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Chapter 019 Share-Based Compensation and Earnings per Share
94. When computing earnings per share, noncumulative preferred dividends not declared should be:
a. Ignored.
b. Deducted from earnings for the year.
c. Added to earnings for the year.
d. Deducted, net of tax effect, from earnings for the year.
95. A company has cumulative preferred stock. When computing earnings per share, the current year’s
dividends not declared on the preferred stock should be:
a. Deducted from earnings for the year.
b. Deducted, net of tax effect, from earnings for the year.
c. Added to earnings for the year.
d. Ignored.
96. At December 31, 2016 and 2015, G Co. had 50,000 shares of common stock and 5,000 shares of
5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the
preferred or common stock in 2016 or 2015. Net income for 2016 was $500,000. For 2016, basic
earnings per common share amounted to:
a. $ 5.00.
b. $ 9.50.
c. $ 9.00.
d. $10.00.
97. Preferred dividends are subtracted from earnings when computing basic earnings per share whether
or not the dividends are declared or paid if the preferred stock is:
a. Callable.
b. Convertible.
c. Participating.
d. Cumulative.
98. Preferred dividends would not be subtracted from earnings when computing basic earnings per
share in a year when the dividends are not declared if the preferred stock is:
a. Noncumulative.
b. Convertible.
c. Participating.
d. Cumulative.
99. At December 31, 2016, Hansen Corporation had 50,000 shares of common stock and 5,000 shares
of 6%, $100 par cumulative preferred stock outstanding. No dividends were declared or paid in 2016.
Net income was reported as $200,000. What is basic EPS?
a. $4.00.
b. $3.40.
c. $3.64.
d. $4.02.
Chapter 019 Share-Based Compensation and Earnings per Share
Use the following information to answer questions 100 and 101:
Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100 par
convertible preferred stock outstanding during the year. Net income for the year was $400,000 and
dividends were paid to both common and preferred shareholders. Rudyard's effective tax rate is 40%.
Each share of preferred stock is convertible into five shares of common.
100. What is Rudyard's basic EPS?
a. $2.13.
b. $4.80.
c. $4.00.
d. $3.20.
101. What is Rudyard's diluted EPS (rounded)?
a. $2.13.
b. $2.67.
c. $3.20.
d. $4.80.
102. On January 1, 2016, Hage Corporation granted incentive stock options to purchase 18,000 of its
common shares at $7 each. The options are exercisable after one year. The market price of common
averaged $9 per share during the quarter ending on March 31, 2016. There was no change in the
100,000 shares of outstanding common stock during the quarter ended March 31, 2016. Net income for
the quarter was $8,268. The number of shares to be used in computing diluted earnings per share for the
quarter is:
a. 100,000.
b. 104,000.
c. 106,000.
d. 118,000.
103. On January 2, 2016, L Co. issued at face value $20,000 of 4% bonds convertible in total into 1,000
shares of L's common stock. No bonds were converted during 2016.
Throughout 2016, L had 1,000 shares of common stock outstanding. L's 2016 net income was $2,000.
L's income tax rate is 50%.
No potential common shares other than the convertible bonds were outstanding during 2016.
L's diluted earnings per share for 2016 would be:
a. $1.00.
b. $1.20.
c. $1.40.
d. $2.00.
104. During 2016, M Co. had the following two classes of stock issued and outstanding for the entire
year:
• 400,000 shares of common stock, $1 par.
• 2,000 shares of 4% preferred stock, $100 par, convertible share-for-share into common stock.
M's 2016 net income was $1,800,000, and its income tax rate for the year was 30%. In the computation
of diluted earnings per share for 2016, the amount to be used in the numerator is:
a. $1,792,000.
b. $1,796,000.
c. $1,800,000.
d. $1,802,400.
105. When we assume conversion of convertible bonds, the numerator is increased by:
a. The amount of after-tax interest.
b. The gross amount of interest.
c. The weighted-average interest.
d. The amount of cash paid during the current year for interest.
106. When we take into account the dilutive effect of convertible securities in the calculation of EPS,
the method used is called the:
a. Treasury stock method.
b. If converted method.
c. Optional method.
d. Dilution method.
107. Contingently issuable shares may be included in:
a. Basic EPS.
b. Diluted EPS.
c. Both A and B.
d. None of these answer choices is correct.
108. If convertible bonds were issued at a discount, when computing diluted EPS, the amortization of
the bond discount:
a. Will have no effect.
b. Will decrease the numerator.
c. Will increase the numerator.
d. May increase or decrease the numerator, depending on the amortization method used.
109. XYZ paid $10,000 in dividends in January of the current year to its preferred shareholders. The
preferred stock is nonconvertible and noncumulative. The dividend:
a. Will be added to the denominator of the earnings per share fraction for the current year.
b. Will be added to the numerator of the earnings per share fraction for the current year.
c. Will be subtracted from the numerator of the earnings per share fraction for the current year.
d. May not affect earnings per share depending on the declaration date.
110. During the current year, East Corporation had 2 million shares of common stock outstanding. Two
thousand 8% convertible bonds, each with $1,000 face value, were issued at face amount at the
beginning of the year. East reported income before tax of $3 million and net income of $1.8 million for
the year. Each bond is convertible into 10 shares of common stock. What is diluted EPS (rounded)?
a. $0.90.
b. $0.95.
c. $0.89.
d. $0.94.
111. During the current year, High Corporation had 3 million shares of common stock outstanding. Five
thousand $1,000, 6% convertible bonds were issued at face amount at the beginning of the year. High
reported income before tax of $4 million and net income of $2.4 million for the year. Each bond is
convertible into 10 shares of common. What is diluted EPS (rounded)?
a. $0.85.
b. $0.86.
c. $0.80.
d. $0.79.
112. Ignatius Corporation had 7 million shares of common stock outstanding during the current
calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is convertible
into 50 shares of common stock. The bonds were issued at face amount and pay interest quarterly at an
annual rate of 10%. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred
stock. Dividends are declared and paid semiannually. Ignatius has an effective tax rate of 40%. Ignatius
would report the following EPS data (rounded) on its net income of $20 million:
Basic EPS Diluted EPS
a. $2.77 $2.67
b. $2.81 $2.71
c. $2.85 $2.67
d. $2.81 $2.68
113. Jet Corporation had 8 million shares of common stock outstanding during the current calendar
year. On July 1, Jet issued ten thousand $1,000 face value, convertible bonds. Each bond is convertible
into 50 shares of common stock. The bonds were issued at face amount and pay interest quarterly for 20
years. They have a stated rate of 12%. Jet had income before tax of $30 million and a net income of $18
million. Jet would report the following EPS data (rounded):
Basic EPS Diluted EPS
a. $2.25 $2.23
b. $2.25 n/a antidilutive
c. $2.25 $2.16
d. $2.25 $2.12
114. Horrocks Company granted 180,000 restricted stock awards of its no par common shares to
executives, subject to forfeiture if employment is terminated within three years. Horrocks’ common
shares have a market price of $10 per share on January 1, 2015, the grant date, and at December 31,
2016, averaging $10 throughout the year. When calculating diluted EPS at December 31, 2016, the net
increase in the denominator of the EPS fraction will be:
a. 0 shares.
b. 60,000 shares.
c. 120,000 shares.
d. 180,000 shares.
115. The single accounting number in the annual report that receives the most attention by investors is:
a. Total revenue.
b. Book value per share.
c. Equity per share.
d. Earnings per share.
116. A primary goal of earnings per share determination is:
a. Conservatism.
b. Comparability.
c. Materiality.
d. Objectivity.
117. The reporting of earnings per share is required only for:
a. Private companies.
b. Companies with complex capital structures.
c. Publicly traded corporations.
d. Medium-sized and large corporations.
118. Which of the following is a correct statement concerning earnings per share?
a. Earnings per share can never be a negative number.
b. Earnings per share must be reported for all corporations.
c. If a company has discontinued operations, at least two EPS amounts must be reported.
d. Reported earnings per share is the result of dividing weighted-average shares by net income.
119. When a company's income statement includes discontinued operations, the company should report
per share information on:
Net Income Income from Continuing Operations
a. Yes No
b. Yes Yes
c. No No
d. No Yes
120. When a company's income statement includes discontinued operations and a gain on the sale of
machinery, the company should report per share information on:
Net Income Income from Continuing Operations Gain on sale of machinery
a. Yes No No
b. Yes Yes No
c. Yes No Yes
d. Yes Yes Yes
121. Earnings per share data is required to be reported:
a. In disclosure notes to the financial statements.
b. Only if it adds to the relevance of the income statement.
c. In the summary section of the annual report.
d. On the face of the income statement.
122. Under IFRS, a deferred tax asset for stock options:
a. Is created for the cumulative amount of the fair value of the options the company has recorded for
compensation expense.
b. Is the portion of the options’ intrinsic value earned to date times the tax rate.
c. Is the tax rate times the amount of compensation.
d. Isn’t created if the award is “in the money;” that is, it has intrinsic value.
123. Which of the following statements is true regarding share appreciation rights (SAR) payable in
cash?
a. Any change in estimated total compensation is recorded as a prior adjustment.
b. The total amount of compensation is not known for certain until the date the SAR is exercised.
c. The liability is adjusted only to reflect each additional year of service.
d. None of these answer choices is correct.
124. Red Company is a calendar-year U.S. firm with operations in several countries. At January 1,
2016, the company had issued 40,000 executive stock options permitting executives to buy 40,000
shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the
third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Amount Fair Value
Date Vesting per Option
Dec. 31, 2016 20% $7
Dec. 31, 2017 30% $8
Dec. 31, 2018 50% $12
What is the compensation expense related to the options to be recorded in 2017?
a. $ 48,000.
b. $ 96,000.
c. $128,000.
d. $140,000.
125. Green Company is a calendar-year U.S. firm with operations in several countries. At January 1,
2016, the company had issued 40,000 executive stock options permitting executives to buy 40,000
shares of stock for $25. The vesting schedule is 20% the first year, 30% the second year, and 50% the
third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Amount Fair Value
Date Vesting per Option
Dec. 31, 2016 20% $7
Dec. 31, 2017 30% $8
Dec. 31, 2018 50% $12
Assuming Green uses the straight-line method, what is the compensation expense related to the options
to be recorded in 2017?
a. $130,667.
b. $200,000.
c. $333,333.
d. $400,000.
126. Yellow Company is a calendar-year firm with operations in several countries. At January 1, 2016,
the company had issued 40,000 executive stock options permitting executives to buy 40,000 shares
of stock for $30. The vesting schedule is 20% the first year, 30% the second year, and 50% the
third year (graded-vesting). The fair value of the options is estimated as follows:
Vesting Amount Fair Value
Date Vesting per Option
Dec. 31, 2016 25% $6
Dec. 31, 2017 25% $7
Dec. 31, 2018 50% $9
Assuming Yellow prepares its financial statements in accordance with International
Financial Reporting Standards (IFRS), what is the compensation expense related to the
options to be recorded in 2017?
a. $ 40,000.
b. $ 60,000.
c. $ 95,000.
Chapter 019 Share-Based Compensation and Earnings per Share
d. $130,000.
Chapter 019 Share-Based Compensation and Earnings per Share
Matching Pair Questions
127. Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Convertible bonds
Add after-tax interest to EPS numerator.
2. Simple capital structure
Applies to both convertible debt and convertible
equity securities.
3. Treasury stock method
Approximation of EPS assuming potential
common shares became common stock.
4. If-converted method
Assumption used for options, rights, and
warrants.
5. Diluted EPS
Dual presentation of EPS does not apply.
128. Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Price-earnings ratio
Expresses the market value of a stock as a
multiple of EPS.
2. Undeclared preferred
dividends
Factored into EPS if the stock is
cumulative.
3. Convertible preferred stock
dividends
Handled retroactively in computing
current and prior years' EPS.
4. Contingently issuable shares
Omitted from the EPS numerator under
the "if converted" method.
5. Stock dividends and splits
Included in diluted EPS when
performance criterion is met.
Answer:
129. Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBER
1. Options, rights, and warrants
Need to be ranked high to low in terms
of dilutive effect.
2. Multiple convertible
securities
No dilution considered.
3. Basic EPS
Tends to be low for growth companies.
4. Earnings available to common
shareholders
The numerator in the EPS formula.
5. Dividend payout ratio
The treasury stock method is used.
Answer:
130. Listed below are five terms followed by a list of phrases that describe or characterize each of the
terms. Match each phrase with the number for the correct term.
TERM
PHRASE
NUMBE
R
1. Antidilutive security
Potentially dilutive debt.
2. Reacquired shares
Time-weighted decrease in the basic EPS
denominator.
3. Preferred dividends
Time-weighted increase in the basic EPS
denominator.
4. Issuance of new
shares
Decrease in the EPS numerator.
5. Convertible bonds
Does not affect and is not affected by EPS
calculations.
