Bakersfield College

ACG 2021

Use the following to answer questions:

Wall Drugs offered an incentive stock option plan to its employees. On January 1, 2016, options were granted for 60,000 $1 par common shares. The exercise price equals the $5 market price of the common stock on the grant date. The options cannot be exercised before January 1, 2019, and expire December 31, 2020. Each option has a fair value of $1 based on an option pricing model.

1)What is the total compensation cost for this plan?

a. $0.

b. $60,000.

c. $240,000.

d. $300,000.

 

 

 

 

2. Which is the correct entry to record compensation expense for the year 2016?

a.            Compensation expense Paid-in capital—stock options	12,000	12,000
b.            Compensation expense Common stock	20,000	20,000
c.             Compensation expense Paid-in capital—stock options	20,000	20,000
d.            Compensation expense Paid-in capital—stock options	80,000	80,000

 

 

 

 

 

3. Which is the correct entry to record the exercise of 90% the options on April 15, 2019, when the market price of the stock was $8?

a.            Cash                                                                                                    270,000

Paid-in capital—stock options                                                    54,000

Common stock                                                                                                  60,000

Paid-in capital—excess of par                                                                   264,000

 

b.	Cash	378,000
	Paid-in capital—stock options Common stock	54,000	54,000
	Paid-in capital—excess of par		378,000
c.	Cash	270,000
	Paid-in capital—stock options	54,000
	Compensation expense Common stock	108,000	54,000
	Paid-in capital—excess of par		378,000
d.	Cash	270,000
	Paid-in capital—stock options Common stock	54,000	54,000
	Paid-in capital—excess of par		270,000

4. What is the entry to record the expiration of 10% of the options on December 31, 2020?

a.            Paid-in capital—stock options Paid-in capital—expired stock options	6,000	6,000
b.            Paid-in capital—stock options Retained earnings	6,000	6,000
c.             Paid-in capital—stock options Compensation expense	6,000	6,000
d.            Stock options receivable Common stock	30,000	6,000
Paid-in capital—excess of par		27,000

 

 

 

 

5. Under U.S. GAAP, a deferred tax asset for stock options:

1. is created for the cumulative amount of the fair value of the options the company has recorded for compensation expense.
2. is the portion of the options’ intrinsic value earned to date times the tax rate.
3. is the tax rate times the fair value of all the options.
4. isn’t created if the award is “in the money;” that is, it has intrinsic value.

 

 

 

 

 

6. On January 1, 2016, Albacore Company had 300,000 shares of its common stock issued and outstanding. Albacore issued a 10% stock dividend on July 1, 2016. On October 1, 2016, Albacore retired 12,000 of its common shares. When calculating basic earnings per share for 2016, what is the appropriate number of shares for Albacore to use in the denominator of the EPS fraction?

a. 303,000.

b. 342,000.

c. 312,000.

d. 327,000.

 

 

 

 

7. To encourage employee ownership of the company's common shares, KL Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 15% discount. During May, employees purchased 10,000 shares at a time when the market price of the shares on the New York Stock Exchange was $15 per share. KL will record compensation expense associated with the May purchases of:

a. $ 0.

b. $ 15,000.

c. $ 22,500.

d. $150,000.

 

 

 

 

8. Martin Corp. permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokerage fees and shares can be purchased at a 10% discount. During 2016, employees purchased 8 million shares; during this same period, the shares had a market price of $15 per share at the end of the year. Martin's 2016 pretax earnings will be reduced by:

a. $ 0.

2. $ 12 million.
3. $108 million.
4. $120 million.

 

 

 

 

9. How many types of potential common shares must a corporation have in order to be said to have a complex capital structure?

1. Three.
2. Two.
3. One.
4. Zero.

 

 

 

 

10. Which of the following does not represent potential shares?

1. Convertible preferred stock.
2. Convertible bonds.
3. Stock rights.
4. Participating preferred stock.

 

 

 

 

11. Basic earnings per share ignores:

1. All potential common shares.
2. Some potential common shares, but not others.
3. Dividends declared on noncumulative preferred stock.
4. Stock splits.

 

 

 

 

12. A simple capital structure might include:

1. Stock rights.
2. Convertible bonds.
3. Nonconvertible preferred stock.
4. Stock purchase warrants.

 

 

 

 

13. When several types of potential common shares exist, the one that enters the computation of diluted EPS first is the one with the:

1. Highest incremental effect.
2. Higher numerator.
3. Median incremental effect.
4. Lowest incremental effect.

 

 

 

 

14. Which of the following results in increasing basic earnings per share?

1. Paying more than book (carrying) value to retire outstanding bonds.
2. Issuing cumulative preferred stock.
3. Purchasing treasury stock.
4. All of these answer choices increase basic earnings per share.

 

 

 

 

15. ABC declared and paid cash dividends to its common shareholders in January of the current year. The dividend:

1. Will be added to the numerator of the earnings per share fraction for the current year.
2. Will be added to the denominator of the earnings per share fraction for the current year.
3. Will be subtracted from the numerator of the earnings per share fraction for the current year.
4. Has no effect on the earnings per share for the coming year.

 

 

 

 

16. Nonconvertible bonds affect the calculation of:

1. Basic earnings per share.
2. Diluted earnings per share.
3. Both A and B.
4. None of these answer choices is correct.

 

 

 

17. What is Angel's basic earnings per share for 2016, rounded to the nearest cent? a. $5.29.

b. $5.57.

c. $6.50.

d. None of these answer choices is correct.

 

 

 

 

18. What will Angel report as diluted earnings per share for 2016, rounded to the nearest cent? a. $6.43.

b. $6.25.

c. $6.22.

d. None of these answer choices is correct.

 

 

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19. Basic earnings per share is computed using:

1. The actual number of common shares outstanding at the end of the year.
2. A weighted-average of preferred and common shares.
3. The number of common shares outstanding plus potential common shares.
4. Weighted-average common shares outstanding for the year.

 

 

 

 

20. When computing diluted earnings per share, which of the following will not be considered in the calculation?

1. Dividends paid on common stock.
2. The weighted average common shares.
3. The effect of stock splits.
4. The number of common shares represented by stock purchase warrants.

 

 

 

 

21. When a company's only potential common shares are convertible bonds:

1. Diluted EPS will be greater if the bonds are actually converted than if they are not converted.
2. Diluted EPS will be smaller if the bonds are actually converted than if the bonds are not converted.
3. Diluted EPS will be the same whether or not the bonds are converted.
4. The effect of conversion on diluted EPS cannot be determined without additional information.

 

 

 

 

22. The adjustment to the weighted-average shares for retired shares is the same as for issuing new shares except:

1. The shares are deducted rather than added.
2. The shares are added rather than deducted.
3. The shares are treated as being acquired at the end of the year.
4. The shares are treated as being acquired at the beginning of the year.

 

 

 

 

23. On December 31, 2015, the Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2016, the company sold 50,000 additional shares for cash. Frisbee's net income for the year ended December 31, 2016, was $700,000. During 2016, Frisbee declared and paid

$80,000 in cash dividends on its nonconvertible preferred stock. What is the 2016 basic earnings per share (rounded)?

a. $2.16.

b. $3.50.

c. $3.10.

d. $2.80.