. With regard to contracts that can be settled in either cash or shares
a. IFRS requires that share settlement must be used.
b. IFRS gives companies a choice of either cash or shares.
c. GAAP requires that share settlement must be used.
d. the FASB project proposes that the IASB adopt the GAAP approach, requiring that share
settlement must be used.
10. Under IFRS, what is recorded as compensation expense for all employee share-purchase
plans?
a. Par value of shares
b. Amount paid by employees
c. Amount of discount
d. Amount transferred to share premium
11. Which of the following differs in GAAP and IFRS?
a. Calculation of EPS
b. Model for recognizing stock-based compensation
c. Accounting for convertible debt
d. Modification of a share option
Florence Inc. issued 8,000, 5-year convertible bonds of $2,000 each for $4,000,000 at the
beginning of 2021. The bonds have a stated rate of interest of 9% and interest is payable
annually. Each bond can be convertible into 100 shares with a par value of $10. The market rate
of similar nonconvertible debt is 10%.
Test Bank for Intermediate Accounting, Seventeenth Edition
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12. The fair value of the liability component using the “with–and–without” method is
a. $3,848,288
b. $2,483,600
c. $1,365,688
d. $ 151,712
Florence Inc. issued 8,000, 5-year convertible bonds of $2,000 each for $4,000,000 at the
beginning of 2021. The bonds have a stated rate of interest of 9% and interest is payable
annually. Each bond can be convertible into 100 shares with a par value of $10. The market rate
of similar nonconvertible debt is 10%.
13. Determine the fair value of the equity component using the “with–and–without” method is
a. $3,848,288
b. $2,483,600
c. $1,365,688
d. $ 151,712
Swing High Inc. offers its 100 employees to participate in an employee share-purchase plan.
Under the terms of plan, employees are entitled to purchase 10 shares at 10% discount. The par
values of shares were $10. Overall, 60 employees accepted the offer and each employee
purchased six shares. The market price on purchase date was $100.
14. What is the compensation expense recorded by Swing High Inc.?
a. $ 3,600
b. $32,400
c. $36,000
d. $28,800
Swing High Inc. offers its 100 employees to participate in an employee share-purchase plan.
Under the terms of plan, employees are entitled to purchase 10 shares at 10% discount. The par
values of shares were $10. Overall, 60 employees accepted the offer and each employee
purchased six shares. The market price on purchase date was $100.
Dilutive Securities and Earnings per Share
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15. Swing High Inc. will credit Share Premium―Ordinary for:
a. $32,400
b. $ 3,600
c. $36,000
d. $28,800
Test Bank for Intermediate Accounting, Seventeenth Edition
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Answers to Multiple Choice:
Short Answer
16. Briefly describe some of the similarities and differences between GAAP and IFRS with
respect to the accounting for dilutive securities, stock-based compensation, and earnings per
share.