c16BExercises.qxd 1/28/13 1:24 PM Page B EXERCISES E16-1B (Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction Luther Corp issued $50,000,000 par value 8% convertible bonds at 102 If the bonds had not been convertible, the company’s investment banker estimates they would have been sold at par Expenses of issuing the bonds were $750,000 Luther Corp issued $35,000,000 par value 12% bonds at 101 One detachable stock purchase warrant was issued with each $1,000 par value bond At the time of issuance, the warrants were selling for $6.50 On October 31, 2014, Luther Corp called its 10% convertible debentures for conversion The $60,000,000 par value bonds were converted into 600,000 shares of $1 par value common stock On October 31, there was $155,000 of unamortized premium applicable to the bonds, and the company paid an additional $355,000 to the bondholders to induce conversion of all the bonds The company records the conversion using the book value method E16-2B (Conversion of Bonds) Telta Inc issued $15,000,000 of 12%, 40-year convertible bonds on November 1, 2014, at 97 plus accrued interest The bonds were dated July 1, 2014, with interest payable January and July Bond discount (premium) is amortized semiannually on a straight-line basis On July 1, 2015, one-half of these bonds were converted into 60,000 shares of $1 par value common stock Accrued interest was paid in cash at the time of conversion Instructions (a) Prepare the entry to record the interest expense at December 31, 2014 Assume that accrued interest payable was credited when the bonds were issued (Round to nearest dollar.) (b) Prepare the entry(ies) to record the conversion on July 1, 2015 (Book value method is used.) Assume that the entry to record amortization of the bond discount and interest payment has been made E16-3B (Conversion of Bonds) Zotar Company has bonds payable outstanding in the amount of $5,600,000, and the Premium on Bonds Payable account has a balance of $150,000 Each $1,000 bond is convertible into 10 shares of common stock with a par value of $1 per share All bonds are converted into common stock Instructions Assuming that the book value method was used, what entry would be made? E16-4B (Conversion of Bonds) On July 1, 2013, when its $1 par value common stock was selling for $66 per share, Indy Hotels Corp issued $25,000,000 of 6% convertible debentures due in 10 years The conversion option allowed the holder of each $1,000 bond to convert the bond into 10 shares of the corporation’s common stock The debentures were issued for $26,500,000 The corporation believes the difference between the par value and the amount paid is attributable to the conversion feature On January 1, 2014, the corporation’s common stock was split for 1, and the conversion rate for the bonds was adjusted accordingly On January 1, 2015, when the corporation’s $0.50 par value common stock was selling for $38 per share, holders of 10,000 of the convertible debentures exercised their conversion options The corporation uses the straight-line method for amortizing any bond discounts or premiums Instructions (a) Prepare in general journal form the entry to record the original issuance of the convertible debentures (b) Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method Show supporting computations in good form E16-5B (Conversion of Bonds) The December 31, 2013, balance sheet of West Word Corp is as follows 12% callable, convertible bonds payable (semiannual interest dates June 30 and December 31; convertible into 15 shares of $10 par value common stock per $1,000 of bond principal; maturity date June 30, 2027) $2,500,000 Premium on bonds payable 110,050 $2,610,050 On April 15, 2014, West Word Corp called all of the bonds as of May 31, 2014 for the principal plus interest through May 31 By May 31, one-half of the bondholders had exercised their conversion to common stock as of the interest payment date Consequently, on May 31, West Word Corp paid the interest c16BExercises.qxd • 1/28/13 1:24 PM Page Chapter 16 Dilutive Securities and Earnings per Share due to all bondholders, issued shares of common stock for one-half of the bonds, and paid cash to retire the remainder of the bonds The premium is amortized on a straight-line basis and West Word uses the book value method Instructions Prepare the entry(ies) to record the interest expense, conversion, and call on May 31, 2014 (Round to the nearest dollar.) E16-6B (Conversion of Bonds) On January 1, 2012, Desert Windows Corporation issued $1,000,000 of 15-year, 12% convertible debentures at 110 Interest is to be paid semiannually on June 30 and December 31 Each $1,000 debenture can be converted into four shares of Desert Windows Corporation $5 par value common stock after December 31, 2013 On January 1, 2014, $400,000 of the debentures is converted into common stock, which is then selling at $300 An additional $400,000 of the debentures is converted on May 31, 2014 The market price of the common stock is then $310 Accrued interest at May 31 will be paid on the next interest date Bond premium is amortized on a straight-line basis Instructions Make the necessary journal entries for: (a) December 31, 2013 (b) January 1, 2014 (c) May 31, 2014 (d) June 30, 2014 Record the conversions using the book value method E16-7B (Issuance of Bonds with Warrants) MagTech Inc requires funding to build a new factory and has decided to raise the additional capital by issuing $850,000 face value of bonds with a coupon rate of 10% In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of warrants for each $1,000 bond sold The value of the bonds without the warrants is considered to be $775,000, and the value of the warrants in the market is $75,000 The bonds sold in the market at issuance for $825,000 Instructions (a) What entry should be made at the time of the issuance of the bonds and warrants? (b) If the warrants were nondetachable, would the entries be different? Discuss E16-8B (Issuance of Bonds with Detachable Warrants) On December 1, 2014, Universal Coat Company sold 10,000 of its 10%, 15-year, $1,000 face value, nonconvertible bonds with detachable stock warrants at 102 Each bond carried three detachable warrants Each warrant was for one share of common stock at a specified option price of $27 per share Shortly after issuance, the warrants were quoted on the market for $2.50 each No market value can be determined for the Universal Coat Company bonds Interest is payable on December and June Bond issue costs of $65,000 were incurred Instructions Prepare in general journal format the entry to record the issuance of the bonds (AICPA adapted) E16-9B (Issuance of Bonds with Stock Warrants) On May 31, 2014, Core Company issued 1,000, 14%, 10-year $1,000 bonds at 105 Each bond was issued with one detachable stock warrant Shortly after issuance, the bonds were selling at 102, but the market value of the warrants cannot be determined Instructions (a) Prepare the entry to record the issuance of the bonds and warrants (b) Assume the same facts as part (a), except that the warrants had a fair value of $8 Prepare the entry to record the issuance of the bonds and warrants E16-10B (Issuance and Exercise of Stock Options) On July 1, 2014, Allied Material Company adopted a stock option plan that granted options to key executives to purchase 100,000 shares of the company’s $1 par value common stock The options were granted on January 1, 2015, and were exercisable years after the date of grant if the grantee was still an employee of the company The options expired years from date of grant The option price was set at $66, and the fair value option pricing model determines the total compensation expense to be $660,000 All of the options were exercised February 1, 2018, when the market price was $78 a share Instructions Prepare journal entries relating to the stock option plan for the years 2014 through 2018 Assume that the employee performs services equally in 2015, 2016, and 2017 c16BExercises.qxd 1/28/13 1:24 PM Page B Exercises E16-11B (Issuance, Exercise, and Termination of Stock Options) On January 1, 2014, EZ Inc granted stock options to officers and key employees for the purchase of 250,000 shares of the company’s $1 par common stock at $86 per share The options were exercisable within a 5-year period beginning January 1, 2016, by grantees still in the employ of the company, and expiring December 31, 2018 The service period for this award is years Assume that the fair value option pricing model determines total compensation expense to be $1,250,000 On July 1, 2014, 20,000 option shares were terminated when the employees resigned from the company The market value of the common stock was $88 per share on this date On March 31, 2016, 130,000 option shares were exercised when the market value of the common stock was $91 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, 2014, 2015, and 2016 E16-12B (Issuance, Exercise, and Termination of Stock Options) On July 1, 2013, Hooker Financial Corporation granted 50,000 options to key executives Each option allows the executive to purchase one share of Hooker’s $1 par value common stock at a price of $58 per share The options were exercisable within a 2-year period beginning July 1, 2015, if the grantee is still employed by the company at the time of the exercise On the grant date, Hooker’s stock was trading at $50 per share, and a fair value option-pricing model determines total compensation to be $350,000 On July 1, 2015, 35,000 options were exercised when the market price of Hooker’s stock was $65 per share The remaining options lapsed in 2015 because executives decided not to exercise their options Instructions Prepare the necessary journal entries related to the stock option plan for the years 2013 through 2017 E16-13B (Accounting for Restricted Stock) Holt Company issues 10,000 shares of restricted stock to its new CEO, on January 1, 2014 The stock has a fair value of $260,000 on this date The service period related to this restricted stock is years Vesting occurs if the CEO stays with the company for years The par value of the stock is $1 At December 31, 2015, the fair value of the stock is $180,000 Instructions (a) Prepare the journal entries to record the restricted stock on January 1, 2014 (the date of grant) and December 31, 2015 (b) On February 22, 2016, the CEO leaves the company Prepare the journal entry (if any) to account for this forfeiture E16-14B (Accounting for Restricted Stock) Lawson Company issues 50,000 shares of restricted stock to its CFO, on January 1, 2014 The stock has a fair value of $1,100,000 on this date The service period related to this restricted stock is years Vesting occurs if CFO stays with the company for years The par value of the stock is $1 At December 31, 2014, the fair value of the stock is $1,750,000 Instructions (a) Prepare the journal entries to record the restricted stock on January 1, 2014 (the date of grant) and December 31, 2015 (b) On August 1, 2017, the CFO leaves the company Prepare the journal entry (if any) to account for this forfeiture E16-15B (Weighted-Average Number of Shares) Keynote Inc uses a calendar year for financial reporting The company is authorized to issue 20,000,000 shares of $1 par common stock At no time has Keynote issued any potentially dilutive securities Listed below is a summary of Keynote’s common stock activities Number of common shares issued and outstanding at December 31, 2012 and 2011 Shares issued for cash on March 31, 2013 A 2-for-1 stock split of Keynote’s common stock took place on August 31, 2013 Shares issued as a result of a 30% stock dividend on June 30, 2014 5,000,000 1,000,000 3,600,000 Instructions (a) Compute the weighted-average number of common shares used in computing earnings per common share for 2012 on the 2013 comparative income statement (b) Compute the weighted-average number of common shares used in computing earnings per common share for 2013 on the 2013 comparative income statement • c16BExercises.qxd • 1/28/13 1:24 PM Page Chapter 16 Dilutive Securities and Earnings per Share (c) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2013 on the 2014 comparative income statement (d) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2014 on the 2014 comparative income statement (CMA adapted) E16-16B (EPS: Simple Capital Structure) On January 1, 2014, Vermont Maple Corp had 2,650,000 shares of common stock issued and outstanding During 2014, it had the following transactions that affected the common stock account Mar Apr July Sept Oct Issued 250,000 shares in exchange for land Acquired 200,000 shares of treasury stock Issued a 20% stock dividend Reissued 240,000 shares of treasury stock (adjusted for 20% stock dividend) Issued a 2-for-1 stock split Instructions (a) Determine the weighted average number of shares outstanding as of December 31, 2014 (b) Assume that Vermont Maple Corp earned net income of $8,352,000 during 2014 In addition, it had 200,000 shares of 9%, $100 par value nonconvertible, cumulative preferred stock outstanding for the entire year Because of liquidity considerations, however, the company did not declare and pay a preferred dividend in 2013 or 2014 Compute earnings per share for 2014, using the weightedaverage number of shares determined in part (a) (c) Assume the same facts as in part (b), except that the preferred stock was noncumulative Compute earnings per share for 2014 (d) Assume the same facts as in part (b), except that net income included a loss from discontinued operations of $500,000, net of $300,000 in income taxes Compute earnings per share for 2014 E16-17B (EPS: Simple Capital Structure) SCR Company had 600,000 shares of common stock outstanding on December 31, 2013 During the year 2014 the company acquired and then retired 15,000 shares on April and issued 50,000 shares on July 31 For the year 2012 SCR Company reported net income of $982,500, after an extraordinary gain of $300,000 (net of tax) Instructions What earnings per share data should be reported at the bottom of its income statement? E16-18B (EPS: Simple Capital Structure) NuCorp presented the following data Net income Bonds: 10%, $750,000 par value Preferred stock: 100,000 shares outstanding, $100 par, 8% cumulative, not convertible Common stock: Shares outstanding 1/1 Issued for cash, 4/1 Issued 40% stock dividend, 10/1 $ 5,800,000 738,500 10,000,000 500,000 800,000 Instructions Compute earnings per share E16-19B (EPS: Simple Capital Structure) Selected financial information of Gray Plains Inc for the current year follows Income before extraordinary item Extraordinary gain, net of applicable income tax $ 53,500,000 6,250,000 Net income Retained earnings at the beginning of the year 59,750,000 268,450,000 328,200,000 Dividends declared: On preferred stock On common stock—$1 per share Retained earnings at the end of the year $ 2,000,000 21,500,000 23,500,000 $304,700,000 Note During the year, Gray Plains Inc took advantage of the current interest rates and called $125 million of long-term debt The early retirement resulted in a gain of $10,000,000 before applicable taxes of $3,750,000 c16BExercises.qxd 1/28/13 1:24 PM Page B Exercises At the end of the current year, Gray Plains Inc has outstanding 21,500,000 shares of $1 par common stock and 200,000 shares of 10%, $100 par preferred There were no changes in shares outstanding during the year Instructions Compute the earnings per share on common stock for the current year as it should be reported to stockholders E16-20B (EPS: Simple Capital Structure) On January 1, 2014, Bio Industries had stock outstanding as follows 8% Noncumulative preferred stock, $100 par value, issued and outstanding 250,000 shares $25,000,000 Common stock, $1 par value, issued and outstanding 600,000 shares 600,000 To acquire the net assets of three smaller companies, Bio issued an additional 600,000 common shares The acquisitions took place as follows Date of Acquisition Shares Issued MicroBio February 1, 2014 BioTech June 1, 2014 SuperBio November 1, 2014 200,000 80,000 320,000 On December 31, 2014, Bio recorded net income of $9,862,000 before taxes No dividends on the common or preferred were declared during 2014 Instructions Assuming a 40% tax rate, compute the earnings per share data that should appear on the financial statements of Bio Industries as of December 31, 2014 E16-21B (EPS: Simple Capital Structure) At January 1, 2014, JR Company’s outstanding shares included the following 200,000 shares of $100 par value, 6% cumulative preferred stock (issued on January 1, 2012) 600,000 shares of $1 par value common stock Net income for 2014 was $2,689,000 No cash dividends were declared or paid during 2012 or 2013 On March 31, 2014, all preferred dividends in arrears for 2012 and 2013 were paid Then, on July 1, 2014, the company declared and distributed a 10% stock dividend on common shares On February 1, 2015, the company declared and paid the 2014 preferred dividend, and a $0.10 per share cash dividend on the common shares On March 1, 2014, 800,000 shares of common stock were sold for $3 per share, and on October 1, 2014, 50,000 shares of common stock held as treasury stock were sold for $4 per share Instructions Compute earnings per share for 2014 Assume that financial statements for 2014 were issued in March 2015 E16-22B (EPS with Convertible Bonds, Various Situations) At the beginning of 2014, Florida Rock Industries had 25,000 shares of common stock issued and outstanding and 500 $1,000, 6% bonds, each convertible into 10 shares of common stock During 2014, Florida Rock had revenues of $156,500 and expenses other than interest and taxes of $104,000 Assume that the tax rate is 40% None of the bonds was converted or redeemed Instructions (a) Compute diluted earnings per share for 2014 (b) Assume the same facts as those assumed for part (a), except that the 500 bonds were issued on September 1, 2014 (rather than in a prior year), and none have been converted or redeemed (c) Assume the same facts as assumed for part (a), except that 100 of the 500 bonds were actually converted on July 1, 2014 E16-23B (EPS with Convertible Bonds) Penguin Ice Inc was formed on June 30, 2011, through the merger of Penguin Corp and Ice Inc Penguin Ice issued a total of 2,500,000 shares of common stock to owners of the merged companies The new company had the following transactions during 2014 On April 1, 2014, the company issued an additional 500,000 shares of stock for cash On July 1, 2014, Penguin Ice issued $1 million of 15-year, 6% convertible bonds at par Each $1,000 bond converts to 25 shares of common at any interest date None of the bonds have been converted to date Penguin Ice is preparing its annual report for the fiscal year ending December 31, 2014, and will report after-tax net income of $13,600,000 The tax rate is 40% • c16BExercises.qxd • 1/28/13 1:24 PM Page Chapter 16 Dilutive Securities and Earnings per Share Instructions Determine the following for 2014 The (1) (2) (b) The (1) (2) (a) number of shares to be used for calculating: Basic earnings per share Diluted earnings per share earnings figures to be used for calculating: Basic earnings per share Diluted earnings per share (CMA adapted) E16-24B (EPS with Convertible Bonds and Preferred Stock) Richie Candy Corporation issued 20-year, $10,000,000 face value, 9% convertible debentures on January 1, 2011 The bonds have a par value of $1,000, with interest payable semiannually The initial conversion ratio is 10:1, and in years it will increase to 12:1 At the date of issue, the bonds were sold at 105 Bond premium is amortized on a straight-line basis Richie Candy’s effective tax was 40% Net income in 2014 was $26,860,000, and the company had 12,800,000 common shares issued and outstanding during the entire year Instructions (a) Prepare a schedule to compute both basic and diluted earnings per share (b) Discuss how the schedule would differ if the security was convertible preferred stock E16-25B (EPS with Convertible Bonds and Preferred Stock) On January 1, 2014, Yellow Car Company issued 15-year, $50,000,000 face value, 4% bonds, at par Each $1,000 bond is convertible into 20 shares of Yellow Car common stock None of the bonds were converted in 2014 Yellow Car’s net income in 2014 was $8,680,000, and its tax rate was 30% The company had 2,650,000 shares of common stock issued and outstanding throughout 2014 Instructions (a) Compute diluted earnings per share for 2014 (b) Compute diluted earnings per share for 2014, assuming the same facts as above, except that $50,000,000 of 6% convertible preferred stock was issued instead of the bonds Each $100 preferred share is convertible into shares of Yellow Car common stock E16-26B (EPS with Options, Various Situations) Backhome Company’s net income for 2014 is $650,000, and 86,000 shares of common were issued and outstanding during 2014 The only potentially dilutive securities outstanding were 25,000 executive stock options issued during 2014, each exercisable for one share at $20.50; none of these have been exercised The average market price of Backhome’s stock during 2014 was $26 Instructions (a) Compute diluted earnings per share (Round to nearest cent.) (b) Assume the same facts as those assumed for part (a), except that 10,000 additional options were issued on October 1, 2014, with an exercise price of $27 (the market price of the common stock on that date) The average market price during the last months of 2014 was $29.50 E16-27B (EPS with Contingent Issuance Agreement) Fremantle Brewing Inc recently purchased Perth Corp One of the terms of the merger was that if Perth’s income for 2015 was $500,000 or more, 100,000 additional shares would be issued to Perth’s stockholders in 2016 Perth’s income for 2014 was $480,000 Instructions (a) Would the contingent shares have to be considered in Fremantle’s 2014 earnings per share computations? (b) Assume the same facts, except that Perth’s income for 2014 was $510,000 Would the contingent shares have to be considered in Fremantle’s earnings per share computations for 2014? E16-28B (EPS with Warrants) Gila Corporation earned $2,650,000 during 2014 The company had an average of 520,000 shares of common stock outstanding The average market price of common stock was $32 per share during the year The company also had 50,000 warrants outstanding, of which two warrants could be exercised to purchase one share of common stock for $30 in total Instructions (a) Are the warrants dilutive? (b) Compute basic earnings per share (c) Compute diluted earnings per share c16BExercises.qxd 1/28/13 1:24 PM Page B Exercises *E16-29B (Stock Appreciation Rights) On December 31, 2012, SuperTex Company issues 250,000 stock appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of $50 The market price fluctuates as follows: 12/31/13—$51; 12/31/14—$48; 12/31/15—$56; 12/31/16—$54 The service period is years and the exercise period is years Instructions (a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stock appreciation rights plan (b) Prepare the entry at December 31, 2016, to record compensation expense, if any, in 2016 (c) Prepare the entry on December 31, 2016, assuming that all 250,000 SARs are exercised *E16-30B (Stock Appreciation Rights) Olympia Company establishes a stock appreciation rights pro- gram that entitles its new CEO to receive cash for the difference between the market price of the stock and a pre-established price of $20 (also market price) on December 31, 2013, on 50,000 stock appreciation rights The date of grant is December 31, 2010, and the required employment (service) period is years The CEO exercises all of the SARs on December 31, 2013 The market value of the stock fluctuates as follows: $19 on December 31, 2014; $23 on December 31, 2015; and $25 on December 31, 2016 Instructions (a) Prepare a 3-year (2014–2016) schedule of compensation expense pertaining to the 50,000 SARs granted the CEO (b) Prepare the journal entry for compensation expense in 2014, 2015, and 2016 relative to the 50,000 SARs (c) Prepare the entry for the exercise of the SARs on December 31, 2016 • c16BExercises.qxd 1/28/13 1:24 PM Page ... employee performs services equally in 2015, 2016, and 2017 c16BExercises.qxd 1/28/13 1:24 PM Page B Exercises E16-11B (Issuance, Exercise, and Termination of Stock Options) On January 1, 2014,... were exercised when the market value of the common stock was $91 per share Instructions Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise. .. 2015, 35,000 options were exercised when the market price of Hooker’s stock was $65 per share The remaining options lapsed in 2015 because executives decided not to exercise their options Instructions