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# 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

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 capitalrestricted stock*........................ 24.93

Deferred tax asset (\$24.93 x 46%)............................. 11.47

Income tax expense............................................ 11.47

Requirement 4

March 16, 2006

Paid-in capitalrestricted 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 capitaltax 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
x 40 million options granted
= \$80 million total compensation

Requirement 2

(\$ in millions)

Compensation expense (\$80 million χ 2 years). 40
Paid-in capital  stock options................ 40

Deferred tax asset (\$40 million x 40%)............. 16
Tax expense ........................................... 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
Paid-in capital  stock options................ 40

Deferred tax asset (\$40 million x 40%)............. 16
Tax expense ........................................... 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
Common stock (40 million shares at \$1 par per share).............. 40
Paid-in capital  excess of par (to balance)............................. 360

Income taxes payable ([\$12 - 8] x 40 million shares x 40%)........... 64
Deferred tax asset (2 years x \$16 million)............................ 32
Paid-in capital - tax effect of stock options (remainder) 32

Requirement 5

Compensation expense (\$80 million χ 2 years)............. 40
Paid-in capital  stock options............................ 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
Paid-in capital - stock options (account balance)......... 80
Common stock (40 million shares at \$1 par per share)... 40
Paid-in capital  excess of par (to balance)................ 360

No tax effect because an incentive plan does not provide the employer a tax deduction.

Problem 19-7

Requirement 1

At January 1, 2011, the total compensation is measured as:

\$ 6 fair value per option

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
Paid-in capital  stock options................ 12.0

Deferred tax asset (\$12 million x 40%)............. 4.8
Tax expense ........................................... 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
Common stock (6 million shares at \$1 par per share).............. 6.0
Paid-in capital  excess of par (to balance)............................ 162.0

Income taxes payable ([\$27 - 22] x 6 million shares x 40%)........ 12.0
Paid-in capital - tax effect of stock options (remainder)...... 2.4
Deferred tax asset (3 years x \$4.8 million)........................... 14.4

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
options fair estimated

expected value total

to vest compensation

Requirement 2

December 31, 2011, 2012, 2013, 2014(\$ in millions)

Compensation expense (\$12 million x Ό)... 3
Paid-in capital  stock options................ 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
options fair estimated

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 dont vest due to performance targets not being met, and thats 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
loss dividends Per Share
 \$140  \$1601  \$300

 =  = (\$.49)

600 (1.05)  30 (8/12) (1.05) + 12 (4/12) 613
shares treasury new
at Jan. 1 shares shares
­___ stock dividend ___­

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
Continuing
operating preferred Operations
income dividends Per Share
\$2602  \$1601 \$100

 =  = \$.16

600 (1.05)  30 (8/12) (1.05)+ 12 (4/12) 613
shares treasury new
at Jan. 1 shares shares
­___ stock dividend ___­

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
before extraordinary items \$ .16 \$.71

Extraordinary loss from
litigation settlement (.65)  .

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
income Per Share
\$450 \$450
 =  = \$.71
600 (1.05) 630
shares stock dividend

Problem 19-10

net Net Loss
loss Per Share
 \$160,500
 = (\$.09)
1,855,000
shares

2010

net Earnings
income Per Share
\$2,240,900 \$2,240,900
 =  = \$1.23
1,855,000  110,000 (3/12)1,827,500
shares retired
at Jan. 1 shares

net Earnings
income Per Share
\$3,308,700 \$3,308,700
 =  = \$1.86
1,745,000* x (1.02)** 1,779,900
shares stock dividend

* 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
income dividends Per Share
\$290  \$1 \$289
 =  = \$4.86
55 + 9 (6/12) 59.5
shares new
at Jan. 1 shares

2010

net preferred Earnings
income dividends Per Share

\$380  \$1 \$379

 =  = \$4.14
64 (1.50)  4 (9/12) (1.50)91.5
shares retired
at Jan. 1 shares

­___ stock split ___­

net preferred Earnings
income dividends Per Share
\$412  \$2 \$410
 =  = \$4.10
90 (1.10) + 3 (4/12) 100
shares stock dividend new

Problem 19-12

(amounts in thousands, except per share amount)

net preferred Earnings
income dividends Per Share
\$2,100  \$75 \$2,025

 =  = \$3.00

600 (1.04) + 60 (10/12) (1.04) 2 (6/12) 675
shares new shares
at Jan. 1 shares retired
­___ stock dividend ___­

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
x \$24 (exercise price)

\$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
income dividends
\$2,100  \$75 \$2,025

 =  = \$3.00

600 (1.04) + 60 (10/12) (1.04) 2 (6/12) 675
shares new shares
at Jan. 1 shares retired
­___ stock dividend ___­

Diluted EPS

net preferred
income dividends
\$2,100  \$75 \$2,025

 =  = \$2.99

600 (1.04) + 60 (10/12) (1.04) 2 (6/12) + (8  6) 677
shares new shares exercise
at Jan. 1 shares retired of options
­___ stock dividend ___­

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
x \$24 (exercise price)

\$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
income dividends
\$2,100  \$75 \$2,025

 =  = \$3.00

600 (1.04) + 60 (10/12) (1.04) 2 (6/12) 675
shares new shares
at Jan. 1 shares retired
­___ stock dividend ___­

Diluted EPS

net preferred after-tax
income dividends interest savings
\$2,100  \$75 + \$80  40%(\$80) \$2,073

 =  = \$2.86

600 (1.04) + 60(10/12) (1.04) 2 (6/12) + (8  6) + 23* + 24** 724
shares new shares exercise contingent conversion
at Jan. 1 shares retired of options shares of bonds
­___ stock dividend ___­

* 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
income dividends
\$520  120* \$400

 =  = \$4.00

100 100
shares
at Jan. 1

The incremental effect of the conversion of the preferred stock is:

preferred
dividends
+120*

 = \$3.75

+32
conversion

of preferred
stock

The incremental effect of the conversion of the bonds is:

after-tax
interest savings
+ \$90** 40% (\$90**)

 = \$4.00

+ 13.5
conversion

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: 465

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