Chapter 16: Dilutive Securities and Earnings per Share

What are stock rights? How does the issuing company account for them?

Douglas Corporation had 120,000 shares of stock outstanding on January 1, 2017. On May 1, 2017, Douglas issued 60,000 shares. On July 1, Douglas purchased 10,000 treasury shares, which were reissued on October 1. Compute Douglas’s weighted-average number of shares outstanding for 2017.

Issuance and Exercise of Stock Options) On November 1, 2017, Columbo Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company’s \(10 par value common stock. The options were granted on January 2, 2018, were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at \)40, and the fair value option-pricing model determines the total compensation expense to be \(450,000.All of the options were exercised during the year 2020: 20,000 on January 3 when the market price was \)67, and 10,000 on May 1 when the market price was $77 a share.

Instructions

Prepare journal entries relating to the stock option plan for the years 2018, 2019, and 2020. Assume that the employee performsservices equally in 2018 and 2019.

Question: Petrenko Corporation has outstanding 2,000 \(1,000 bonds, each convertible into 50 shares of \)10 par value ordinary shares. The bonds are converted on December 31, 2017. The bonds payable has a carrying value of \(1,950,000 and conversion equity of \)20,000. Record the conversion using the book value method.

Tomba Corporation had 300,000 shares of common stock outstanding on January 1, 2017. On May 1, Tomba issued 30,000 shares. (a) Compute the weighted-average number of shares outstanding if the 30,000 shares were issued for cash. (b) Compute the weighted-average number of shares outstanding if the 30,000 shares were issued in a stock dividend.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.

Angela Corporation issues 2,000 convertible bonds at January 1, 2016. The bonds have a 3-year life, and are issued at par with a face value of \(1,000 per bond, giving total proceeds of \)2,000,000. Interest is payable annually at 6%. Each bond is convertible into 250 ordinary shares (par value of $1). When the bonds are issued, the market rate of interest for similar debt without the conversion option is 8%.

Instructions

(a) Compute the liability and equity component of the convertible bond on January 1, 2016.

(b) Prepare the journal entry to record the issuance of the convertible bond on January 1, 2016.

(c) Prepare the journal entry to record the repurchase of the convertible bond for cash at January 1, 2019, its maturity date.

The 2017 income statement of Wasmeier Corporation showed net income of \(480,000 and a loss from discontinued operations of \)120,000. Wasmeier had 100,000 shares of common stock outstanding all year. Prepare Wasmeier’s income statement presentation of earnings per share.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2016, Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share of Nichols’ \(5 par value common stock at a price of \)20 per share. The options were exercisable within a 2-year period beginning January 1, 2018, if the grantee is still employed by the company at the time of the exercise. On the grant date, Nichols’ stock was trading at \(25 per share, and a fairvalue option-pricing model determines total compensation to be \)400,000.On May 1, 2018, 8,000 options were exercised when the market price of Nichols’ stock was $30 per share. The remaining options lapsed in 2020 because executives decided not to exercise their options.

Instructions

Prepare the necessary journal entries related to the stock option plan for the years 2016 through 2020.

IFRS16-12 Assume the same information in IFRS16-11, except that Angela Corporation converts its convertible bonds on January 1, 2017.

Instructions

(a) Compute the carrying value of the bond payable on January 1, 2017.

(b) Prepare the journal entry to record the conversion on January 1, 2017.

(c) Assume that the bonds were repurchased on January 1, 2017, for \(1,940,000 cash instead of being converted. The net present value of the liability component of the convertible bonds on January 1, 2017, is \)1,900,000. Prepare the journal entry to record the repurchase on January 1, 2017.