CHAPTER 16
DILUTIVE SECURITIES AND EARNINGS PER SHARE
CHAPTER LEARNING OBJECTIVES
1. Describe the accounting for the issuance, conversion, and retirement of convertible
securities.
2. Describe the accounting for share warrants and for share warrants issued with other
securities.
3. Describe the accounting and reporting for share compensation plans.
4. Compute basic earnings per share.
5. Compute diluted earnings per share.
*6. Explain the accounting for share-appreciation rights plans.
*7. Compute earnings per share in a complex situation.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 2
TRUE-FALSE—Conceptual
1. IFRS requires that convertible debt be separated into its liability and equity components
for accounting purposes.
2. Companies recognize a gain or loss on the conversion of convertible debt before maturity.
3. When an issuer offers some form of additional consideration (a sweetener) to encourage
of its convertible debt, it reports the sweetener as a current period expense.
4. The issuer of convertible preference shares uses the fair value method to record the
conversion of the shares.
5. Companies recognize a gain or loss when shareholders exercise convertible preference
shares.
6. A company should allocate the proceeds from the sale of debt with detachable share
warrants between the two securities based on their a fair values.
7. Non-detachable warrants, unlike detachable warrants, are not considered a compound
instrument for accounting purposes.
8. The intrinsic value of a share option is the difference between the market price of the
shares and the exercise price of the options at the grant date.
9. Under the fair value method, companies compute total compensation expense based on
the fair value of options on the date of exercise.
10. The service period in share option plans is the time between the grant date and the
vesting date.
11. If an employee fails to exercise a share option before its expiration date, the company
should decrease compensation expense.
12. If a service condition exists, the company is not permitted to adjust the estimate of
compensation expense.
13. If preference shares are cumulative and no dividends are declared, the company
subtracts the current year preference dividend in computing earnings per share.
14. When share dividends or share splits occur, companies must restate the shares outstand-
ing after the share dividend or split, in order to compute the weighted-average number of
shares.
15. If a share dividend occurs after year-end, but before the financial statements, are
authorized for issuance, a company must restate the weighted-average number of shares
outstanding for the year.
16. Preference dividends are subtracted from net income but not income from continuing
operations in computing earnings per share.
Dilutive Securities and Earnings per Share
16 – 3
17. When a company has a complex capital structure, it must report both basic and diluted
earnings per share.
18. In computing diluted earnings per share, share options are considered dilutive when their
option price is greater than the market price.
19. The number of contingent shares to be included in diluted earnings per share is based on
the number of shares that would be issuable as if the end of the period were the end of
the contingency period.
20. A company should report per share amounts for income from continuing operations, but
not for discontinued operations.
True-False Answers—Conceptual
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MULTIPLE CHOICE—Dilutive Securities, Conceptual
21. Convertible bonds
a. have priority over other indebtedness.
b. are usually secured by a first or second mortgage.
c. pay interest only in the event earnings are sufficient to cover the interest.
d. may be exchanged for equity securities.
22. The conversion of bonds is most commonly recorded by the
a. incremental method.
b. proportional method.
c. fair value method.
d. book value method.
23. When a bond issuer offers some form of additional consideration (a “sweetener”) to
induce conversion, the sweetener is accounted for as a(n)
a. equity item.
b. expense.
c. loss.
d. None of these a are correct.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 4
S24. Corporations issue convertible debt for two main reasons. One is the desire to raise equity
capital that, assuming conversion, will arise when the original debt is converted. The other
is
a. the ease with which convertible debt is sold even if the company has a poor credit
rating.
b. the fact that equity capital has issue costs that convertible debt does not.
c. that many corporations can obtain financing at lower rates.
d. that convertible bonds will always sell at a premium.
S25. When convertible debt is not converted at maturity
a. a gain or loss is recorded for the difference between the book value of the debt and
the present value of the cash flows.
b. the amount originally allocated to equity is recorded as a gain on retirement.
c. the amount allocated to the equity component at the issuance date is recorded as a
loss on retirement.
d. the carrying value of the bond equals its face value and it is removed from the books.
26. Convertible bonds
a. Are separated into the bond component and the expense component.
b. Allow a company to issue debt financing at cheaper rates.
c. Are separated into their components based on relative fair values.
d. All of these answer choices are correct.
27. Mae Jong Corp issues $1,000,000 of 10% bonds payable which may be converted into
10,000 shares of $2 par value ordinary shares. The market rate of interest on similar
bonds is 12%. Interest is payable annually on December 31, and the bonds were issued
for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will
a. First assign a value to the equity component, then determine the liability component.
b. Assign no value to the equity component since the conversion privilege is not
separable from the bond.
c. First assign a value to the liability component based on the face amount of the bond.
d. Use the “with-and-without” method to value the compound instrument.
28. Convertible preference shares
a. Are compound instruments with both a liability and an equity component.
b. Include an option for the holder to convert preference shares into a fixed number of
ordinary shares.
c. Use the “with-and-without” method to value the compound instrument.
d. All of these answer choices are correct.
S29. The conversion of preference shares into ordinary shares requires that any excess of the
par value of the ordinary shares issued over the carrying amount of the preference shares
being converted should be
a. reflected currently in income.
b. reflected currently in other comprehensive income.
c. treated as a prior period adjustment.
d. treated as a direct reduction of retained earnings.
Dilutive Securities and Earnings per Share
16 – 5
30. The conversion of preference shares may be recorded by the
a. incremental method.
b. book value method.
c. market value method.
d. par value method.
31. When the cash proceeds from bonds issued with detachable share warrants exceed the
fair value of the bonds without the warrants, the excess should be credited to
a. Share Premium—Ordinary.
b. Retained Earnings.
c. A share liability account.
d. Share Premium-Share Warrants.
32. Proceeds from an issue of debt securities having share warrants should not be allocated
between debt and equity features when
a. the fair value of the warrants is not readily available.
b. exercise of the warrants within the next few fiscal periods seems remote.
c. the warrants issued with the debt are non-detachable.
d. Proceeds should be allocated between debt and equity for all of these.
P33. A corporation issues bonds with detachable warrants. The amount to be recorded as
share premium is preferably
a. zero.
b. calculated as the excess of the proceeds over the face value of the bonds.
c. equal to the market value of the warrants.
d. calculated as the excess of the proceeds over the fair value of the bonds.
P34. The distribution of share rights to existing ordinary shareholders will increase share
premium at the
Date of Issuance Date of Exercise
of the Rights of the Rights
a. Yes Yes
b. Yes No
c. No Yes
d. No No
S35. The major difference between convertible debt and share warrants is that upon exercise
of the warrants
a. the shares are held by the company for a defined period of time before they are issued
to the warrant holder.
b. the holder has to pay a certain amount of cash to obtain the shares.
c. the shares involved are restricted and can only be sold by the recipient after a set
period of time.
d. no share premium can be a part of the transaction.
36. According to IFRS, a company makes only a memorandum entry when
a. companies give warrants to executives and employees as a form of compensation.
b. companies include warrants to make a security more attractive.
c. companies issue rights to existing shareholders.
d. All of these answer choices are correct.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 6
37. According to IFRS, once the total compensation is measured at the date of grant
a. it can be changed in future periods related to a change in market conditions.
b. it can be changed to reflect the rise or fall in the market price of the company’s
ordinary shares.
c. a company is permitted to adjust the number of share options expected to the actual
number of instruments vested.
d. All of these answer choices are correct.
38. Restricted shares
a. better align the employee incentives with the companies’ incentives.
b. result in less dilution to existing shareholders.
c. never become completely worthless.
d. All of these choices are correct.
S39. Which of the following is not a characteristic of a noncompensatory stock option plan?
a. Substantially all full-time employees may participate on an equitable basis.
b. The plan offers no substantive option feature.
c. Unlimited time period permitted for exercise of an option as long as the holder is still
employed by the company.
d. Discount from the market price of the stock no greater than would be reasonable in an
offer of stock to stockholders or others.
40. The date on which to measure the compensation element in a share option granted to a
corporate employee ordinarily is the date on which the employee
a. is granted the option.
b. has performed all conditions precedent to exercising the option.
c. may first exercise the option.
d. exercises the option.
41. Compensation expense resulting from a compensatory share option plan is generally
a. recognized in the period of exercise.
b. recognized in the period of the grant.
c. allocated to the periods benefited by the employee’s required service.
d. allocated over the periods of the employee’s service life to retirement.
42. The date on which total compensation expense is computed in a share option plan is the date
a. of grant.
b. of exercise.
c. that the market price coincides with the option price.
d. that the market price exceeds the option price.
43. Employee share purchase plans (ESPP)
a. Permit all employees to purchase shares at a discounted price.
b. Are generally considered noncompensatory and result in no compensation expense
being recorded.
c. Distribute restricted shares to employees for a short period of time.
d. All of these answer choices are correct regarding ESPP.
*44. In accounting for share-appreciation rights plans, compensation expense is generally
a. not recognized because no excess of market price over the option price exists at the
date of grant.
b. recognized in the period of the grant.
Dilutive Securities and Earnings per Share
16 – 7
c. allocated over the service period of the employees.
d. recognized in the period of exercise.
*45. For share appreciation rights that are a liability award, the measurement date for
computing compensation is the date
a. the rights mature.
b. the share’s price reaches a predetermined amount.
c. of grant.
d. of exercise.
*46. An executive pays no taxes at time of exercise in a(an)
a. share appreciation rights plan.
b. incentive share option plan.
c. nonqualified share option plan.
d. Taxes would be paid in all of these.
*47. A company estimates the fair value of SARs, using an option-pricing model, for
a. share-based equity awards.
b. share-based liability awards.
c. both equity awards and liability awards.
d. neither equity awards or liability awards.
Multiple Choice Answers—Dilutive Securities, Conceptual
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MULTIPLE CHOICE—Dilutive Securities, Computational
48. Fogel Co. has €2,500,000 of 8% convertible bonds outstanding. Each €1,000 bond is
convertible into 30 shares of €30 par value ordinary shares. The bonds pay interest on
January 31 and July 31. On July 31, 2019, the holders of €800,000 bonds exercised the
conversion privilege. On that date the market price of the bonds was 105 and the market
price of the ordinary shares was €36. The total unamortized bond premium at the date of
conversion was €175,000. Fogel should record, as a result of this conversion, a
a. credit of €136,000 to Share Premium—Ordinary.
b. credit of €120,000 to Share Premium—Ordinary.
c. credit of €56,000 to on Bonds Payable.
d. loss of €8,000.
49. On July 1, 2019, an interest payment date, €60,000 of Parks Co. bonds were converted
into 1,200 ordinary shares of Parks Co. each having a par value of €45 and a fair value of
€54. There is €2,400 unamortized discount on the bonds. Parks would record
a. no change in share premium.
b. a €3,600 increase in share premium.
c. a €7,200 increase in share premium.
d. a €4,800 increase in share premium.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 8
Dilutive Securities and Earnings per Share
16 – 9
50. Morgan Corporation had two issues of securities outstanding: ordinary shares and an 8%
convertible bond issue in the face amount of €16,000,000. Interest payment dates of the
bond issue are June 30th and December 31st. The conversion clause in the bond
indenture entitles the bondholders to receive forty shares of €20 par value ordinary shares
in exchange for each €1,000 bond. On June 30, 2019, the holders of €2,400,000 face
value bonds exercised the conversion privilege. The market price of the bonds on that
date was €1,100 per bond and the market price of the shares was €35. The total
unamortized bond discount at the date of conversion was €1,000,000. What amount
should Morgan credit to the account “Share Premium—Ordinary,” as a result of this
conversion?
a. €330,000.
b. €160,000.
c. €1,440,000.
d. €720,000.
51. Litke Corporation issued at a premium of £5,000 a £100,000 bond issue convertible into
2,000 ordinary shares (par value $40). At the time of the conversion, the unamortized
premium is £2,000, the market value of the bonds is £110,000, and the shares are quoted
on the market at £60 per share. If the bonds are converted into ordinary shares, what is
the amount of share premium to be recorded on the conversion of the bonds?
a. £25,000
b. £22,000
c. £32,000
d. £40,000
52. Mae Jong Corp. issues 1,000 convertible bonds at the beginning of 2019. The bonds have
a four-year term with a stated rate of interest of 6 percent, and are issued at par with a
face value of €1,000 per bond (the total proceeds received from issuance of the bonds are
€1,000,000). Interest is payable annually at December 31. Each bond is convertible into
250 ordinary shares with a par value of €1. The market rate of interest on similar non–
convertible debt is 9 percent. Compute the liability component of Mae Jong’s convertible
debt. The following present value factors are available:
PV Ordinary Annuity–4 periods
6% 3.46511
9% 3.23972
PV of 1–4 periods
6% .79209
9% .70843
a. €1,000,000
b. €750,000
c. €902,813
d. €916,337
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 10
53. Mae Jong Corp. issues 1,000 convertible bonds at the beginning of 2019. The bonds have
a four-year term with a stated rate of interest of 6 percent, and are issued at par with a
face value of €1,000 per bond (the total proceeds received from issuance of the bonds are
€1,000,000). Interest is payable annually at December 31. Each bond is convertible into
250 ordinary shares with a par value of €1. The market rate of interest on similar non–
convertible debt is 9 percent. When Mae Jong records the issuance of these bonds, how
much will it credit to Share Premium—Conversion Equity? The following present value
factors are available:
PV Ordinary Annuity – 4 periods
6% 3.46511
9% 3.23972
PV of 1 – 4 periods
6% .79209
9% .70843
a. € -0-
b. €97,187
c. €83,663
d. €250,000
54. Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2019. The bonds have
a four-year term with a stated rate of interest of 6 percent, and are issued at par with a
face value of €1,000 per bond (the total proceeds received from issuance of the bonds are
€1,000,000). Interest is payable annually at December 31. Each bond is convertible into
250 ordinary shares with a par value of €1. The market rate of interest on similar non–
convertible debt is 9 percent. Assume that at the issuance date, €97,187 was credited to
Share Premium—Conversion Equity and that the bonds were not converted until maturity.
What amount will Mae Jong credit to Share Premium—Ordinary at the maturity date?
a. €750,000
b. €652,813
c. €847,187
d. €347,187
55. Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2019. The bonds have
a four-year term with a stated rate of interest of 6 percent, and are issued at par with a
face value of €1,000 per bond (the total proceeds received from issuance of the bonds are
€1,000,000). Interest is payable annually at December 31. Each bond is convertible into
250 ordinary shares with a par value of €1. The market rate of interest on similar non–
convertible debt is 9 percent. Assume that at the issuance date, €97,187 was credited to
Share Premium—Conversion Equity. The bonds were not converted at maturity and Mae
Jong pays off the convertible debt holders. What amount will Mae Jong record as a gain
or a loss on this transaction?
a. € -0-
b. €97,187
c. €24,297
d. €250,000
Dilutive Securities and Earnings per Share
16 – 11
56. Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2019. The bonds have
a four-year term with a stated rate of interest of 6 percent, and are issued at par with a
face value of €1,000 per bond (the total proceeds received from issuance of the bonds are
€1,000,000). Interest is payable annually at December 31. Each bond is convertible into
250 ordinary shares with a par value of €1. The market rate of interest on similar non–
convertible debt is 9 percent. On December 31, 2020, Mae Jong wishes to reduce its
annual interest cost. The company agrees to pay the holder of its convertible bonds an
additional €40,000 if they will convert. Assuming conversion occurs, Mae Jong’s journal
entry to record the conversion will include all of the following except
a. Debit Bonds Payable €1,000,000.
b. Debit Share Premium—Ordinary €40,000.
c. Credit Cash €40,000.
d. Credit Share Capital—Ordinary €250,000.
57. Pelton, Inc. issued £2,000,000 par value, 7% convertible bonds at 99 for cash. The net
present value of the debt without the conversion feature is £1,9000,000. What amount will
Peloton assign to the equity feature of these bonds?
a. £100,000
b. £ – 0 –
c. £99,000
d. £80,000
58. On January 2, 2017, LexxMark Co. issues 2,000 convertible preference shares that have
a par value of €20 per share. The shares were issued at a price of €400 per share. On
December 31, 2019, LexxMark Co. repurchases the convertible preference shares for
€820,000. On this date, LexxMark will record
a. A loss of €20,000.
b. A credit to Share Premium—Conversion Equity €40,000.
c. A debit to Retained Earnings €20,000.
d. A credit to Share Capital—Preference €40,000.
59. In 2018, Eklund, Inc., issued for €103 per share, 60,000 shares of €100 par value
convertible preference shares. One share of preference shares can be converted into
three shares of Eklund’s €25 par value ordinary shares at the option of the preference
shareholder. In August 2019, all of the preference shares were converted. The fair value
of the ordinary shares at the date of the conversion was €30 per share. What total amount
should be credited to share premium—ordinary as a result of the conversion of the
preference shares into ordinary shares?
a. €1,020,000.
b. €780,000.
c. €1,500,000.
d. €1,680,000.
60. On December 1, 2019, Lester Company issued at 103, two hundred of its 9%, €1,000
bonds. Attached to each bond was one detachable share warrant entitling the holder to
purchase 10 shares of Lester’s ordinary shares. On December 1, 2019, the fair value of
the bonds, without the share warrants, was 95, and the fair value of each share warrant
was €50. The amount of the proceeds from the issuance that should be accounted for as
the initial carrying value of the bonds payable would be
a. €195,700.
b. €190,000.
c. €200,000.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 12
d. €206,000.
Dilutive Securities and Earnings per Share
16 – 13
61. On March 1, 2019, Ruiz Corporation issued £800,000 of 8% nonconvertible bonds at 104,
which are due on February 28, 2039. In addition, each £1,000 bond was issued with 25
detachable share warrants, each of which entitled the bondholder to purchase for £50 one
share of Ruiz ordinary shares, par value £25. The bonds without the warrants would
normally sell at 95. On March 1, 2019, the fair value of Ruiz’s ordinary shares was £40 per
share and the fair value of the warrants was £2. What amount should Ruiz record on
March 1, 2019 as share premium—share warrants?
a. £40,000
b. £41,600
c. £72,000
d. £83,200
62. During 2019, Gordon Company issued at 104 three hundred, €1,000 bonds due in ten
years. One detachable share warrant entitling the holder to purchase 15 shares of
Gordon’s ordinary shares was attached to each bond. At the date of issuance, the market
value of the bonds, without the share warrants, was quoted at 96. The fair value of each
detachable warrant was quoted at €40. What amount, if any, of the proceeds from the
issuance should be accounted for as part of Gordon’s equity?
a. €0
b. €12,000
c. €24,000
d. €12,480
63. On April 7, 2019, Kegin Corporation sold a €2,000,000, twenty-year, 8 percent bond issue
for €2,120,000. Each €1,000 bond has two detachable warrants, each of which permits
the purchase of one share of the corporation’s ordinary shares for €30. The shares have a
par value of €25 per share. Immediately after the sale of the bonds, the corporation’s
securities had the following fair values:
8% bond without warrants €1,008
Warrants 21
Ordinary Shares 28
What accounts should Kegin credit to record the sale of the bonds?
a. Bonds Payable €2,077,600
Share Premium—Share Warrants 42,400
b. Bonds Payable €2,035,200
Share Premium—Share Warrants 84,800
c. Bonds Payable €2,016,000
Share Premium—Share Warrants 104,000
d. Bonds Payable €2,120,000
Use the following information for questions 64 and 65.
On May 1, 2019, Payne Co. issued €300,000 of 7% bonds at 103, which are due on April 30,
2029. Twenty detachable share warrants entitling the holder to purchase for €40 one share of
Payne’s ordinary shares, €15 par value, were attached to each €1,000 bond. The bonds without
the warrants would sell at 96. On May 1, 2019, the fair value of Payne’s shares was $35 per
share and of the warrants was €2.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 14
64. On May 1, 2019, Payne should credit Share Premium –Share Warrants for
a. €9,000.
b. €12,000.
c. €21,000.
d. €12,360.
65. On May 1, 2019, Payne should record bonds at payable
a. discount of €296,640.
b. discount of €288,000.
c. discount of €300,000.
d. premium of €309,000.
66. Vernon Corporation offered detachable 5-year warrants to buy one ordinary share (par
value €5) at €20 (at a time when the shares were selling for €32). The price paid for 2,000,
€1,000 bonds with the warrants attached was €205,000. The market price of the Vernon
bonds without the warrants was €180,000, and the market price of the warrants without
the bonds was €20,000. What amount should be allocated to the warrants?
a. €20,000
b. €25,000
c. €24,000
d. €20,500
Use the following information for questions 67 and 68.
On May 1, 2019, Marly Co. issued €500,000 of 7% bonds at 103, which are due on April 30,
2029. Twenty detachable stock warrants entitling the holder to purchase for €40 one share of
Marly’s ordinary shares €15 par value, were attached to each €1,000 bond. The bonds without
the warrants would sell at 96. On May 1, 2019, the fair value of Marly’s shares was €35 per share
and of the warrants was €2.
67. On May 1, 2019, Marly should record bonds payable at
a. €515,000.
b. €500,000.
c. €480,000.
d. €494,400.
68. On May 1, 2019, Marly should credit Share Premium–Share Warrants for
a. €20,600
b. €35,000
c. €20,000
d. €15,000
Dilutive Securities and Earnings per Share
16 – 15
69. On July 1, 2019, Ellison Company granted Sam Wine, an employee, an option to buy 400
shares of Ellison Co. shares 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 £1,800. Wine exercised his option on October 1, 2019 and sold his 400
shares on December 1, 2019. Quoted market prices of Ellison Co. shares in 2019 were:
July 1 £30 per share
October 1 £36 per share
December 1 £40 per share
The service period is for three years beginning January 1, 2019. As a result of the option
granted to Wine, using the fair value method, Ellison should recognize compensation
expense on its books in the amount of
a. £1,800.
b. £600.
c. £450.
d. £0.
70. On January 1, 2019, Trent Company granted Dick Williams, an employee, an option to
buy 100 shares of Trent Co. shares 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 €900. Williams exercised his option on September 1, 2019, and sold his
100 shares on December 1, 2019. Quoted market prices of Trent Co. shares during 2019
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 1,2019. As a result of the option
granted to Williams, using the fair value method, Trent should recognize compensation
expense for 2019 on its books in the amount of
a. €1,000.
b. €900.
c. €450.
d. €0.
71. On December 31, 2018, Gonzalez Company granted some of its executives options to
purchase 100,000 shares of the company’s €10 par ordinary shares at an option price of
€50 per share. The Black-Scholes option pricing model determines total compensation
expense to be €750,000. The options become exercisable on January 1, 2019, and
represent compensation for executives’ services over a three-year period beginning
January 1, 2019. At December 31, 2019 none of the executives had exercised their
options. What is the impact on Gonzalez’s net income for the year ended December 31,
2019 as a result of this transaction under the fair value method?
a. €250,000 increase.
b. €750,000 decrease.
c. €250,000 decrease.
d. €0.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 16
72. On January 1, 2019 Reese Company granted Jack Buchanan, an employee, an option to
buy 100 shares of Reese Co. shares for €40 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 €1,200. Buchanan exercised his option on September 1, 2019, and sold
his 100 shares on December 1, 2019. Quoted market prices of Reese Co. shares during
2019 were:
January 1 €40 per share
September 1 €48 per share
December 1 €54 per share
The service period is for two years beginning January 1, 2019. As a result of the option
granted to Buchanan, using the fair value method, Reese should recognize compensation
expense for 2019 on its books in the amount of
a. €0.
b. €600.
c. €1,200
d. €1,400
73. On June 30, 2018, Yang Corporation granted compensatory share options for 20,000
shares of its €24 par value ordinary shares to certain of its key employees. The market
price of the ordinary shares on that date was €31 per share and the option price was €28.
Using a fair value option pricing model, total compensation expense is determined to be
€64,000. The options are exercisable beginning January 1, 2020, providing those key
employees are still in the employ of the company at the time the options are exercised.
The options expire on June 30, 2021.
On January 4, 2020, when the market price of the shares was €36 per share, all options
for the 20,000 shares were exercised. The service period is for two years beginning
January 1, 2018. Using the fair value method, what should be the amount of
compensation expense recorded by Yang Corporation for these options on December 31,
2018?
a. €64,000
b. €32,000
c. €15,000
d. €0
74. In order to retain certain key executives, Smiley Corporation granted them incentive share
options on December 31, 2017. 80,000 options were granted at an option price of £35
per share. Market prices of the shares were as follows:
December 31, 2018 £46 per share
December 31, 2019 51 per share
The options were granted as compensation for executives’ services to be rendered over a
two-year period beginning January 1, 2018. The Black-Scholes option pricing model
determines total compensation expense to be £800,000. What amount of compensation
expense should Smiley recognize as a result of this plan for the year ended December 31,
2018 under the fair value method?
a. £1,400,000.
b. £880,000.
c. £800,000.
d. £400,000.
Dilutive Securities and Earnings per Share
16 – 17
75. On January 1, 2018, Ritter Company granted share options to officers and key employees
for the purchase of 10,000 ordinary shares of the company’s €1 par at €20 per share as
additional compensation for services to be rendered over the next three years. The
options are exercisable during a five-year period beginning January 1, 2021 by grantees
still employed by Ritter. The Black-Scholes option pricing model determines total
compensation expense to be €90,000. The market price of ordinary shares was €26 per
share at the date of grant. The journal entry to record the compensation expense related
to these options for 2018 would include a credit to the Share Premium—Share Options
account for
a. €0.
b. €18,000.
c. €20,000.
d. €30,000.
76. On January 1, 2019, Evans Company granted Tim Telfer, an employee, an option to buy
1,000 ordinary shares of Evans Co. for €25 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 €7,500. Telfer exercised his option on September 1, 2019, and sold his
1,000 shares on December 1, 2019. Quoted market prices of Evans Co. shares during
2019 were January 1 €25 per share
September 1 €30 per share
December 1 €34 per share
The service period is for three years beginning January 1, 2019. As a result of the option
granted to Telfer, using the fair value method, Evans should recognize compensation
expense for 2019 on its books in the amount of
a. €9,000.
b. €7,500.
c. €2,500.
d. €1,500.
77. On December 31, 2018, Kessler Company granted some of its executives options to
purchase 50,000 shares of the company’s €10 par ordinary shares at an option price of
€50 per share. The options become exercisable on January 1, 2019, and represent
compensation for executives’ services over a three-year period beginning January 1,
2019. The Black-Scholes option pricing model determines total compensation expense to
be €300,000. At December 31, 2019, none of the executives had exercised their options.
What is the impact on Kessler’s net income for the year ended December 31, 2019 as a
result of this transaction under the fair value method?
a. €100,000 increase
b. €0
c. €100,000 decrease
d. €300,000 decrease
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 18
78. Weiser Corp. on January 1, 2016, granted share options for 40,000 shares of its €10 par
value ordinary shares to its key employees. The market price of the shares on that date was
€23 per share and the option price was €20. The Black-Scholes option pricing model
determines total compensation expense to be €240,000. The options are exercisable
beginning January 1, 2019, provided those key employees are still in Weiser’s employ at the
time the options are exercised. The options expire on January 1, 2020.
On January 1, 2019, when the market price of the shares was €29 per share, all 40,000
options were exercised. The amount of compensation expense Weiser should record for
2018 under the fair value method is
a. €0.
b. €40,000.
c. €80,000.
d. €120,000.
79. On December 31, 2018, Houser Company granted some of its executives options to
purchase 45,000 shares of the company’s £50 par ordinary shares at an option price of £60
per share. The Black-Scholes option pricing model determines total compensation expense
to be £900,000. The options become exercisable on January 1, 2019, and represent
compensation for executives‘ past and future services over a three-year period beginning
January 1, 2018. What is the impact on Houser’s total equity for the year ended December
31, 2018, as a result of this transaction under the fair value method?
a. £900,000 decrease
b. £300,000 decrease
c. £0
d. £300,000 increase
80. On June 30, 2016, Norman Corporation granted compensatory share options for 30,000
shares of its €20 par value ordinary shares to certain of its key employees. The market
price of the shares on that date was €36 per share and the option price was €30. The
Black-Scholes option pricing model determines total compensation expense to be
€360,000. The options are exercisable beginning January 1, 2019, provided those key
employees are still in Norman’s employ at the time the options are exercised. The options
expire on June 30, 2020.
On January 4, 2019, when the market price of the shares was €42 per share, all 30,000
options were exercised. What should be the amount of compensation expense recorded
by Norman Corporation for the calendar year 2018 using the fair value method?
a. €0.
b. €144,000.
c. €180,000.
d. €360,000.
Dilutive Securities and Earnings per Share
16 – 19
81. In order to retain certain key executives, Jensen Corporation granted them incentive share
options on December 31, 2017. 50,000 options were granted at an option price of €35 per
share. Market prices of the shares were as follows:
December 31, 2018 €46 per share
December 31, 2019 51 per share
The options were granted as compensation for executives’ services to be rendered over a
two-year period beginning January 1, 2018. The Black-Scholes option pricing model
determines total compensation expense to be €500,000. What amount of compensation
expense should Jensen recognize as a result of this plan for the year ended
December 31, 2018 under the fair value method?
a. €250,000.
b. €500,000.
c. €550,000.
d. €1,750,000.
82. Grant, Inc. had 40,000 treasury shares ($10 par value) at December 31, 2018, which it
acquired at €11 per share. On June 4, 2019, Grant issued 20,000 treasury shares to
employees who exercised options under Grant’s employee share option plan. The fair
value per share was €13 at December 31, 2018, €15 at June 4, 2019, and €18 at
December 31, 2019. The share options had been granted for $12 per share. The cost
method is used. What is the balance of the treasury shares on Grant’s statement of
financial position at December 31, 2019?
a. €140,000.
b. €180,000.
c. €220,000.
d. €240,000.
83. On January 1, 2019 (the date of grant), Henrik Co. issues 2,000 shares of restricted
shares to its executives. The fair value of these shares is £75,000, and their par value is
£10,000. The shares are forfeited if the executives do not complete 3 years of
employment with the company. Assuming the service period is three years, how much
compensation expense will Henrik Co. record on January 1, 2019?
a. £25,000.
b. £-0-
c. £3,333.
d. £21,667.
84. Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee
share-purchase plan. Under the terms of the plan, the employees are entitled to purchase
100 ordinary shares (par value €1 per share) at a 20 percent discount. The purchase price
must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept
the offer, and each employee purchases on average 80 shares at €22 share (market price
€27.50). Under IFRS, Anazazi Co. will record
a. No compensation since the plan is used to raise capital, not compensate employees.
b. Compensation expense of €5,500,000.
c. Compensation expense of €18,700,000.
d. Compensation expense of €3,740,000.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 20
Use the following information for questions 85 through 87.
On January 1, 2017, Korsak, Inc. established a share appreciation rights plan for its executives. It
entitled them to receive cash at any time during the next four years for the difference between the
market price of its ordinary shares and a pre-established price of €20 on 60,000 SARs. Current
fair values of the shares are as follows:
January 1, 2017 €35 per share
December 31, 2017 38 per share
December 31, 2018 30 per share
December 31, 2019 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning
January 1, 2017.
*85. What amount of compensation expense should Korsak recognize for the year ended
December 31, 2017?
a. €180,000 c. €225,000
b. €270,000 d. €1,080,000
*86. What amount of compensation expense should Korsak recognize for the year ended
December 31, 2018?
a. €0
b. €30,000
c. €300,000
d. €150,000
*87. On December 31, 2019, 16,000 SARs are exercised by executives. What amount of
compensation expense should Korsak recognize for the year ended December 31, 2019?
a. €285,000
b. €195,000
c. €585,000
d. €78,000
Multiple Choice Answers—Dilutive Securities, Computational
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Dilutive Securities and Earnings per Share
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MULTIPLE CHOICE—Dilutive Securities, CPA Adapted
88. On January 2, 2018, Farr Co. issued 10-year convertible bonds at 105. During 2018,
these bonds were converted into ordinary shares having an aggregate par value equal to
the total face amount of the bonds. At conversion, the market price of Farr’s shares was
50 percent above its par value. On January 2, 2018, cash proceeds from the issuance of
the convertible bonds should be reported as
a. share capital for the entire proceeds.
b. share premium for the portion of the proceeds attributable to the conversion feature
and as a liability for the balance.
c. a liability for the entire proceeds.
d. a liability for the present value of the bonds and share premium for the amount over
the bonds present value.
89. Lang Co. issued bonds with detachable ordinary share warrants. Only the bonds had a
known fair value. The cash proceeds exceed the fair value of the bonds. This excess is
reported as
a. Share Premium—Share Warrants.
b. Share Premium—Ordinary.
c. Bonds Payable.
d. Share Premium—Conversion Equity.
90. On January 1, 2018, Sharp Corp. granted an employee an option to purchase 6,000
shares of Sharp’s £5 par value ordinary shares at £20 per share. The Black-Scholes
option pricing model determines total compensation expense to be £140,000. The option
became exercisable on December 31, 2019, after the employee completed two years of
service. The market prices of Sharp’s shares were as follows:
January 1, 2018 £30
December 31, 2019 50
For 2019, should recognize compensation expense under the fair value method of
a. £90,000.
b. £30,000.
c. £70,000.
d. £0.
*91. On January 2, 2018, for past services, Rosen Corp. granted Nenn Pine, its president,
16,000 share appreciation rights that are exercisable immediately and expire on
January 2, 2019. On exercise, Nenn is entitled to receive cash for the excess of the
market price of the shares on the exercise date over the market price on the grant date.
Nenn did not exercise any of the rights during 2018. The market price of Rosen’s shares
was €30 on January 2, 2018, and €45 on December 31, 2018. As a result of the share
appreciation rights, Rosen should recognize compensation expense for 2018 of
a. €0.
b. €80,000.
c. €240,000.
d. €480,000.
Multiple Choice Answers—Dilutive Securities, CPA Adapted
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Test Bank for Intermediate Accounting, IFRS Edition, 3e
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MULTIPLE CHOICE—Earnings Per Share—Conceptual
92. With respect to the computation of earnings per share, which of the following would be
most indicative of a simple capital structure?
a. Ordinary shares, preference shares, and convertible securities outstanding in lots of
even thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of ordinary shares
d. None of these answers are correct
93. In computing earnings per share for a simple capital structure, if the preference shares are
cumulative, the amount that should be deducted as an adjustment to the numerator
(earnings) is the
a. preference dividends in arrears.
b. preference dividends in arrears times (one minus the income tax rate).
c. annual preference dividend times (one minus the income tax rate).
d. None of these answers are correct.
94. In computations of weighted average of shares outstanding, when a share dividend or
stock split occurs, the additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.
95. What effect will the acquisition of treasury shares have on shareholders’ equity and earnings
per share, respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease
S96. Due to the importance of earnings per share information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes
P97. A convertible bond issue should be included in the diluted earnings per share computation
as if the bonds had been converted into ordinary shares, if the effect of its inclusion is
Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No
98. When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
Dilutive Securities and Earnings per Share
16 – 23
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.
99. Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. None of these answers are correct.
100. In computing earnings per share, the equivalent number of shares of convertible
preference shares are added as an adjustment to the denominator (number of shares
outstanding). If the preference shares are cumulative, which amount should then be
added as an adjustment to the numerator (net earnings)?
a. Annual preference dividend
b. Annual preference dividend times (one minus the income tax rate)
c. Annual preference dividend times the income tax rate
d. Annual preference dividend divided by the income tax rate
101. In the diluted earnings per share computation, the treasury share method is used for
options and warrants to reflect assumed reacquisition of ordinary shares at the average
market price during the period. If the exercise price of the options or warrants exceeds the
average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a
prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of shares
assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.
102. In applying the treasury share method to determine the dilutive effect of share options and
warrants, the proceeds assumed to be received upon exercise of the options and warrants
a. are used to calculate the number of ordinary shares repurchased at the average
market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per
share.
c. are disregarded in the computation of earnings per share if the exercise price of the
options and warrants is less than the ending market price of ordinary shares.
d. None of these answers are correct.
103. When applying the treasury share method for diluted earnings per share, the market price
of the ordinary shares used for the repurchase is the
a. price at the end of the year.
b. average market price.
c. price at the beginning of the year.
d. None of these answers are correct.
104. Antidilutive securities
a. should be included in the computation of diluted earnings per share but not basic
earnings per share.
b. are those whose inclusion in earnings per share computations would cause basic
earnings per share to exceed diluted earnings per share.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 24
c. include share options and warrants whose exercise price is less than the average
market price of ordinary shares.
d. should be ignored in all earnings per share calculations.
*105. Assume there are two dilutive convertible securities. The one that should be used first to
recalculate earnings per share is the security with the
a. greater earnings adjustment.
b. greater earnings effect per share.
c. smaller earnings adjustment.
d. smaller earnings effect per share.
Multiple Choice Answers—Earnings Per Share—Conceptual
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MULTIPLE CHOICE—Earnings Per Share—Computational
106. Hill Corp. had 600,000 ordinary shares outstanding on January 1, issued 900,000 shares
on July 1, and had income applicable to common stock of €1,050,000 for the year ending
December 31, 2019. Earnings per share for 2019 would be
a. €1.75.
b. €.83.
c. €1.00.
d. €1.17.
107. At December 31, 2019, Hancock Company had 500,000 ordinary shares issued and
outstanding, 400,000 of which had been issued and outstanding throughout the year and
100,000 of which were issued on October 1, 2019. Net income for the year ended
December 31, 2019, was €1,020,000. What should be Hancock’s 2019 earnings per
share, rounded to the nearest penny?
a. €2.02
b. €2.55
c. €2.40
d. €2.27
108. Milo Co. had 600,000 ordinary shares outstanding on January 1, issued 126,000 shares
on May 1, purchased 63,000 shares of treasury shares on September 1, and issued
54,000 shares on November 1. The weighted average shares outstanding for the year is
a. 651,000.
b. 672,000.
c. 693,000.
d. 714,000.
Dilutive Securities and Earnings per Share
16 – 25
109. On January 1, 2019, Gridley Corporation had 125,000 shares of its €2 par value ordinary
shares outstanding. On March 1, Gridley sold an additional 250,000 shares on the open
market at €20 per share. Gridley issued a 20% share dividend on May 1. On August 1,
Gridley purchased 140,000 shares and immediately retired the shares. On November 1,
200,000 shares were sold for €25 per share. What is the weighted-average number of
shares outstanding for 2019?
a. 510,000
b. 375,000
c. 358,333
d. 258,333
110. The following information is available for Barone Corporation:
January 1, 2019 Shares outstanding 1,250,000
April 1, 2019 Shares issued 200,000
July 1, 2019 Treasury shares purchased 75,000
October 1, 2019 Shares issued in a 100% stock dividend 1,375,000
The number of shares to be used in computing earnings per ordinary share for 2019 is
a. 2,825,500.
b. 2,737,500.
c. 2,725,000.
d. 1,706,250.
111. At December 31, 2018 Rice Company had 300,000 ordinary shares and 10,000 shares of
5%, £100 par value cumulative preference shares outstanding. No dividends were
declared on either the preference or ordinary shares in 2018 or 2019. On January 30,
2020, prior to the issuance of its financial statements for the year ended December 31,
2019, Rice declared a 100% share dividend on its ordinary shares. Net income for 2019
was £950,000. In its 2019 financial statements, Rice’s 2019 earnings per share should be
a. £1.50.
b. £1.58.
c. £3.00.
d. £3.17.
112. Fultz Company had 300,000 ordinary shares issued and outstanding at December 31,
2018. During 2019, no additional ordinary shares were issued. On January 1, 2019, Fultz
issued 400,000 shares of nonconvertible preference shares. During 2019, Fultz declared
and paid €180,000 cash dividends on the ordinary shares and €150,000 on the
nonconvertible preference shares. Net income for the year ended December 31, 2019,
was €960,000. What should be Fultz’s 2019 earnings per share, rounded to the nearest
penny?
a. €1.16
b. €2.10
c. €2.70
d. €3.20
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 26
113. At December 31, 2018 Pine Company had 200,000 ordinary shares and 10,000 shares of
4%, €100 par value cumulative preference shares outstanding. No dividends were
declared on either the preference or ordinary shares in 2018 or 2019. On February 10,
2020, prior to the issuance of its financial statements for the year ended December 31,
2019, Pine declared a 100% stock split on its ordinary shares. Net income for 2019 was
€720,000. In its 2019 financial statements, Pine’s 2019 earnings per share should be
a. €3.40.
b. €3.20.
c. €1.70.
d. €1.00.
114. Stine Inc. had 300,000 ordinary shares issued and outstanding at December 31, 2018. On
July 1, 2019 an additional 300,000 shares were issued for cash. Stine also had share
options outstanding at the beginning and end of 2019 which allow the holders to purchase
90,000 ordinary shares at €28 per share. The average market price of Stine’s ordinary
shares was €35 during 2019. The number of shares to be used in computing diluted
earnings per share for 2019 is
a. 672,000
b. 618,000
c. 522,000
d. 468,000
115. Kasravi Co. had net income for 2019 of €300,000. The average number of shares
outstanding for the period was 200,000 shares. The average number of shares under
outstanding options, at an option price of €30 per share is 12,000 shares. The average
market price of the ordinary shares during the year was €36. What should Kasravi Co.
report for diluted earnings per share for the year ended 2019?
a. €1.50
b. €1.49
c. €1.43
d. €1.42
116. On January 2, 2019, Worth Co. issued at par £2,000,000 of 7% convertible bonds. Each
£1,000 bond is convertible into 20 ordinary shares. No bonds were converted during 2019.
Worth had 200,000 ordinary shares outstanding during 2019. Worth’s 2019 net income
was £600,000 and the income tax rate was 30%. Worth’s diluted earnings per share for
2019 would be (rounded to the nearest penny):
a. £3.49.
b. £2.91.
c. £3.00.
d. £3.08.
117. Beaty Inc. purchased Dunbar Co. and agreed to give shareholders of Dunbar Co. 10,000
additional shares in 2020 if Dunbar Co.’s net income in 2019 is €500,000; in 2018 Dunbar
Co.’s net income is €520,000. Beaty Inc. has net income for 2018 of €200,000 and has an
average number of ordinary shares outstanding for 2018 of 100,000 shares. What should
Beaty report as diluted earnings per share for 2018?
a. €2.22
b. €2.00
c. €1.82
d. €1.67
Dilutive Securities and Earnings per Share
16 – 27
Use the following information for questions 118 and 119.
Hanson Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and
€1,000,000 of 10% convertible bonds outstanding during 2019. The preference shares are
convertible into 40,000 ordinary shares. During 2019, Hanson paid dividends of €1.20 per share
on the ordinary shares and €4 per share on the preference shares. Each €1,000 bond is
convertible into 45 ordinary shares. The net income for 2019 was $800,000 and the income tax
rate was 30%.
118. Basic earnings per share for 2019 is (rounded to the nearest penny)
a. €2.94.
b. €3.22.
c. €3.35.
d. €3.60.
119. Diluted earnings per share for 2019 is (rounded to the nearest penny)
a. €2.77.
b. €2.81.
c. €3.05.
d. €3.33.
120. Fugate Company had 500,000 ordinary shares issued and outstanding at December 31,
2018. On July 1, 2019 an additional 500,000 shares were issued for cash. Fugate also
had share options outstanding at the beginning and end of 2019 which allow the holders
to purchase 150,000 ordinary shares at €20 per share. The average market price of
Fugate’s ordinary shares was €25 during 2016. What is the number of shares that should
be used in computing diluted earnings per share for the year ended December 31, 2019?
a. 1,030,000
b. 870,000
c. 787,500
d. 780,000
121. Shipley Corporation had net income for the year of £480,000 and a weighted average
number of ordinary shares outstanding during the period of 200,000 shares. The company
has a convertible bond issue outstanding. The bonds were issued four years ago at par
(£2,000,000), carry a 7% interest rate, and are convertible into 40,000 shares. The
company has a 40% tax rate. Diluted earnings per share are
a. £1.65
b. £2.23.
c. £2.35.
d. £2.58.
122. Colt Corporation purchased Massey Inc. and agreed to give shareholders of Massey Inc.
50,000 additional shares in 2020 if Massey Inc.’s net income in 2019 is €400,000 or more;
in 2018 Massey Inc.’s net income is €410,000. Colt has net income for 2018 of €800,000
and has an average number of ordinary shares outstanding for 2018 of 500,000 shares.
What should Colt report as earnings per share for 2018?
Basic Earnings Diluted Earnings
Per Share Per Share
a. €1.60 €1.60
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 28
b. €1.45 €1.60
c. €1.60 €1.45
d. €1.45 €1.45
123. On January 2, 2019, Perez Co. issued at par €10,000 of 6% bonds convertible in total into
1,000 ordinary shares of Perez’s. No bonds were converted during 2019. Throughout
2019, Perez had 1,000 ordinary shares outstanding. Perez’s 2019 net income was
€3,000, and its income tax rate is 30%. No potentially dilutive securities other than the
convertible bonds were outstanding during 2019. Perez’s diluted earnings per share for
2019 would be (rounded to the nearest cent)
a. €1.50.
b. €1.71.
c. €1.80.
d. €3.42.
124. At December 31, 2018, Kifer Company had 500,000 ordinary shares outstanding. On
October 1, 2019, an additional 100,000 ordinary shares were issued. In addition, Kifer had
€10,000,000 of 6% convertible bonds outstanding at December 31, 2018, which are
convertible into 225,000 ordinary shares. No bonds were converted in 2019. The net
income for the year ended December 31, 2019, was €3,000,000. Assuming the income
tax rate was 30%, the diluted earnings per share for the year ended December 31, 2019,
should be (rounded to the nearest penny)
a. €6.52.
b. €4.80.
c. €4.56.
d. €4.00.
125. On January 2, 2019, Mize Co. issued at par €300,000 of 9% convertible bonds. Each
€1,000 bond is convertible into 30 ordinary shares. No bonds were converted during 2019.
Mize had 50,000 ordinary shares outstanding during 2019. Mize ‘s 2019 net income was
€160,000 and the income tax rate was 30%. Mize’s diluted earnings per share for 2019
would be (rounded to the nearest penny)
a. €2.71.
b. €3.03.
c. €3.20.
d. €3.58.
126. At December 31, 2018, Sager Co. had 1,200,000 ordinary shares outstanding. In addition,
Sager had 450,000 shares of preference shares which were convertible into 750,000
ordinary shares. During 2019, Sager paid £600,000 ordinary cash dividends and £400,000
preference cash dividends. Net income for 2019 was £3,400,000 and the income tax rate
was 40%. The diluted earnings per share for 2019 is (rounded to the nearest penny)
a. £1.24.
b. £1.74.
c. £2.51.
d. £2.84.
Dilutive Securities and Earnings per Share
16 – 29
Use the following information for questions 127 and 128.
Lerner Co. had 200,000 ordinary shares, 20,000 shares of convertible preference shares, and
€1,000,000 of 10% convertible bonds outstanding during 2019. The preference shares are
convertible into 40,000 ordinary shares. During 2019, Lerner paid dividends of €.90 per ordinary
share and €3.00 per preference share. Each €1,000 bond is convertible into 45 ordinary shares.
The net income for 2019 was €600,000 and the income tax rate was 30%.
127. Basic earnings per share for 2019 is (rounded to the nearest penny)
a. €2.21.
b. €2.42.
c. €2.51.
d. €2.70.
128. Diluted earnings per share for 2019 is (rounded to the nearest penny)
a. €2.14.
b. €2.25.
c. €2.35.
d. €2.46.
129. Yoder, Incorporated, has 3,200,000 ordinary shares outstanding on December 31, 2018.
An additional 800,000 ordinary shares were issued on April 1, 2019, and 400,000 more on
July 1, 2019. On October 1, 2019, Yoder issued 20,000, €1,000 face value, 8%
convertible bonds. The bonds are dilutive. Each bond is convertible into 20 ordinary
shares. No bonds were converted in 2019. What is the number of shares to be used in
computing basic earnings per share and diluted earnings per share, respectively?
a. 4,000,000 and 4,000,000
b. 4,000,000 and 4,100,000
c. 4,000,000 and 4,400,000
d. 4,400,000 and 5,200,000
130. Nolte Co. has 4,000,000 ordinary shares outstanding on December 31, 2018. An
additional 200,000 shares are issued on April 1, 2019, and 480,000 more on September
1. On October 1, Nolte issued €6,000,000 of 9% convertible bonds. The bonds are
dilutive. Each €1,000 bond is convertible into 40 ordinary shares. No bonds have been
converted. The number of shares to be used in computing basic earnings per share and
diluted earnings per share on December 31, 2019 is
a. 4,310,000 and 4,310,000.
b. 4,310,000 and 4,370,000.
c. 4,310,000 and 4,550,000.
d. 5,080,000 and 5,320,000.
131. At December 31, 2018, Tatum Company had 2,000,000 ordinary shares outstanding. On
January 1, 2019, Tatum issued 500,000 shares of preference shares which were
convertible into 1,000,000 ordinary shares. During 2019, Tatum declared and paid
£1,500,000 ordinary cash dividends and £500,000 preference cash dividends. Net income
for the year ended December 31, 2019, was £5,000,000. Assuming an income tax rate of
30%, what should be diluted earnings per share for the year ended December 31, 2019?
(Round to the nearest cent.)
a. £$1.50
b. £1.67
c. £2.50
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 30
d. £2.08
132. At December 31, 2018, Emley Company had 1,200,000 ordinary shares outstanding. On
September 1, 2019, an additional 400,000 ordinary shares were issued. In addition, Emley
had €12,000,000 of 6% convertible bonds outstanding at December 31, 2018, which are
convertible into 800,000 ordinary shares. No bonds were converted in 2019. The net
income for the year ended December 31, 2019, was €4,500,000. Assuming the income
tax rate was 30%, what should be the diluted earnings per share for the year ended
December 31, 2019, rounded to the nearest cent?
a. $2.11
b. $3.38
c. $2.35
d. $2.45
133. Grimm Company has 1,800,000 ordinary shares outstanding on December 31, 2018. An
additional 150,000 ordinary shares were issued on July 1, 2019, and 300,000 more on
October 1, 2019. On April 1, 2019, Grimm issued 6,000, €1,000 face value, 8%
convertible bonds. Each bond is convertible into 40 ordinary shares. The bonds are
dilutive. No bonds were converted in 2019. What is the number of shares to be used in
computing basic earnings per share and diluted earnings per share, respectively, for the
year ended December 31, 2019?
a. 1,950,000 and 2,130,000
b. 1,950,000 and 1,950,000
c. 1,950,000 and 2,190,000
d. 2,250,000 and 2,430,000
Use the following information for questions 134 and 135.
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2019 2018
Ordinary Shares 150,000 shares 150,000 shares
Convertible preference shares 15,000 shares 15,000 shares
9% convertible bonds €2,400,000 €2,400,000
During 2019, Piper paid dividends of €1.20 per ordinary share and €3.00 per preference share.
The preference shares are convertible into 30,000 ordinary shares. The 9% convertible bonds are
convertible into 75,000 ordinary shares. The net income for the year ended December 31, 2019,
was €600,000. Assume that the income tax rate was 30%.
134. What should be the basic earnings per share for the year ended December 31, 2019,
rounded to the nearest penny?
a. €2.66
b. €2.92
c. €3.70
d. €4.00
135. What should be the diluted earnings per share for the year ended December 31, 2019,
rounded to the nearest penny?
a. €3.20
b. €2.95
c. €2.83
d. €2.35
Dilutive Securities and Earnings per Share
16 – 31
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 32
136. Warrants exercisable at £20 each to obtain 30,000 ordinary shares were outstanding
during a period when the average market price of the ordinary shares was £25.
Application of the treasury share method for the assumed exercise of these warrants in
computing diluted earnings per share will increase the weighted average number of
outstanding shares by
a. 30,000.
b. 24,000.
c. 6,000.
d. 7,500.
137. Terry Corporation had 300,000 ordinary shares outstanding at December 31, 2019. In
addition, it had 90,000 share options outstanding, which had been granted to certain
executives, and which gave them the right to purchase Terry’s shares at an option price of
€37 per share. The average market price of Terry’s ordinary shares for 2019 was €50.
What is the number of shares that should be used in computing diluted earnings per share
for the year ended December 31, 2019?
a. 300,000
b. 331,622
c. 366,600
d. 323,400
Multiple Choice Answers—Earnings Per Share—Computational
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MULTIPLE CHOICE—Earnings Per Share—CPA Adapted
138. Didde Co. had 300,000 ordinary shares issued and outstanding at December 31, 2018.
No ordinary shares were issued during 2019. On January 1, 2019, Didde issued 200,000
shares of nonconvertible preference shares. During 2019, Didde declared and paid
€100,000 cash dividends on the ordinary shares and €80,000 on the preference shares.
Net income for the year ended December 31, 2019 was €620,000. What should be
Didde’s 2019 earnings per share?
a. €2.07
b. €1.80
c. €1.73
d. €1.47
139. At December 31, 2019 and 2018, Miley Corp. had 180,000 ordinary shares and 10,000
shares of 5%, €100 par value cumulative preference shares outstanding. No dividends
were declared on either the preference or ordinary shares in 2019 or 2018. Net income for
2019 was €400,000. For 2019, earnings per share amounted to
a. €2.22.
b. €1.94.
Dilutive Securities and Earnings per Share
16 – 33
c. €1.67.
d. €1.11.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
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140. Marsh Co. had 2,400,000 ordinary shares outstanding on January 1 and December 31,
2018. In connection with the acquisition of a subsidiary company in June 2017, Marsh is
required to issue 100,000 additional ordinary shares on July 1, 2019, to the former owners
of the subsidiary. Marsh paid €200,000 in preference share dividends in 2018, and
reported net income of €3,400,000 for the year. Marsh’s diluted earnings per share for
2018 should be
a. $1.42.
b. $1.36.
c. $1.33.
d. $1.28.
141. Foyle, Inc., had 560,000 ordinary shares and outstanding at December 31, 2018. On July 1,
2016, an additional 40,000 shares were issued for cash. Foyle also had unexercised
share options to purchase 32,000 ordinary shares at £15 per share outstanding at the
beginning and end of 2019. The average market price of Foyle’s ordinary shares was £20
during 2019. What is the number of shares that should be used in computing diluted
earnings per share for the year ended December 31, 2019?
a. 580,000
b. 588,000
c. 608,000
d. 612,000
142. When computing diluted earnings per share, convertible securities are
a. ignored.
b. recognized only if they are dilutive.
c. recognized only if they are antidilutive.
d. recognized whether they are dilutive or antidilutive.
143. In determining diluted earnings per share, dividends on nonconvertible cumulative
preference shares should be
a. disregarded.
b. added back to net income whether declared or not.
c. deducted from net income only if declared.
d. deducted from net income whether declared or not.
144. The if-converted method of computing earnings per share data assumes conversion of
convertible securities as of the
a. beginning of the earliest period reported (or at time of issuance, if later).
b. beginning of the earliest period reported (regardless of time of issuance).
c. middle of the earliest period reported (regardless of time of issuance).
d. ending of the earliest period reported (regardless of time of issuance).
Multiple Choice Answers—Earnings Per Share—CPA Adapted
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16 – 35
DERIVATIONS — Dilutive Securities, Computational
No. Answer Derivation
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 36
DERIVATIONS — Dilutive Securities, Computational (cont.)
No. Answer Derivation
Dilutive Securities and Earnings per Share
16 – 37
DERIVATIONS — Dilutive Securities, Computational (cont.)
No. Answer Derivation
DERIVATIONS — Dilutive Securities, CPA Adapted
No. Answer Derivation
DERIVATIONS — Earnings Per Share, Computational
No. Answer Derivation
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 38
DERIVATIONS — Earnings Per Share, Computational (cont.)
No. Answer Derivation
Dilutive Securities and Earnings per Share
16 – 39
DERIVATIONS — Earnings Per Share, Computational (cont.)
No. Answer Derivation
DERIVATIONS — Earnings Per Share, CPA Adapted
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 40
Dilutive Securities and Earnings per Share
16 – 41
EXERCISES
Ex. 16-145—Issuance and Conversion Repurchase of Convertible Bonds. Barone
Corporation issues 3,000 convertible bonds at January 1, 2018. The bonds have a three year life,
and are issued at par with a face value of €1,000 per bond, giving total proceeds of €3,000,000.
Interest is payable annually at 6 percent. Each bond is convertible into 250 ordinary shares (par
value of €1). When the bonds are issued, the market rate of interest for similar debt without the
conversion option is 8%.
Instructions
(a) Compute the liability and equity component of the convertible bond on January 1, 2018.
(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2018.
(c) Prepare the journal entry to record the conversion on January 1, 2019.
(d) Assume that the bonds were repurchased on January 1, 2019, for €2,910,000 cash instead of
being converted. The net present value of the liability component of the convertible bonds on
January 1, 2019, is €2,850,000. Prepare the journal entry to record the repurchase on
January 1, 2019.
Solution 16-145
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 42
Ex. 16-146—Convertible Bonds.
Koch Co. sold convertible bonds at a premium. Interest is paid on May 31 and November 30. On
May 31, after interest was paid, 100, €1,000 bonds are tendered for conversion into 3,000 shares
of €10 par value ordinary shares that had a market price of €40 per share. How should Koch Co.
account for the conversion of the bonds into ordinary shares under the book value method?
Discuss the rationale for this method.
Solution 16-146
Ex. 16-147 (Issuance, Conversion, Repurchase of Convertible Bonds) On January 1, 2017,
Lin Company issued a convertible bond with a par value of €100,000 in the market for €120,000.
The bonds are convertible into 12,000 ordinary shares of €1 per share par value. The bond has a
5-year life and has a stated interest rate of 10% payable annually. The market interest rate for a
similar non-convertible bond at January 1, 2017, is 8%. The liability component of the bond is
computed to be €107,986. The following bond amortization schedule is provided for this bond.
EFFECTIVE–INTEREST METHOD
10% BOND DISCOUNTED AT 8%
Date
Cash Paid
Interest Expense
Premium Amortized
Carrying Amount
of Bonds
1/1/17
€107,986
12/31/17
€10,000
€8,639
€1,361
106,625
12/31/18
10,000
8,530
1,470
105,155
12/31/19
10,000
8,412
1,588
103,567
12/31/20
10,000
8,285
1,715
101,852
12/31/21
10,000
8,148
1,852
100,000
Instructions
(a) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2017.
(b) Assume that the bonds were converted on December 31, 2019. The fair value of the liability
component of the bond is determined to be €108,000 on December 31, 2019. Prepare the
journal entry to record the conversion on December 31, 2019. Assume that the accrual of
interest related to 2019 has been recorded.
(c) Assume that the convertible bonds were repurchased on December 31, 2019, for €111,000
instead of being converted. As indicated, the liability component of the bond is determined to
be €108,000 on December 31, 2019. Assume that the accrual of interest related to 2019 has
been recorded.
Dilutive Securities and Earnings per Share
16 – 43
Solution 16-147
Ex. 16-148 (Issuance and Conversion of Bonds) For each of the unrelated transactions
described below, present the entry(ies) required to record each transaction:
1. Baden Corp. issued €5,000,000 par value 10% convertible bonds at 99. If the bonds had not
been convertible, the company’s investment banker determines that they would have been
sold at 95.
2. Fleming Company issued €5,000,000 par value 10% bonds at 98. One share warrant was
issued with each €100 par value bond. At the time of issuance, the warrants were selling for
€4. The net present value of the bonds without the warrants was €4,800,000.
3. Jackson, Inc. called its convertible debt in 2019. Assume the following related to the
transaction: The 11% €5,000,000 par value bonds were converted into 500,000 shares of €1
par value ordinary shares on July 1, 2019. The carrying amount of the debt on July 1 was
€4,800,000. The Share Premium––Conversion Equity account had a balance of €100,000
and the company paid an additional €35,000 to the bondholders to induce conversion of all
the bonds. The company records the conversion using the book value method.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 44
Solution 16-148
Ex. 16-149—Share options.
Prepare the necessary entries from 1/1/17-2/1/19 for the following events using the fair value
method. If no entry is needed, write “No Entry Necessary.”
1. On 1/1/17, the shareholders adopted a share option plan for top executives whereby each
might receive rights to purchase up to 12,000 ordinary shares at £40 per share. The par value
is $10 per share.
2. On 2/1/17, options were granted to each of five executives to purchase 12,000 shares. The
options were non-transferable and the executive had to remain an employee of the company
to exercise the option. The options expire on 2/1/19. It is assumed that the options were for
services performed equally in 2017 and 2018. The Black-Scholes option pricing model
determines total compensation expense to be $1,300,000.
3. At 2/1/19, four executives exercised their options. The fifth executive chose not to exercise his
options, which therefore were forfeited.
Solution 16-149
Dilutive Securities and Earnings per Share
16 – 45
Ex. 16-150—Weighted average shares outstanding.
On January 1, 2019, Warren Corporation had 1,000,000 ordinary shares outstanding. On March
1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the
corporation declared and issued a 2-for–1 share split. On October 1, the corporation purchased
on the market 600,000 of its own outstanding shares and retired them.
Instructions
Compute the weighted average number of shares to be used in computing earnings per share for
2019.
Solution 16-150
Ex. 16-151—Earnings per share.
Santana Corporation has 400,000 ordinary shares outstanding throughout 2019. In addition, the
corporation has 5,000, 20-year, 7% bonds issued at par in 2017. Each €1,000 bond is convertible
into 20 ordinary shares after 9/23/20. During the year 2019, the corporation earned €600,000
after deducting all expenses. The tax rate was 30%.
Instructions
Compute the proper earnings per share for 2019.
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 46
Solution 16-151
Ex. 16-152—Diluted earnings per share.
Dunbar Company had 400,000 ordinary shares outstanding during the year 2019. In addition, at
December 31, 2019, 90,000 shares were issuable upon exercise of executive share options
which require a €40 cash payment upon exercise (options granted in 2017). The average market
price during 2019 was €50.
Instructions
Compute the number of shares to be used in determining diluted earnings per share for 2019.
Solution 16-152
Dilutive Securities and Earnings per Share
16 – 47
*Ex. 16-153—Share appreciation rights.
On January 1, 2016, Orr Co. established a share 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 ordinary shares and a preestablished price of £16 on 300,000 SARs. The fair
value of the SARs is estimate as follows: 12/31/16—£5; 12/31/14—£2; 12/31/15—£3; 12/31/19—
£4. On December 31, 2018, 50,000 SARs are exercised, and the remaining SARs are exercised
on December 31, 2019.
Instructions
(a) Prepare a schedule that shows the amount of compensation expense for each of the four
years starting with 2016.
(b) Prepare the journal entry at 12/31/17 to record compensation expense.
(c) Prepare the journal entry at 12/31/19 to record the exercise of the remaining SARs.
*Solution 16-153
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 48
PROBLEMS
Pr. 16-154—Convertible bonds and share warrants.
For each of the unrelated transactions described below, present the entry(ies) required to record
the bond transactions.
1. On August 1, 2019, Lane Corporation called its 10% convertible bonds for conversion. The
€8,000,000 par bonds were converted into 320,000 shares of €20 par ordinary shares. On
August 1, there was €700,000 of unamortized premium applicable to the bonds. The Share
Premium—Conversion Equity account had a balance of €300,000. The fair value of the
ordinary shares was €20 per share. Ignore all interest payments.
2. Packard, Inc. decides to issue convertible bonds instead of ordinary shares. The company
issues 10% convertible bonds, par €3,000,000, at 97. The investment banker indicates that if
the bonds had not been convertible they would have sold at 94.
3. Gomez Company issues €5,000,000 of bonds with a coupon rate of 8%. To help the sale,
detachable share warrants are issued at the rate of ten warrants for each €1,000 bond sold. It
is estimated that the fair value of the bonds without the warrants is €4,935,000. The bonds
with the warrants sold at 101.
Pr. 16-155—Earnings per share.
Colson Corp. had $500,000 net income in 2019. On January 1, 2019 there were 200,000 ordinary
shares outstanding. On April 1, 20,000 shares were issued and on September 1, Adcock bought
30,000 treasury shares. There are 30,000 options to buy ordinary shares at €40 a share
outstanding. The market price of the ordinary shares averaged €50 during 2019. The tax rate is
40%.
During 2019, there were 40,000 shares of cumulative convertible preference shares outstanding.
The preference is €100 par, pays €3.50 a year dividend, and is convertible into three ordinary
shares.
Colson issued €2,000,000 of 8% convertible bonds at face value during 2018. Each €1,000 bond
is convertible into 30 ordinary shares.
Dilutive Securities and Earnings per Share
16 – 49
Instructions
Compute diluted earnings per share for 2019. Complete the schedule and show all computations.
Net Adjust- Adjusted Adjust- Adjusted
Security Income ment Net Income Shares ment Shares EPS
Solution 16-155
Pr. 16-156—Basic and diluted EPS.
Assume that the following data relative to Kane Company for 2019 is available:
Net Income €2,100,000
Transactions in Ordinary Shares Change Cumulative
Jan. 1, 2019, Beginning number 700,000
Mar. 1, 2019, Purchase of treasury shares (60,000) 640,000
June 1, 2019, Share split 2-1 640,000 1,280,000
Nov. 1, 2019, Issuance of shares 120,000 1,400,000
8% Cumulative Convertible Preference Shares
Sold at par, convertible into 200,000 ordinary shares
(adjusted for split). $1,000,000
Share Options
Exercisable at the option price of €25 per share. Average
market price in 2019, €30 (market price and option price
adjusted for split). 60,000 shares
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 50
Instructions
(a) Compute the basic earnings per share for 2019. (Round to the nearest penny.)
(b) Compute the diluted earnings per share for 2019. (Round to the nearest penny.)
Pr. 16-157—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] £230,000
2. Capital Structure
a. Cumulative 8% preference shares, £100 par,
6,000 shares issued and outstanding £600,000
b. £10 par, 74,000 ordinary 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. £980,000
c. On January 2 of the current year, Starr purchased Oslo Corporation.
One of the terms of the purchase was that if Starr’s net income for the
following year is £200,000 or more, 50,000 additional shares would
Dilutive Securities and Earnings per Share
16 – 51
be issued to Oslo stockholders next year.
3. Other Information
a. Average market price per ordinary share during entire year £30
b. Income tax rate 30%
Instructions
Compute earnings per share for the current year.
Pr. 16-158—Basic and diluted EPS.
The following information was taken from the books and records of Ludwick, Inc.:
1. Net income € 280,000
2. Capital structure:
a. Convertible 6% bonds. Each of the 300, €1,000 bonds is convertible
Test Bank for Intermediate Accounting, IFRS Edition, 3e
16 – 52
into 50 ordinary shares at the present date and for the next
10 years. 300,000
b. €10 par, 200,000 ordinary shares issued and outstanding
during the entire year. 2,000,000
c. Share warrants outstanding to buy 16,000 ordinary shares
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.
Solution 16-158