Questions and Answers on Share-based Compensation and Earnings per Share

Pages: 215 (35462 words) Published: December 3, 2014
Chapter 19
Share-Based Compensation and Earnings per Share
 

True / False Questions
 
1.
GAAP requires using intrinsic value accounting for employee stock options.   
True    False
 
2.
If previous experience indicates that a material number of stock options will be forfeited before they vest, the fair value estimate of the options on the grant date should be adjusted to reflect that expectation.   

True    False
 
3.
Compensation expense must be adjusted during the service period to reflect changes in the fair value of options caused by changes in the market price of the underlying shares.   
True    False
 
4.
Current year stock dividends and splits require retroactive restatement of EPS for all prior years presented in comparative financial statements.   
True    False
 
5.
Stock options will be dilutive and included in the calculation of dilutive EPS if the exercise price is greater than the average market value of the stock.   
True    False
 
6.
Dilutive convertible bonds affect both the numerator and the denominator in computing diluted EPS.   
True    False
 
7.
Except for tax considerations the potentially dilutive effect of convertible preferred stock is handled in EPS calculations in much the same way as convertible debt.   
True    False
 
8.
No time-weighting of contingently issuable shares is required when computing basic EPS.   
True    False
 
9.
If a company's capital structure includes convertible bonds, diluted EPS might be reduced even if the bonds are not actually converted during the year.   
True    False
 
10.
If a company reports an extraordinary gain, EPS must be disclosed for both income from continuing operations and net income.   
True    False
 
 

Multiple Choice Questions
 
11.
FX Services granted 15 million of its $1 par common shares to executives, subject to forfeiture if employment is terminated within three years. The common shares have a market price of $8 per share on the grant date. Ignoring taxes, what is the effect on earnings in the year after the shares are granted to executives?   

A. 
$0.

B. 
$15 million.

C. 
$40 million.

D. 
$120 million.

 
12.
The compensation associated with restricted stock under a stock award plan is:   

A. 
The book value of an unrestricted share of the same stock times the number of shares.

B. 
The estimated fair value of a share of similar stock times the number of shares.

C. 
Allocated to expense over the service period which usually is the vesting period.

D. 
The book value of a share of similar stock times the number of shares.

 
13.
The compensation associated with a share of restricted stock under a stock award plan is:   

A. 
The market price of a share of similar fixed income securities.

B. 
The market price of an unrestricted share of the same stock.

C. 
The book value of an unrestricted share of the same stock.

D. 
The book value of a share of similar stock.

 

On January 1, 2013, M Company granted 90,000 stock options to certain executives. The options are exercisable no sooner than December 31, 2015, and expire on January 1, 2019. Each option can be exercised to acquire one share of $1 par common stock for $12. An option-pricing model estimates the fair value of the options to be $5 on the date of grant.  

14.
What amount should M recognize as compensation expense for 2013?   

A. 
$30,000.

B. 
$60,000.

C. 
$120,000.

D. 
$150,000.

 
15.
If unexpected turnover in 2014 caused the company to estimate that 10% of the options would be forfeited, what amount should M recognize as compensation expense for 2014?   

A. 
$30,000.

B. 
$60,000.

C. 
$120,000.

D. 
$150,000.

 
16.
Under its executive stock option plan, N Corporation granted options on January 1, 2013, that permit executives to purchase 15 million of the company's $1 par common shares within the next eight years, but not before December...
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