Chapter 019 Share-Based Compensation and Earnings per Share
46. What is the entry to record the expiration of 10% of the options on December 31, 2020?
a. Paid-in capital—stock options 6,000
Paid-in capital—expired stock options 6,000
b. Paid-in capital—stock options 6,000
Retained earnings 6,000
c. Paid-in capital—stock options 6,000
Compensation expense 6,000
d. Stock options receivable 30,000
Common stock 6,000
Paid-in capital—excess of par 27,000
47. Under U.S. GAAP, 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 fair value of all the options.
d. isn’t created if the award is “in the money;” that is, it has intrinsic value.
48. On January 1, 2016, Albacore Company had 300,000 shares of its common stock issued and
outstanding. Albacore issued a 10% stock dividend on July 1, 2016. On October 1, 2016, Albacore
retired 12,000 of its common shares. When calculating basic earnings per share for 2016, what is the
appropriate number of shares for Albacore to use in the denominator of the EPS fraction?
a. 303,000.
b. 342,000.
c. 312,000.
d. 327,000.
49. To encourage employee ownership of the company’s common shares, KL 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 May, employees purchased 10,000 shares
at a time when the market price of the shares on the New York Stock Exchange was $15 per share. KL
will record compensation expense associated with the May purchases of:
a. $ 0.
b. $ 15,000.
c. $ 22,500.
d. $150,000.
50. Martin 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 10% discount. During 2016,
employees purchased 8 million shares; during this same period, the shares had a market price of $15 per
share at the end of the year. Martin’s 2016 pretax earnings will be reduced by:
a. $ 0.
b. $ 12 million.
c. $108 million.
d. $120 million.
51. How many types of potential common shares must a corporation have in order to be said to have a
complex capital structure?
a. Three.
b. Two.
c. One.
d. Zero.
52. Which of the following does not represent potential shares?
a. Convertible preferred stock.
b. Convertible bonds.
c. Stock rights.
d. Participating preferred stock.
53. Basic earnings per share ignores:
a. All potential common shares.
b. Some potential common shares, but not others.
c. Dividends declared on noncumulative preferred stock.
d. Stock splits.
54. A simple capital structure might include:
a. Stock rights.
b. Convertible bonds.
c. Nonconvertible preferred stock.
d. Stock purchase warrants.
55. When several types of potential common shares exist, the one that enters the computation of diluted
EPS first is the one with the:
a. Highest incremental effect.
b. Higher numerator.
c. Median incremental effect.
d. Lowest incremental effect.
56. Which of the following results in increasing basic earnings per share?
a. Paying more than book (carrying) value to retire outstanding bonds.
b. Issuing cumulative preferred stock.
c. Purchasing treasury stock.
d. All of these answer choices increase basic earnings per share.
57. ABC declared and paid cash dividends to its common shareholders in January of the current year.
The dividend:
a. Will be added to the numerator of the earnings per share fraction for the current year.
b. Will be added to the denominator 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. Has no effect on the earnings per share for the coming year.
58. Nonconvertible bonds affect the calculation of:
a. Basic earnings per share.
b. Diluted earnings per share.
c. Both A and B.
d. None of these answer choices is correct.
Chapter 019 Share-Based Compensation and Earnings per Share
Use the following to answer questions 59 and 60:
During 2016, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6%
preferred stock outstanding. The preferred stock does not have cumulative or convertible features.
Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred
shareholders, respectively, during 2016.
On January 1, 2015, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond
is convertible into five common shares.
Angel’s net income for the year ended December 31, 2016, was $6 million. The income tax rate is 20%.
59. What is Angel’s basic earnings per share for 2016, rounded to the nearest cent?
a. $5.29.
b. $5.57.
c. $6.50.
d. None of these answer choices is correct.
60. What will Angel report as diluted earnings per share for 2016, rounded to the nearest cent?
a. $6.43.
b. $6.25.
c. $6.22.
d. None of these answer choices is correct.
61. Basic earnings per share is computed using:
a. The actual number of common shares outstanding at the end of the year.
b. A weighted-average of preferred and common shares.
c. The number of common shares outstanding plus potential common shares.
d. Weighted-average common shares outstanding for the year.
62. When computing diluted earnings per share, which of the following will not be considered in the
calculation?
a. Dividends paid on common stock.
b. The weighted average common shares.
c. The effect of stock splits.
d. The number of common shares represented by stock purchase warrants.
63. When a company’s only potential common shares are convertible bonds:
a. Diluted EPS will be greater if the bonds are actually converted than if they are not converted.
b. Diluted EPS will be smaller if the bonds are actually converted than if the bonds are not converted.
c. Diluted EPS will be the same whether or not the bonds are converted.
d. The effect of conversion on diluted EPS cannot be determined without additional information.
64. The adjustment to the weighted-average shares for retired shares is the same as for issuing new
shares except:
a. The shares are deducted rather than added.
b. The shares are added rather than deducted.
c. The shares are treated as being acquired at the end of the year.
d. The shares are treated as being acquired at the beginning of the year.
65. On December 31, 2015, the Frisbee Company had 250,000 shares of common stock issued and
outstanding. On March 31, 2016, the company sold 50,000 additional shares for cash. Frisbee’s net
income for the year ended December 31, 2016, was $700,000. During 2016, Frisbee declared and paid
$80,000 in cash dividends on its nonconvertible preferred stock. What is the 2016 basic earnings per
share (rounded)?
a. $2.16.
b. $3.50.
c. $3.10.
d. $2.80.
66. Flyaway Travel Company reported net income for 2016 in the amount of $90,000. During 2016,
Flyaway declared and paid $2,125 in cash dividends on its nonconvertible preferred stock. Flyaway also
paid $10,000 cash dividends on its common stock. Flyaway had 40,000 common shares outstanding
from January 1 until 10,000 new shares were sold for cash on April 1, 2016. What is 2016 basic
earnings per share?
a. $1.85.
b. $1.64.
c. $1.76.
d. None of these answer choices is correct.
67. The result of a stock split is:
a. A larger number of more valuable shares.
b. An increase in corporate assets.
c. An increase in shareholders’ equity.
d. A larger number of less valuable shares.
68. If a stock split occurred, when calculating the current year’s EPS, the shares are treated as issued:
a. At the end of the year.
b. On the first day of the next fiscal year.
c. At the beginning of the year.
d. On the date of distribution.
69. Stock options, rights, and warrants are different from convertible securities in that they:
a. Typically increase cash upon exercise.
b. Usually reduce total assets upon exercise.
c. Often reduce liabilities upon exercise.
d. Normally increase retained earnings upon exercise.
70. The calculation of diluted earnings per share assumes that stock options were exercised and that the
proceeds were used to buy treasury stock at:
a. The average market price for the reporting period.
b. The market price at the end of the period.
c. The purchase price stated on the options.
d. The stock’s par value.
71. When we take into account the dilutive effect of stock options, rights, and warrants in the
calculation of EPS, the method used is called the:
a. Optional method.
b. If converted method.
c. Dilution method.
d. Treasury stock method.
72. In computing diluted earnings per share, the treasury stock method is used for:
a. Stock warrants.
b. Stock splits.
c. Reverse stock splits.
d. Convertible preferred stock.
73. The following information pertains to J Company’s outstanding stock for 2016:
Common stock, $1 par
Shares outstanding, 1/1/2016 10,000
2 for 1 stock split, 4/1/2016 10,000
Shares issued, 7/1/2016 5,000
Preferred stock, $100 par, 7% cumulative
Shares outstanding, 1/1/2016 4,000
What is the number of shares J should use to calculate 2016 basic earnings per share?
a. 20,000.
b. 22,500.
c. 25,000.
d. 27,000.
74. When calculating diluted earnings per share, stock options:
a. Are included if they are antidilutive.
b. Should be ignored.
c. Are included if they are dilutive.
d. Increase the numerator while not affecting the denominator.
75. Which of the following will require a recalculation of weighted-average shares outstanding for all
years presented?
a. Stock dividends and stock splits.
b. Stock dividends but not stock splits.
c. Stock splits but not stock dividends.
d. Stock rights.
76. All other things equal, what is the effect on earnings per share when a corporation acquires shares of
its own stock on the open market?
a. Decrease.
b. No effect if the shares are held as treasury shares.
c. Increase only if the shares are considered to be retired.
d. Increase.
77. If a stock dividend were distributed, when calculating the current year’s EPS, the shares distributed
are treated as having been issued:
a. At the end of the year.
b. At the beginning of the year.
c. On the declaration date.
d. On the date of distribution.
78. Stock options do not affect the calculation of:
a. Diluted EPS.
b. Weighted-average common shares.
c. The denominator in the diluted EPS fraction.
d. Basic EPS.
79. The calculation of diluted earnings per share assumes that stock options were exercised and that the
proceeds were used to:
a. Buy common stock as an investment.
b. Retire preferred stock.
c. Buy treasury stock.
d. Increase net income.
Use the following information to answer questions 80 and 81.
Chapter 019 Share-Based Compensation and Earnings per Share
During 2016, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6% cumulative
preferred stock outstanding. The preferred stock has a par value of $100 per share. Falwell did not
declare or pay any dividends during 2016.
Falwell’s net income for the year ended December 31, 2016, was $2.5 million. The income tax rate is
40%. Falwell granted 10,000 stock options to its executives on January 1 of this year. Each option gives
its holder the right to buy 20 shares of common stock at an exercise price of $29 per share. The options
vest after one year. The market price of the common stock averaged $30 per share during 2016.
80. What is Falwell’s basic earnings per share for 2016, rounded to the nearest cent?
a. $3.14.
b. $4.40.
c. $5.00.
d. None of these answer choices is correct.
81. What is Falwell’s diluted earnings per share for 2016, rounded to the nearest cent?
a. $3.14.
b. $4.90.
c. $4.34.
d. Cannot determine from the given information.
82. On December 31, 2015, Beta Company had 300,000 shares of common stock issued and
outstanding. Beta issued a 5% stock dividend on June 30, 2016. On September 30, 2016, 40,000 shares
of common stock were reacquired as treasury stock. What is the appropriate number of shares to be
used in the basic earnings per share computation for 2016?
a. 315,000.
b. 307,500.
c. 305,000.
d. 267,500.
83. On December 31, 2015, the Bennett Company had 100,000 shares of common stock issued and
outstanding. On July 1, 2016, the company sold 20,000 additional shares for cash. Bennett’s net income
for the year ended December 31, 2016, was $650,000. During 2016, Bennett declared and paid $89,000
in cash dividends on its nonconvertible preferred stock. What is the 2016 basic earnings per share?
a. $5.91.
b. $5.61.
c. $5.10.
d. None of these answer choices is correct.
84. Getaway Travel Company reported net income for 2016 in the amount of $50,000. During 2016,
Getaway declared and paid $2,000 in cash dividends on its nonconvertible preferred stock. Getaway
also paid $10,000 cash dividends on its common stock. Getaway had 40,000 common shares
outstanding from January 1 until 10,000 new shares were sold for cash on July 1, 2016. A 2-for-1 stock
split was granted on July 5, 2016. What is the 2016 basic earnings per share (rounded)?
a. $.42.
b. $.47.
c. $.53.
d. $.56.
85. Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2016. On April 1,
2016, the company issued 20,000 shares of common stock. The company had outstanding fully vested
incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its
executives. The average market price of common stock for the year was $12. What number of shares of
stock (rounded) should be used in computing diluted earnings per share?
a. 65,000.
b. 56,667.
c. 55,000.
d. 46,667.
86. Blue Cab Company had 50,000 shares of common stock outstanding on January 1, 2016. On April
1, 2016, the company issued 20,000 shares of common stock. The company had outstanding fully
vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its
executives. The end-of-year market price of common stock was $13 while the average price for the year
was $12. The company reported net income in the amount of $269,915 for 2016. What is the diluted
earnings per share (rounded)?
a. $3.60.
b. $4.10.
c. $4.50.
d. $3.81.
87. Purple Cab Company had 50,000 shares of common stock outstanding on January 1, 2016. On April
1, 2016, the company issued 20,000 shares of common stock. The company had outstanding fully
vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its
executives. The average market price of common stock was $12. The company reported net income in
the amount of $269,915 for 2016. What is the basic earnings per share (rounded)?
a. $4.10.
b. $3.86.
c. $3.60.
d. $4.15.
88. Burnet Company had 30,000 shares of common stock outstanding on January 1, 2016. On April 1,
2016, the company issued 15,000 shares of common stock. The company had outstanding fully vested
incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives.
The average market price of common stock was $9. The company reported net income in the amount of
$189,374 for 2016. What is the effect of the options?
a. The options are antidilutive.
b. The options will dilute EPS by $.09 per share.
c. The options will dilute EPS by $.33 per share.
d. The options will dilute EPS by $.17 per share.
89. Dulce Corporation had 200,000 shares of common stock outstanding during the current year. There
were also fully vested options for 10,000 shares of common stock were granted with an exercise price
of $20. The market price of the common stock averaged $25 for the year. Net income was $4 million.
What is diluted EPS (rounded)?
a. $20.00.
b. $19.80.
c. $19.23.
d. $18.18.
90. Cracker Company had 2 million shares of common stock outstanding all through 2015. On April 1,
2016, an additional 100,000 shares were sold and issued. On September 30, 2016, Cracker declared a 2-
for-1 stock split. Net income in 2016 and 2015 was $10 million and $8 million, respectively. In the
2016 comparative financial statements, EPS (rounded) would be reported as follows:
2016 EPS 2015 EPS
a. $2.41 $2.00
b. $2.41 $4.00
c. $4.82 $4.00
d. $4.82 $4.00
91. Dublin Inc. had the following common stock record during the current calendar year:
Outstanding–beginning of year
2,000,000
Additional shares issued 6/30
100,000
Additional shares issued 9/30
100,000
A 10% stock dividend was paid on December 1. What is the number of shares to be used in computing
basic EPS?
a. 2,075,000.
b. 2,282,500.
c. 2,475,000.
d. 2,620,000.
92. Morrison Corporation had the following common stock record during the current calendar year:
Outstanding–January 1
2,000,000
Additional shares issued 3/31
100,000
Distributed a 10% stock dividend on 6/30
Additional shares issued 9/30
100,000
What is the number of shares to be used in computing basic EPS?
a. 2,000,000.
b. 2,205,000.
c. 2,307,500.
d. 2,335,000.
93. Gear Corporation had the following common stock record during the current calendar year:
Outstanding–January 1
100,000
Additional shares issued 3/31
5,000,000
Distributed a 10% stock dividend on 6/30
Shares reacquired 9/30
100,000
What is the number of shares to be used in computing basic EPS?
a. 5,500,000.
b. 4,210,000.
c. 5,303,750.
d. 5,050,000.