978-1259722653 Chapter 15 Solution Manual Part 5

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C15-4. Salesforce.com: Interpreting Share-based Compensation

Disclosures (LO 15-7, LO 15-8)

All answers involving financial statement amounts are in

thousands.

Requirement 1: 2015 share-based compensation expense and

classification

The total amount of share-based compensation expense is $564,765. It

The entry would have been:

DR Various compensation expense accounts $564,765

Marketing and sales, and General and administrative expenses

Requirement 2: Net loss versus cash from operations

There are a number of large non-cash expenses, Depreciation and

Requirement 3: Cost of options granted versus 2015 share-based

compensation expense

Total compensation cost of options granted expense is $163,510.286

granted in 2015 of 9,506.412 from Note 7.

Note 1 says that awards generally vest over 4 years. Therefore, the above

requirement 1 above.

Requirement 4: Verify fair value of options granted in 2015

Most of the assumptions come from Note 1 (Accounting for Stock-Based

Expense):

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Dividends = zero.

The exercise price and stock price come from Note 7, for options granted

during 2015:

Using the CBOE calculator at www.cboe.com, one enters the above

values.

The $16.90 value approximates the salesforce.com of $17.20, though we had

value of an option.

Requirement 5: Effect of assumption change

The change increased the fair value of the option. The longer time period

expected stock price and the present value of the exercise price.

Requirement 6: Aggregate intrinsic value and interpretation

Note that salesforce.com’s intrinsic value table is presented in actual dollars

$34.37) equals $248,470.259, which is very close to the reported amount of

$248,524.393.

Outstanding represents all options, whereas exercisable means that the

options have vested. Unvested options cannot be exercised.

$379,380.854 from the note divided by market value of $36,726,144 ($56.45

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Requirement 7: Tax benefits

Excess tax benefits of $7,730 are shown as an increase to the financing

Requirement 8: Effect of ASU 2016-09

Income tax expense will be lower. The $7,730 in excess tax benefits from

though it has a GAAP loss. Normally, we would expect an income tax benefit

that is subtracted from the GAAP loss.

Subtracting $7,730 from income tax expense of $49,603 yields a new income

Requirement 9: EPS effect

Salesforce.com has a Net loss of $(262,688). If the denominator for EPS is

Recall from questions 1 and 2 that share-based compensation expense was

$104,409, computed as -$262,688 + [share-based expense of 564,765 x (1

minus the tax rate of .65)].

C15-5. Classifying as equity or debt (LO LO 15-1, 15-3, LO 15-9)

Requirement 1:

The cash flows associated with the January 1, 1997 issuance of junior

debentures and “capital securities” (preferred stock) are as follows:

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The end result is that investors own preferred stock and Aon Corp has

the cash. Aon Capital has no assets other than the junior debentures

from Aon Corp.

Requirement 2:

The interest and dividend payment cash flows are as follows:

Requirement 3:

For financial reporting purposes, Aon Capital will be consolidated with

Similarly, interest “income” (at Aon Capital) will be cancelled against

Requirement 4:

There are two related reasons why Aon Corp. created Aon Capital as

a vehicle for raising $800 million cash. One explanation is that doing

tax advantage).

A second reason to create Aon Capital is to keep the “debt” off of the

books of Aon Corp. Although the transaction has the legal form of a

to say so.

Requirement 5:

Aon’s financial statements pre-date current GAAP (pre-Codification

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GAAP (and SEC rules) prevailing at the time and shows the

redeemable preferred in the “mezzanine” section.

Requirement 6:

The following schedule shows the calculation of Aon’s debt-to-equity

ratio with and without the preferred capital securities being considered

as debt:

As reported Preferred as debt

2002

2001

2002

2001

Short-term borrowings

$117

$257

$117

$257

Notes payable $1,671 $1,694 $1,671 $1,694

Preferred capital securities as debt $702 $800

Total debt

$1,788

$1,951

$2,490

$2,751

Redeemable preferred stock $50 $50 $50 $50

Preferred capital securities as equity $702 $800

Common stockholders equity $3,895 $3,465 $3,895 $3,465

Total equity

$4,647

$4,315

$3,945

$3,515

Long-term debt to equity

0.38

0.45

0.63

0.78

true financial condition.

Part B: Cephalon Inc.’s Zero-Coupon, Zero Yield-to-Maturity

Convertible Notes

Requirement 1:

The following entry was made when the convertible notes were

issued:

U.S. GAAP does not yet require firms to separately value the

company’s books.

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Because the note does not require any cash interest or principal

Requirement 2:

Investors paid $233.854 million (rounded) for the note and another

paid $516.146 million (or $750.000 – $233.854) for the conversion

option.

Requirement 3:

The following entry would be made when the notes are issued on

June 11, 2003:

The stock options account would appear on the balance sheet as part

of stockholders’ equity.

At the end of the year, Cephalon would record interest expense on the

only 204 days out of a 365-day year. Interest expense would then

total only $7.842 million (or $14.031 x 204 / 365) and the company

No other entries are required.

Requirement 4:

Current GAAP follows the accounting described in Requirement 1,

restrictions are no longer in force, Cephalon will include the Notes in

the computation of diluted EPS using the “if converted” method

described in the text.

Requirement 5:

As the book goes to press, the FASB is still deliberating changes to

debt and option components of the note as shown in Requirement 3.

Part C: Avenet’s Cash Settled Convertible Debt

Requirement 1:

The following entry was made when the convertible debentures were

originally issued:

component of the convertible debenture. Interest expense would be

recorded at 2% per year, or $6 million ($300 million x 2%) annually.

Requirement 2:

Under current GAAP, the following entry would have been made when

Interest expense would be recorded at 7% per year, based on the

maturity (see Chapter 11).

Requirement 3:

IFRS rules also require separation of the embedded conversion option

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Requirement 4:

Management may have decided to extinguish the 2% convertible debt

so that it could take advantage of a more favorable interest rate

expense that would have been reported under the new GAAP

guidelines.

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