Chapter 019 Share-Based Compensation and Earnings per Share
131. 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 most correct term.
TERM
PHRASE
NUMBE
R
1. Expired options
A right to buy shares of stock in the future.
2. Stock option
Shares given for achieving financial goals.
3. Bonuses
Benefit period over which stock option
compensation expense is spread.
4. Performance condition
plans
Paid-in capital effectively renamed under
the fair value approach.
5. Vesting period
Expensed as compensation in the period
earned.
NUMBE
R
1. Expired options
A right to buy shares of stock in the
future.
3. Bonuses
Benefit period over which stock option
compensation expense is spread.
4. Performance condition plans
Paid-in capital effectively renamed under
the fair value approach.
5. Vesting period
Expensed as compensation in the period
earned.
132. 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 most correct term.
TERM
PHRASE
NUMBE
R
1. Stock volatility
Require(s) compensation expense regardless of
condition satisfaction.
2. Option exercise price
Date on or after which employees can buy
stock with options.
3. Option exercise date
Date on which options are awarded.
4. Market condition plans
An important factor in option pricing models.
5. Grant date
The amount paid to convert the option into
stock.
TERM
PHRASE
NUMBE
R
1. Stock volatility
Require(s) compensation expense regardless of
condition satisfaction.
2. Option exercise price
Date on or after which employees can buy
stock with options.
Date on which options are awarded.
An important factor in option pricing models.
5. Grant date
The amount paid to convert the option into
stock.
Chapter 019 Share-Based Compensation and Earnings per Share
Problems
133. EG Corporation granted restricted stock units (RSUs) representing 32 million of its $1 par
common shares to executives, subject to forfeiture if employment is terminated within four
years. After the recipients of the RSUs satisfy the vesting requirement, the company will
distribute the shares. The common shares had a market price of $6 per share on the grant date.
Required:
(1.) Ignoring taxes, determine the total compensation cost pertaining to the restricted stock
units.
(2.) What is the effect on earnings in the year after the shares are granted to executives?
134. On January 1, 2016, Cobbler Corporation awarded restricted stock units (RSUs) representing
30 million of its $1 par common shares to key personnel, subject to forfeiture if employment is
terminated within three years. After the recipients of the RSUs satisfy the vesting requirement,
the company will distribute the shares. On the grant date, the shares had a market price of $3
per share.
Required:
(1.) Determine the total compensation cost pertaining to the RSUs.
(2.) Prepare the appropriate journal entry to record the award of RSUs on January 1, 2016.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31,
2016.
(4.) Prepare the appropriate journal entry to record compensation expense on December 31,
2017.
(5.) Prepare the appropriate journal entry to record compensation expense on December 31,
2018.
(6.) Prepare the appropriate journal entry to record the lifting of restrictions on the RSUs and
issuing shares at December 31, 2018.
Chapter 019 Share-Based Compensation and Earnings per Share
Answer:
135. Tweet Inc. included the following disclosure note in an annual report:
Share-Based Compensation (in part)
…. compensation expense related to these grants is based on the grant date fair value of the RSUs
and is recognized on a straight-line basis over the applicable three-year vesting period.
The following table summarizes the activities for our unvested RSUs for the year ended
December 31, 2016:
Number of Shares Weighted Average
Grant Date
Fair Value
Unvested at December 31, 2015 110,000 $ 21.40
Granted 54,000 29.50
Vested (48,300) 17.00
Forfeited (14,800) 25.30
Unvested at December 31, 2016 100,900 $ 27.30
Required:
(1.) Ignoring taxes, determine compensation expense Tweet reported in the year ended December
31, 2017, for the restricted stock units granted during the year ended December 31, 2016.
(2.) Based on the information provided in the disclosure note, prepare the journal entry that
summarizes the vesting of RSUs during the year ended December 31, 2016. (Tweet’s
common shares have a par amount per share of $0.01.)
Answer:
Chapter 019 Share-Based Compensation and Earnings per Share
136. As part of its stock-based compensation package, on January 1, 2016, Weldon Well Supplies
granted restricted stock units (RSUs) representing 100,000 $1 par common shares. At exercise,
holders of the RSUs are entitled to receive cash or stock equal in value to the market price of
those shares at exercise. The RSUs cannot be exercised until the end of 2019 (vesting date) and
expire at the end of 2021. The $1 par common shares have a market price of $6 per share on the
grant date. The fair value at December 31, 2016, 2017, 2018, 2019, and 2020, is $16, $12, $16,
$10, and $12, respectively. All recipients are expected to remain employed through the vesting
date.
Required:
(1.) Prepare the appropriate journal entry to record the award of RSUs on January 1,
2016.
(2.) Prepare the appropriate journal entries pertaining to the RSUs on December 31, 2016–
December 31, 2019.
(3.) The RSUs remain unexercised on December 31, 2020. Prepare the appropriate journal
entry on that date.
(4.) The RSUs are exercised on June 6, 2021, when the share price is $13, and executives
choose to receive cash. Prepare the appropriate journal entry(s) on that date.
Answer:
Chapter 019 Share-Based Compensation and Earnings per Share
137. The Peach Corporation provides restricted stock to certain executives. Under the plan, the
company granted 30 million shares on January 1, 2016, which vest in four years. The fair value of the
shares is $14. No forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the restricted stock.
2. Prepare the appropriate journal entry (if any) to record the award of restricted stock on January 1,
2016.
3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31,
2016.
138. Jmart Corporation included the following disclosure note in a recent annual report:
RESTRICTED STOCK (in part)
…we issued 100,000 shares of restricted stock at market prices ranging from $46.00 to $60. …The
restricted stock generally vests over three years, during which time we will recognize total
compensation expense of approximately $6 million.
Required:
1. Based on the information provided in the disclosure note, determine the weighted average market
price of the restricted stock issued.
2. How much compensation expense did Jmart report for the year following the year in which the
restricted stock was issued?
139. DJ Co. is a calendar-year firm with 120 million common shares outstanding throughout 2016.
As part of its executive compensation plan, at January 1, 2015, the company had issued 12 million
executive stock options permitting executives to buy 12 million shares of stock for $10 each within the
next eight years, but not prior to January 1, 2018. The fair value of the options was estimated on the
grant date to be $3 per option. The stock options qualify for tax purposes as an incentive plan. The
company’s net income was $480 million in 2016. Its income tax rate is 40%. The average market price
of the stock during 2016 was $12 per share.
Required:
Determine basic and diluted earnings per share (rounded to two decimal places) for DJ in 2016.
Answer:
Chapter 019 Share-Based Compensation and Earnings per Share
140. JD Co. is a calendar-year firm with 600 million common shares outstanding throughout 2016 and
2017. As part of its executive compensation plan, at January 1, 2015, the company had issued 60
million executive stock options permitting executives to buy 60 million shares of stock for $10
per share within the next eight years, but not prior to January 1, 2018. The fair value of the
options was estimated on the grant date to be $3 per option.
In 2016, JD began granting employees stock awards rather than stock options as part of its equity
compensation plans and granted 30 million restricted common shares to senior executives at
January 1, 2016. The shares vest four years later. The fair value of the stock was $12 per share on
the grant date. The average market price of the common shares was $12 and $15 during 2016 and
2017, respectively.
The stock options qualify for tax purposes as an incentive plan. The restricted stock does not.
The company’s net income was $240 million and $300 million in 2016 and 2017, respectively. Its
income tax rate is 40%.
Required:
1. Determine basic and diluted earnings per share (rounded to 2 decimal places) for JD in 2016.
2. Determine basic and diluted earnings per share for JD (rounded to 2 decimal places) in 2017.
Chapter 019 Share-Based Compensation and Earnings per Share
1.
Chapter 019 Share-Based Compensation and Earnings per Share
Chapter 019 Share-Based Compensation and Earnings per Share
141. Mann Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2016, the
corporation granted 10 million of its $5 par common shares, subject to forfeiture if employment is
terminated within two years. The common shares have a market value of $10 per share on the date
the award is granted.
Required:
1. Assume that no shares are forfeited. Determine the total compensation cost pertaining to the
restricted shares.
2. Prepare the appropriate journal entries related to the restricted stock through December 31,
2017.
Answer:
142. On January 1, 2016, Jeans-R-Us Company awarded 15 million of its $1 par common shares to
key personnel, subject to forfeiture if employment is terminated within three years. On the date of
the grant, the stock had a market price of $3 per share.
Required:
(1.) Determine the total compensation cost pertaining to the restricted shares.
(2.) Prepare the appropriate journal entry to record the award on January 1, 2016.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2016.
Chapter 019 Share-Based Compensation and Earnings per Share
143. On January 1, 2016, Jeans-R-Us Company awarded 15 million of its $1 par common shares to key
personnel, subject to forfeiture if employment is terminated within three years. On the date of the
grant, the stock had a market price of $3 per share.
Required:
(1.) Determine the total compensation cost pertaining to the restricted shares.
(2.) Prepare the appropriate journal entry to record the award on January 1, 2016.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31,
2016.
(4.) Prepare the appropriate journal entry to record compensation expense on December 31,
2017.
(5.) Prepare the appropriate journal entry to record compensation expense on December 31,
2018.
(6.) Prepare the appropriate journal entry to record the lifting of restrictions on December 31,
2018.
144. Hammerstein Corporation offers a variety of share-based compensation plans to employees. Under
its restricted stock award plan, the company, on January 1, 2016, granted 2 million of its $1 par
common shares to various division managers. The shares are subject to forfeiture if employment is
terminated within four years. The common shares have a market price of $20 per share on the award
date.
Required:
(1.) Determine the total compensation cost from these restricted shares.
(2.) Prepare the appropriate journal entry to record the award on January 1, 2016.
(3.) Prepare the appropriate journal entry to record compensation expense on December 31, 2016.
(4.) Suppose a 15% forfeiture rate was expected prior to vesting. Determine the total compensation cost,
assuming the company follows the fair value approach and chooses to anticipate forfeitures at the grant
date.
145. The Santiago Corporation provides an executive stock option plan. Under the plan, the company
granted options on January 1, 2016, that permit executives to acquire 70 million of the company’s $1
par value common shares within the next eight years, but not before December 31, 2019 (the vesting
date). The exercise price is the market price of the shares on the date of the grant, $27 per share. The
fair value of the options, estimated by an appropriate option pricing model, is $4 per option. No
forfeitures are anticipated. Ignore taxes.
Required:
1. Determine the total compensation cost pertaining to the options.
2. Prepare the appropriate journal entry (if any) to record the award of options on January 1, 2016.
3. Prepare the appropriate journal entry (if any) to record compensation expense on December 31,
2016.
146. Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2016,
the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is
terminated within two years. The common shares have a market value of $6 per share on the date the
award is granted.
Required:
(1.) Assume that no shares are forfeited. Determine the total compensation cost pertaining to the
restricted shares.
(2.) Prepare the appropriate journal entries related to the restricted stock through December 31, 2017.
147. Olde Corporation provides an executive stock option plan. Under the plan, the company granted
options on January 1, 2016, that permit executives to acquire 2 million of the company‘s $1 par value
common shares within the next five years, but not before December 31, 2017 (the vesting date). The
exercise price is the market price of the shares on the date of the grant, $14 per share. The fair value of
the options, estimated by an appropriate option pricing model, is $2 per option. No forfeitures are
anticipated. Ignore taxes.
Required:
(1.) Determine the total compensation cost pertaining to the options, assuming the fair value approach
has been selected.
(2.) Prepare the appropriate journal entry to record the award of the options on January 1, 2016.
(3.) Prepare the journal entry to record compensation expense on December 31, 2016.
(4.) Prepare the journal entry to record compensation expense on December 31, 2017.
148. The Burford Corporation provides an executive stock option plan. Under the plan, the company
granted options on January 1, 2016, that permit executives to acquire 12 million of the company’s $1
par value common shares within the next five years, but not before December 31, 2019 (the vesting
date). The exercise price is the market price of the shares on the date of the grant, $14 per share. The
fair value of the options, estimated by an appropriate model, is $3 per option. No forfeitures are
anticipated. Ignore taxes.
Required:
(1.) Determine the total compensation cost pertaining to the options. Show calculations.
(2.) Prepare the appropriate journal entry (if any) to record the award of options on January 1, 2016.
(3.) Prepare the appropriate journal entry (if any) to record compensation expense on December 31,
2016.
Chapter 019 Share-Based Compensation and Earnings per Share
149. In order to encourage employee ownership of the company’s $1 par common shares, T Corp.
permits any of its employees to buy shares directly from the company through payroll deduction. There
are no brokerage fees and shares can be purchased at a 15% discount. During June, employees
purchased 150,000 shares at a time when the market price of the shares on the New York Stock
Exchange was $10 per share.
Required:
Prepare the appropriate journal entry to record the June purchases of shares under the employee share
purchase plan.
150. Kramer Inc. had 95 million shares of common stock, 1 million shares of 6%, $100 par, cumulative
preferred stock, and 1 million shares of 8%, $100 par, noncumulative preferred stock outstanding at the
end of 2015 and 2016. No dividends were declared or paid on common stock in either year. In 2016, a
$3 million dividend was paid on the 6% preferred stock and a $4 million dividend was paid on the 8%
preferred stock. Net income for 2016 was $300 million. The company’s tax rate is 30%.
Required:
Compute basic earnings per share (rounded to 2 decimal places) for the year ended December 31, 2016.
Chapter 019 Share-Based Compensation and Earnings per Share
151. Capital Consulting Company had 400,000 shares of common stock outstanding on December 31,
2016. On that date, there were also 5,000 shares of $100 par, 6% noncumulative preferred stock
outstanding. On March 1, 2016, the company’s common stock split 3-for-1. On December 15, 2016, a
preferred dividend was declared and paid in the amount of $25,000. Net income for 2016 was
$3,000,000.
Required:
Compute basic earnings per share (rounded to 2 decimal places) for the year ended December 31,
2016.
152. Parsley Corporation had 250,000 shares of common stock and 5,000 shares of 8%, $100 par,
preferred stock outstanding on December 31, 2015. The preferred stock is cumulative, nonconvertible
preferred stock. On June 1, 2016, Parsley sold 36,000 shares of common stock for cash. No cash
dividends were declared for 2016. Parsley reported a net loss of $320,000 for the year ended December
31, 2013.
Required:
Calculate Parsley’s loss per share (rounded to 2 decimal places) for the year ended December 31, 2016.