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The formula to calculate diluted earnings per share.

FASB ASC 260–10–45–16: “Earnings per Share–Overall–Other Presentation Matters–Computation of Diluted EPS.”

The way stock dividends or stock splits in the current year affect the presentation of EPS on the income statement.

FASB ASC 260–10–55–12: “Earnings per Share–Overall–Implementation Guidelines–Stock Dividends or Stock Splits.”


Exercise 19-27

Requirement 1

The SARs are considered to be equity because IE will settle in shares of IE stock at exercise

January 1, 2011

No entry

Calculate total compensation expense:

$ 3 estimated fair value per SAR
x 24 million SARs granted
= $72 million total compensation


The total compensation is allocated to expense over the 4-year service (vesting) period: 2011 – 2014
$72 million ÷ 4 years = $18 million per year

 

Requirement 2

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

Compensation expense ($72 million ÷ 4 years) 18
Paid-in capital – SAR plan 18

 

 

Requirement 3

The total compensation is measured once – at the grant date – and is not re-measured subsequently.

 

Requirement 4

June 6, 2016

Paid-in capital – SAR plan (account balance) 72

Common stock ($1 par per share x [$96 million*\ $50]) 1.92

Paid-in capital – in excess of par (to balance) 70.08

 

*$50 – 46 = $4 appreciation per share times 24 million units = $96 million

 


Exercise 19-28

Requirement 1

The SARs are considered to be a liability because employees can elect to receive cash at exercise.

January 1, 2011

No entry

 

Requirement 2

December 31, 2011 ($ in millions)

Compensation expense ($4 x 24 million x 1/4) 24
Liability – SAR plan 24

 

December 31, 2012
Compensation expense ([$3 x 24 million x 2/4] - 24) 12
Liability – SAR plan 12

 

December 31, 2013
Compensation expense ([$4 x 24 million x 3/4] – 24 – 12) 36
Liability – SAR plan 36

December 31, 2014
Liability – SAR plan 12
Compensation expense ([$2.50 x 24 million x 4/4] –24 –12 –36) 12

Requirement 3

December 31, 2015
Compensation expense ([$3 x 24 million x all] –24 –12 –36 +12) 12
Liability – SAR plan 12

 

Requirement 4

June 6, 2016
Compensation expense ([($50-46) x 24 million x all] –24–12–36+12–12) 24
Liability – SAR plan 24


Liability – SAR plan (account balance) 96

Cash 96

 


CPA / CMA REVIEW QUESTIONS

 

CPA Exam Questions

 

1. c. In SFAS 123(R), the FASB requires companies with a history of forfeitures to use that history in estimating the compensation expense allocated over the service period. Therefore, Pall Corp. should record compensation expense of $192,000 for 2011. The total compensation is $400,000 (40,000 options x estimated fair value of $10 each) times 96% = $384,000 divided by 2-year service period = $192,000 per year.

 

2. b. The total compensation is $24,000, the option model price of $8 each times the number of options, 3,000. Since the service period is two years, the compensation expense for 2011 is $12,000 ($24,000/2 years).



 

3. b. The key point is that the stock split is retroactive to the beginning of the year.

20,000 (2.0, for stock split) + 10,000 (6/12, for new shares) = 45,000

 

 

4. b.

$1,000,000 – 50,000

= $9.50 EPS

100,000

 

Even though no dividends were declared, the preferred dividends are subtracted from the numerator since the preferred shares are cumulative.

 

 

5. b. Proceeds from exercise of options = 9,000 shs. $7 = $63,000

Used to repurchase common stock at average market price = $63,000 $9 = 7,000 shs.

Number of shares if options exercised 9,000

Less: Shares assumed repurchased (7,000)

Dilution (Potential Common Shares) 2,000

Shares for Diluted EPS = 50,000 + 2,000 = 52,000


CPA Exam Questions (concluded)

 

6. c. The “if converted method” assumes that the preferred stock was converted to common stock and that preferred dividends were not distributed. Therefore, the numerator in the computation of Diluted EPS would be the net income of $900,000.

 

7. b. Diluted EPS = $1,000 NI + $200 after-tax interest*

1,000 shs. common + 1,000 Potential common shares

= $1,200

2,000

= $.60

 

*($10,000 x 4%) x (1 – .50) = $200

 

 

 

CMA Exam Questions

1. d. A noncompensatory plan is defined as one in which substantially all full-time employees participate, the stock available to each employee is equal or is based on salary, the option exercise period is reasonable, and the discount from market is not greater than reasonable in an offer to shareholders or others. Noncompensatory plans do not provide for the achievement of certain performance criteria.

 

2. b. A compensatory stock option plan involves the issuance of stock in whole or in part for employee services. The compensation cost should be recognized as an expense of one or more periods in which the employee performed services.


PROBLEMS

Problem 19-1

Requirement 1

The measurement date is always is the date of grant.

Requirement 2

$ 6 estimated fair value per option
x 20 million options granted
= $120 million fair value of award

 

The total compensation is to be allocated to expense over the 3-year service (vesting) period: 2011 - 2013

$120 million ÷ 3 years = $40 million per year

Requirement 3

Ensor should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes.

($ in millions)

Compensation expense ([$120 x 90% x 2/3] – $40)........... 32
Paid-in capital–stock options ......................................... 32

Compensation expense ([$120 x 90% x 3/3] – $40 – $32). 36
Paid-in capital–stock options ......................................... 36


Problem 19-1 (concluded)

Requirement 4

This approach is contrary to the usual way companies account for changes in estimates. For instance, assume a company acquires a 3-year depreciable asset having no estimated residual value for $120 million. The $120 million depreciable cost would be depreciated straight-line at $40 million over the three-year useful life. If the estimated residual value changes after one year to 10% of cost, the new estimated depreciable cost of $108 would be reduced by the $40 million depreciation recorded the first year, and the remaining $68 million would be depreciated equally, $34 million per year, over the remaining two years.

Requirement 5

($ in millions)

Cash ($15 x 80% = $12 exercise price x 18 million shares).... 216
Paid-in capital - stock options (account balance of $108 million) 108
Common stock (2 million shares at $1 par per share)..... 18
Paid-in capital – excess of par (remainder)................ 306

Note: The market price at exercise is irrelevant.


Problem 19-2

Requirement 1

 

We treat each individual vesting date as a separate award:

 


Date: 2016-01-14; view: 1052


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