118. Gear Corporation had the following common stock record during the current calendar year:
-
Outstanding - January 1
5,000,000
Additional shares issued 3/31
100,000
Distributed a 10% stock dividend on 6/30
Shares reacquired 9/30
100,000
What is the number of shares to be used in computing basic EPS?
A) 5,500,000.
B) 5,557,500.
C) 5,555,000.
D) 5,050,000.
Answer: B Learning Objective: 7 Level of Learning: 3
Rationale: (5,000,000 x 1.10) + (100,000 x 9/12 x 1.10) - (100,000 x 3/12) = 5,557,500
119. During the current year, High Corporation had 3 million shares of common stock outstanding. Five thousand, $1,000, 6% convertible bonds were issued at face amount at the beginning of the year. High reported income before tax of $4 million and net income of $2.4 million for the year. Each bond is convertible into ten shares of common. What is diluted EPS?
A) $.85.
B) $.86.
C) $.80.
D) $.79.
Answer: A Learning Objective: 10 Level of Learning: 3
Rationale:
*($4-$2.4)/$4 = 40%
120. Ignatius Corporation had 7 million shares of common stock outstanding during the current calendar year. It issued ten thousand, $1,000, convertible bonds on January 1. On June 30, Ignatius issued 100,000 shares of $100 par 6% cumulative preferred stock. Dividends are declared and paid semiannually. The bonds were issued at face amount and pay interest quarterly at an annual rate of 10%. Each bond is convertible into 50 shares of common stock. Ignatius has an effective tax rate of 40%. Ignatius would report the following EPS data on its net income of $20 million.
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Basic EPS
Diluted EPS
A)
$2.77
$2.67
B)
$2.81
$2.71
C)
$2.85
$2.67
D)
$2.81
$2.68
Answer: B Learning Objective: 10 Level of Learning: 3
Rationale:
Diluted EPS: [$20,000,000 - $300,000 + (1,000,000 x .6)]/7,000,000 + (10,000 x 50) = $2.71
121. Jet Corporation had 8 million shares of common stock outstanding during the current calendar year. On July 1, Jet issued ten thousand, $1,000 face value, convertible bonds. The bonds were issued at face amount and pay interest quarterly for 20 years. They have a stated rate of 12%. Each bond is convertible into 50 shares of common stock. Jet had income before tax of $30 million and a net income of $18 million. Jet would report the following EPS data:
-
Basic EPS
Diluted EPS
A)
$2.25
$2.23
B)
$2.25
n/a - antidilutive
C)
$2.25
$2.16
D)
$2.25
$2.12
Answer: A Learning Objective: 10 Level of Learning: 3
Rationale:
*($30 $18)/$30 = 40%
Problems
122. Cartel Products Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2006, the corporation granted 12 million of its $1 par common shares, subject to forfeiture if employment is terminated within 2 years. The common shares have a market value of $6 per share on the date the award is granted.
Required:
-
Assume that no shares are forfeited. Determine the total compensation cost pertaining to the restricted shares.
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Prepare the appropriate journal entries related to the restricted stock through December 31, 2007.
Answer:
-
($ in millions)
1.
$6 x 12 shares = $72
2.)
December 31, 2006
Compensation expense ($72/2)
36
Paid-in capital-restricted stock
36
December 31, 2007
Compensation expense ($72/2)
36
Paid-in capital-restricted stock
36
Paid-in capital-restricted stock
72
Common stock (12 x $1)
12
Paid-in capital-excess of par
60
Learning Objective: 2 Level of Learning: 3
123. Steverino Inc. offers a restricted stock award plan to its vice presidents. On January 1, 2006, the corporation granted 10 million of its $5 par common shares, subject to forfeiture if employment is terminated within 2 years. The common shares have a market value of $10 per share on the date the award is granted.