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Chapter 19 Share-Based Compensation and Earnings per
Share
QUESTIONS FOR REVIEW OF KEY TOPICS
Question 19–1
Restricted stock refers to shares actually awarded in the name of an employee,
although the employer might retain physical possession of the shares. Typically, the
employee has all rights of a shareholder, but the shares are subject to certain
restrictions or forfeiture. Usually the employee is not free to sell the shares during the
Question 19–2
The fair value of a stock option is determined by employing a recognized option
Answers to Questions (continued)
Question 19–3
The recipient pays no tax at the time of the grant or the exercise of the options
under an incentive plan. Instead, the tax on the difference between the option price
Question 19–4
For performance-based options initial estimates of compensation cost as well as
subsequent revisions of that estimate take into account the likelihood of both
forfeitures and achieving performance targets. If it is probable that the performance
Answers to Questions (continued)
Question 19–5
A firm has a simple capital structure if it has no potential common shares
Question 19–6
There is a fundamental difference between the increase in shares caused by stock
dividends and stock splits and an increase from selling new shares. When additional
shares are sold, both the assets of the firm and shareholders’ equity are increased by
19–4 Intermediate Accounting, 8/e
Answers to Questions (continued)
Question 19–7
The weighted-average number of shares for calculating EPS would be 104,500
determined as follows:
Question 19–8
Preferred dividends are deducted from the numerator in the EPS fraction so that
Question 19–9
Question 19–10
When calculating diluted EPS, we assume that the shares specified by stock
Answers to Questions (continued)
Question 19–11
The potentially dilutive effect of convertible bonds is reflected in diluted EPS
calculations by assuming the bonds were converted into common stock. The
Question 19–12
The potentially dilutive effect of convertible preferred stock is reflected in diluted
EPS calculations by assuming the preferred stock was converted into common stock,
just as is done with convertible bonds. The conversion is assumed to have occurred at
Question 19–13
The order in which convertible securities are included in the dilutive EPS
Answers to Questions (continued)
Question 19–14
For the treasury stock method, “proceeds” include (1) the amount, if any, received
Question 19–15
Contingently issuable shares are considered outstanding in the computation of
diluted EPS when they will later be issued upon the mere passage of time or because
of conditions that currently are met. If this year’s operating income was $2.2 million,
Answers to Questions (continued)
Question 19–16
The calculation of diluted EPS assumes convertible bonds had been converted at
the beginning of the year (unless they actually were issued later). If they actually had
Question 19–17
EPS data (both basic and diluted for a complex capital structure) must be
Question 19–18
Disclosure notes should include (a) a summary description of the rights and
19–8 Intermediate Accounting, 8/e
Answers to Questions (concluded)
Question 19–19
The fair value of stock options has two essential components: (1) intrinsic value
Question 19–20
The accounting treatment of SARs depends on whether the award is considered an
equity instrument or a liability. If the employer can choose to settle in shares rather
than cash, the award is considered to be equity. If the employee will receive cash or
can choose to receive cash, the award is considered to be a liability. This is the case
BRIEF EXERCISES
Brief Exercise 19–1
$6 fair value per share
x 8 million shares granted
= $48 million fair value of award
Brief Exercise 19–2
$10 fair value per share
x 16 million shares represented by RSUs shares granted
= $160 million fair value of shares represented by RSUs
Brief Exercise 19–3
$5 fair value per option
19–10 Intermediate Accounting, 8/e
Brief Exercise 19–4
The company should adjust the cumulative amount of compensation expense
recorded to date in the year the estimate changes.
2017
2018
Compensation expense ([$60 x 95% x 3/3] – 20 – 18) ............. 19
Paid-in capital—stock options ............................................. 19
Brief Exercise 19–5
($ in millions)
Cash ($17 exercise price x 12 million shares) ...................... 204
Brief Exercise 19–6
Paid-in capital—stock options (account balance) ............ 60
Paid-in capital—expiration of stock options .......... 60
Brief Exercise 19–7
The estimate of the total compensation would be:
Brief Exercise 19–8
The new estimate of the total compensation would change to:
19–12 Intermediate Accounting, 8/e
Brief Exercise 19–9
In that case, in 2017, the revised estimate of the total compensation would change to
$600,000:
Farmer would reflect the cumulative effect on compensation in 2017 earnings and
record compensation thereafter:
2017
Compensation expense ([$600,000 x 2/3] – 0) 400,000
Brief Exercise 19–10
If an award contains a market condition such as the stock price reaching a specified
level, then no special accounting is required. The fair value estimate of the share
option ($6) already implicitly reflects market conditions due to the nature of share
option pricing models. So, Farmer recognizes compensation expense regardless of
when, if ever, the market condition is met. The estimate of the total compensation
would be:
Brief Exercise 19–11
(amounts in millions, except per share amount)
Brief Exercise 19–12
(amounts in millions, except per share amount)
19–14 Intermediate Accounting, 8/e
Brief Exercise 19–13
24,000 shares – 20,000 shares* = 4,000 shares
*Purchase of treasury shares
Brief Exercise 19–14
(amounts in thousands, except per share amounts)
Basic EPS
Diluted EPS
• The preferred shares are considered converted when calculating diluted EPS. If
converted, there would be no preferred dividends.
Brief Exercise 19–15
The total compensation for the award is $45 million ($5 market price per share x 9
million shares). Because the stock award vests over three years, it is expensed as $15
million each year for three years. At the end of 2016, the second year, $30 million
No adjustment to the numerator
9 million – 3* million = 6 million
*Assumed purchase of treasury shares
19–16 Intermediate Accounting, 8/e
EXERCISES
Exercise 19–1
Requirement 1
Requirement 2
December 31, 2016 ($ in millions)
Compensation expense ($80 million ÷ 2 years) ... 40
Paid-in capital—restricted stock ................. 40
December 31, 2017
Exercise 19–2
Requirement 1
Requirement 2
no entry
Requirement 3
Requirement 4
Compensation expense ($30 million ÷ 3 years) ... 10
Paid-in capital—restricted stock ................. 10
Requirement 5
Exercise 19–3
Requirement 1
$29.98 x 53,344,000 shares = $1,600 million
The $1,600 million total compensation is expensed over the four-year vesting
period, $400 million each year. During 2013, the expense is the appropriate portion of
Requirement 2
($ in millions)
Paid-in capital—restricted stock
Exercise 19–4
Requirement 1
Requirement 2
no entry
Requirement 3
($ in millions)
Requirement 4
$22.50 fair value per share
Exercise 19–5
Requirement 1
Requirement 2
no entry
Requirement 3
($ in millions)
Compensation expense ($12 million ÷ 2 years) ... 6
Requirement 4
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