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Vesting Number Fair Value CompensationDate Vesting per Option Cost Dec. 31, 2011 100,000 $3.50 $ 350,000 Dec. 31, 2012 100,000 $4.00 400,000 Dec. 31, 2013 100,000 $4.50 450,000 Dec. 31, 2014 100,000 $5.00 500,000 $1,700,000
The compensation cost is allocated on a straight-line basis over the appropriate vesting (service) period:
Shares Compensation Expense Recorded in: Vesting at: 2011 2012 2013 2014 Dec. 31, 2011 $350,000 Dec. 31, 2012 200,000 $200,000 Dec. 31, 2013 150,000 150,000 $150,000 Dec. 31, 2014 125,000 125,000 125,000 $125,000 $825,000 $475,000 $275,000 $125,000
= $1,700,000
Also, a company must have recognized at least the amount vested by that date. The allocation here meets that constraint: · The $825,000 recognized in 2011 exceeds the $350,000 vested. · The $1,300,000 ($825,000 + $475,000) recognized by 2012 exceeds the $750,000 ($350,000 + $400,000) vested by the same time. · The $1,575,000 ($825,000 + $475,000 + $275,000) recognized by 2013 exceeds the $1,200,000 ($350,000 + $400,000 + $450,000) vested by the same time. Problem 19-2 (concluded)
Requirement 2
Companies are allowed to use the straight-line method. The $1,700,000 total compensation cost is allocated equally to 2011, 2012, 2013, and 2014 at $425,000 per year. Also, a company must have recognized at least the amount vested by that date. The straight-line allocation meets that constraint: · The $425,000 recognized in 2011 exceeds the $350,000 vested. · The $850,000 ($425,000 + $425,000) recognized by 2012 exceeds the $750,000 ($350,000 + $400,000) vested by the same time. · The $1,275,000 ($425,000 + $425,000 + $425,000) recognized by 2013 exceeds the $1,200,000 ($350,000 + $400,000 + $450,000) vested by the same time. Problem 19-3 Requirement 1
We treat each individual vesting date as a separate award:
Vesting Number Fair Value Compensation Date Vesting per Option Cost Dec. 31, 2011 100,000 $4.50 $ 450,000 Dec. 31, 2012 100,000 $4.50 450,000 Dec. 31, 2013 100,000 $4.50 450,000 Dec. 31, 2014 100,000 $4.50 450,000 $1,800,000
The compensation cost is allocated on a straight-line basis over the appropriate vesting (service) period:
Shares Compensation Expense Recorded in: Vesting at: 2011 2012 2013 2014 Dec. 31, 2011 $450,000 Dec. 31, 2012 225,000 $225,000 Dec. 31, 2013 150,000 150,000 $150,000 Dec. 31, 2014 112,500 112,500 112,500 $112,500 $937,500 $487,500 $262,500 $112,500
= $1,800,000
Also, a company must have recognized at least the amount vested by that date. The allocation here meets that constraint: · The $937,500 recognized in 2011 exceeds the $450,000 vested. · The $1,425,000 ($937,500 + $487,500) recognized by 2012 exceeds the $900,000 ($450,000 + $450,000) vested by the same time. · The $1,687,500 ($937,500 + $487,500 + $262,500) recognized by 2013 exceeds the $1,350,000 ($450,000 + $450,000 + $450,000) vested by the same time. Problem 19-3 (concluded) Requirement 2 Companies are allowed to use the straight-line method. The $1,800,000 total compensation cost is allocated equally to 2011, 2012, 2013, and 2014 at $450,000 per year. Notice that this approach is essentially the same as we use for options that vest all at one time at the end of the vesting period (cliff-vesting). Also, a company must have recognized at least the amount vested by that date. The straight-line allocation meets that constraint: · The $450,000 recognized in 2011 equals the $450,000 vested. · The $900,000 ($450,000 + $450,000) recognized by 2012 equals the $900,000 ($450,000 + $450,000) vested by the same time. · The $1,350,000 ($450,000 + $450,000 + $450,000) recognized by 2013 equals the $1,350,000 ($450,000 + $450,000 + $450,000) vested by the same time. Problem 19-4 Requirement 1
Using IFRS, the basic accounting would be the same as under U.S. GAAP, except there is no specific requirement that a company must have recognized at least the amount vested by that date. We treat each individual vesting date as a separate award:
Vesting Number Fair Value Compensation Date Vesting per Option Cost Dec. 31, 2011 100,000 $3.50 $ 350,000 Dec. 31, 2012 100,000 $4.00 400,000 Dec. 31, 2013 100,000 $4.50 450,000 Dec. 31, 2014 100,000 $5.00 500,000 $1,700,000
The compensation cost is allocated on a straight-line basis over the appropriate vesting (service) period: Shares Compensation Expense Recorded in: Vesting at: 2011 2012 2013 2014 Dec. 31, 2011 $350,000 Dec. 31, 2012 200,000 $200,000 Dec. 31, 2013 150,000 150,000 $150,000 Dec. 31, 2014 125,000 125,000 125,000 $125,000 $825,000 $475,000 $275,000 $125,000
= $1,700,000
Requirement 2
Under IFRS companies are not permitted to use the straight-line method. Problem 19-5 Requirement 1 $7.48 x 10 million shares = $74.8 million χ 3 years $24.93 million per year The compensation expense is $24.93 million each full year, which was 2006 and 2007. Because the stock award was issued during 2005, an appropriate portion of that amount was recorded in 2005 and 2006. Requirement 2 $296 million χ $646.6 million = 46%, or 4.6 million shares χ 10 million shares = 46% Requirement 3 September 25, 2005 ($ in millions) Compensation expense (from requirement 1).............. 24.93 Paid-in capitalrestricted stock*........................ 24.93 Deferred tax asset ($24.93 x 46%)............................. 11.47 Income tax expense............................................ 11.47 Requirement 4 March 16, 2006 Paid-in capitalrestricted stock* ($24.93 x 3 yrs)....... 74.80 Common stock................................................... 74.80 Income tax payable (given)...................................... 296.00 Deferred tax asset ($11.47 x 3 yrs)......................... 34.41 Paid-in capitaltax effect of restricted stock*.... 261.59 ....... Common stock...................................................... 296.00 Income tax and employment tax payable.......... 296.00
* In its financial statements, Apple combines all of its paid-in capital accounts under a single title common stock.
Problem 19-6 Requirement 1 At January 1, 2011, the estimated value of the award is: $2 estimated fair value per option Requirement 2 ($ in millions) Compensation expense ($80 million χ 2 years). 40
Deferred tax asset ($40 million x 40%)............. 16 Note: Since the plan does not qualify as an incentive plan, Walters will deduct the difference between the exercise price and the market price at the exercise date. Recall from Chapter 16 that this creates a temporary difference between accounting income (for which compensation expense is recorded currently) and taxable income (for which the tax deduction is taken later upon the exercise of the options). Under FASB 123(r), we assume the temporary difference is the cumulative amount expensed for the options, $40 million at this point. So, the deferred tax benefit is 40% x $40 million. Requirement 3
Compensation expense ($80 million χ 2 years). 40
Deferred tax asset ($40 million x 40%)............. 16
Problem 19-6 (concluded) Requirement 4 ($ in millions) Cash ($8 exercise price x 40 million shares)........................... 320 Paid-in capital - stock options (account balance)............... 80
Requirement 5
Compensation expense ($80 million χ 2 years)............. 40
No deferred tax asset is recorded because an incentive plan does not provide the employer a tax deduction.
Requirement 6
Cash ($8 exercise price x 40 million shares)....................... 320
Problem 19-7 Requirement 1 At January 1, 2011, the total compensation is measured as:
x 6 million options granted = $36 million fair value of award Requirement 2 Dec. 31, 2011, 2012, 2013 ($ in millions) Compensation expense ($36 million χ 3 years). 12.0
Deferred tax asset ($12 million x 40%)............. 4.8 Note: Since the plan does not qualify as an incentive plan, JBL will deduct the difference between the exercise price and the market price at the exercise date. Recall from Chapter 16 that this creates a temporary difference between accounting income (for which compensation expense is recorded currently) and taxable income (for which the tax deduction is taken later upon the exercise of the options). Under FASB 123, we assume the temporary difference is the cumulative amount expensed for the options, $12 million, $24 million, and $36 million at Dec. 31, 2011, 2012, and 2013, respectively. So, the deferred tax benefit is 40% of that amount each year. Requirement 3 August 21, 2015 ($ in millions) Cash ($22 exercise price x 6 million shares)................................ 132.0 Paid-in capital - stock options (account balance).................. 36.0
Problem 19-8 Requirement 1 No entry until the end of the reporting period, but compensation must be estimated at the grant date: 1 million x $12 = $12 million expected value total to vest compensation Requirement 2 December 31, 2011, 2012, 2013, 2014($ in millions) Compensation expense ($12 million x Ό)... 3 Requirement 3 If, after two years, LCI estimates that it is not probable that the performance goals will be met, then the new estimate of the total compensation would change to: 0 x $12 = $0 expected value total to vest compensation In that case, LCI would reverse the $6 million expensed in 2011-2012 because no compensation can be recognized for options that dont vest due to performance targets not being met, and thats the new expectation. December 31, 2013($ in millions) Paid-in capital stock options................... 6 Compensation expense .......................... 6
December 31, 2014 No entry
Problem 19-9 1. Net loss per share for the year ended December 31, 2011: (amounts in millions, except per share amount) net preferred Net Loss = = ($.49) 600 (1.05) 30 (8/12) (1.05) + 12 (4/12) 613 adjustment
2. Per share amount of income or loss from continuing operations for the year ended December 31, 2011: (amounts in millions, except per share amount) Income from = = $.16 600 (1.05) 30 (8/12) (1.05)+ 12 (4/12) 613 adjustment 120 million shares x $100 x 8% = $160 million 2 $400 $140 = $260 million Problem 19-9 (concluded) 3. 2011 and 2010 comparative income statements: (amounts in millions, except per share amount) 2011 2010 Earnings (Loss) Per Common Share: Income (loss) from operations Extraordinary loss from Net income (loss) ($ .49) $.71 Note: The weighted-average number of common shares in 2010 should be adjusted for the stock dividend in 2011 for the purpose of reporting 2010 EPS in subsequent years for comparative purposes:
net Earnings
Problem 19-10 net Net Loss
net Earnings
net Earnings
* 1,855,000 110,000 = 1,745,000 shares ** This is a 2% stock dividend: 34,900 χ 1,745,000 = 2%. Alternatively, the additional 34,900 shares could be simply added to the 1,745,000 initial shares outstanding.
Problem 19-11 (amounts in millions, except per share amount) net preferred Earnings
net preferred Earnings $380 $1 $379 = = $4.14 ___ stock split ___ adjustment
net preferred Earnings
Problem 19-12 (amounts in thousands, except per share amount) net preferred Earnings = = $3.00 600 (1.04) + 60 (10/12) (1.04) 2 (6/12) 675 adjustment
Problem 19-13
The options issued in 2010 are not considered when calculating 2011 EPS because the exercise price ($33) is not less than the 2010 average market price of $32. As a result, these options are antidilutive. The options issued in 2011 do not affect the calculation of 2011 EPS for two reasons related to their being issued at December 31. First, the exercise price ($32) is equal to the 2011 average market price of $32. While they are not antidilutive, neither are they dilutive. Second, even if the exercise price had been less than the market price, these options would be excluded. Options are assumed exercised at the beginning of the year or when granted, whichever is later when granted, in this case. So, the fraction of the year the shares are assumed outstanding is 0/12, meaning no increase in the weighted-average shares. The options issued in 2009 are considered exercised for 8,000 shares when calculating 2011 EPS because the exercise price ($24) is less than the 2011 average market price of $32. Treasury shares are assumed repurchased at the average price for diluted EPS:
8,000 shares $192,000 χ $32 (average market price) 6,000 shares Problem 19-13 (concluded) (amounts in thousands, except per share amount) Basic EPS net preferred = = $3.00 600 (1.04) + 60 (10/12) (1.04) 2 (6/12) 675 adjustment
Diluted EPS net preferred = = $2.99 600 (1.04) + 60 (10/12) (1.04) 2 (6/12) + (8 6) 677 Adjustment
Problem 19-14
The options issued in 2010 are not considered when calculating 2011 EPS because the exercise price ($33) is not less than the 2010 average market price of $32. As a result, these options are antidilutive. The options issued in 2011 do not affect the calculation of 2011 EPS for two reasons related to their being issued at December 31. First, the exercise price ($32) is equal to the 2011 average market price of $32. While they are not antidilutive, neither are they dilutive. Second, even if the exercise price had been less than the market price, these options would be excluded. Options are assumed exercised at the beginning of the year or when granted, whichever is later when granted, in this case. So, the fraction of the year the shares are assumed outstanding is 0/12, meaning no increase in the weighted-average shares. The options issued in 2009 are considered exercised for 8,000 shares when calculating 2011 EPS because the exercise price ($24) is less than the 2011 average market price of $32. Treasury shares are assumed repurchased at the average price for diluted EPS:
8,000 shares $192,000 χ $32 (average market price) 6,000 shares Problem 19-14 (concluded) (amounts in thousands, except per share amounts) Basic EPS net preferred = = $3.00 600 (1.04) + 60 (10/12) (1.04) 2 (6/12) 675 adjustment Diluted EPS net preferred after-tax = = $2.86 600 (1.04) + 60(10/12) (1.04) 2 (6/12) + (8 6) + 23* + 24** 724 adjustment
* The contingently issuable shares are considered issued when calculating diluted EPS because the condition for issuance (Merrill net income > $500,000) currently is being met. ** The bonds are considered converted when calculating diluted EPS: 800 bonds x 30 shares = 24,000 shares upon conversion. Interest = $800,000 x 10% = $80,000. Problem 19-15 (amounts in millions, except per share amounts) Basic EPS net preferred = = $4.00 100 100 The incremental effect of the conversion of the preferred stock is:
preferred = $3.75 +32 of preferred The incremental effect of the conversion of the bonds is:
after-tax = $4.00 + 13.5 of bonds *60 million shares x $2 ** $900 million x 10% Order of Entry: We include in our calculation the convertible security with the lowest incremental effect ($3.75) before the one with the higher effect ($4.00).
Problem 19-15 (concluded) Date: 2016-01-14; view: 1037
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