Exercise 19-4
Requirement 1
$22.50fair value per share
x 4 millionshares granted
= $90 millionfair value of award
Requirement 2
no entry
Requirement 3
($ in millions)
Compensation expense ($90 million ÷ 3 years) 30
Paid-in capital – restricted stock 30
Requirement 4
$22.50fair value per share
x 4 millionshares granted
x 90%100% – 10% forfeiture rate
= $81 millionfair value of award
Exercise 19-5
Requirement 1
$3fair value per option
x 4 millionoptions granted
= $12 milliontotal compensation
Requirement 2
no entry
Requirement 3
($ in millions)
Compensation expense ($12 million ÷ 2 years) 6
Paid-in capital – stock options 6
Requirement 4
Compensation expense ($12 million ÷ 2 years) 6
Paid-in capital – stock options 6
Exercise 19-6
Requirement 1
At January 1, 2009, the estimated value of the award is:
$3estimated fair value per option
x 25 millionoptions granted
= $75 milliontotal compensation
Requirement 2
($ in millions)
Compensation expense ($75 million ÷ 3 years) 25.0
Paid-in capital – stock options 25.0
Requirement 3
Adams-Meneke should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes.
2010
Compensation expense ([$75 x 94% x 2/3] – $25) 22
Paid-in capital –stock options 22
2011
Compensation expense ([$75 x 94% x 3/3] – $25 – $22) 23.5
Paid-in capital –stock options 23.5
Note that this approach is contrary to the usual way companies account for changes in estimates. For instance, assume a company acquires a 3-year depreciable asset having no estimated residual value. The $75 million depreciable cost would be depreciated straight-line at $25 million over the three-year useful life. If the estimated residual value changes after one year to 6% of cost, the new estimated depreciable cost of $70.5 would be reduced by the $25 million depreciation recorded the first year, and the remaining $45.5 million would be depreciated equally, $22.75 million per year, over the remaining two years.
Exercise 19-7
Requirement 1
At January 1, 2009, the estimated value of the award is:
$1estimated fair value per option
x 40 millionoptions granted
= $40 millionfair value of award
Requirement 2
($ in millions)
Compensation expense ($40 million ÷ 2 years) 20
Paid-in capital – stock options 20
Requirement 3
Compensation expense ($40 million ÷ 2 years) 20
Paid-in capital – stock options 20
Requirement 4
Cash ($8 exercise price x 30 million shares) 240
Paid-in capital - stock options
(3/4 account balance of $40 million) 30
Common stock (30 million shares at $1 par per share) 30
Paid-in capital – excess of par (remainder) 240
Note: The market price at exercise is irrelevant.
Requirement 5
Paid-in capital – stock options ($40 -30 million) 10
Paid-in capital – expiration of stock options 10
Exercise 19-8
Requirement 1
At January 1, 2009, the total compensation is measured as:
$ 3 fair value per option
x 12 millionoptions granted
= $36 millionfair value of award
Requirement 2
December 31, 2009, 2010, 2011
($ in millions)
Compensation expense ($36 million ÷ 3 years) 12
Paid-in capital – stock options 12
Requirement 3
Cash ($11 exercise price x 12 million shares) 132
Paid-in capital - stock options ($12 million x 3 years) 36
Common stock(12 million shares at $1 par per share) 12
Paid-in capital – excess of par (to balance) 156
Note: The market price at exercise is irrelevant.
Exercise 19-9
Cash ($12 x 50,000 x 85%) 510,000
Compensation expense ($12 x 50,000 x 15%) 90,000
Common stock ($1 x 50,000) 50,000
Paid-in capital - in excess of par ($11 x 50,000) 550,000
Exercise 19-16
(amounts in millions, except per share amount)
Basic EPS
netpreferred
income dividends
$150 – $27$123
——————————————————————————= —— = $.62
200(1.05)– 24 (10/12) (1.05)+ 4 (3/12) + 30(4/12) 200
sharestreasurynewactual exercise
at Jan. 1sharessharesof options
___ stock dividend ___
adjustment
Diluted EPS
netpreferred
income dividends
$150 – $27$123
————————————————————————————= —— = $.60
200 (1.05) – 24(10/12) (1.05) + 4(3/12) + (30 – 24*)(8/12) + 30(4/12) 204
sharestreasurynewassumed exerciseactual exercise
at Jan. 1sharessharesof optionsof options
___ stock dividend ___
adjustment
*Purchase of treasury stock
30 million shares
x $56 (exercise price)
$1,680 million
÷ $70 (average market price)
24 million shares
Exercise 19-23
Requirement 1
The SARs are considered to be equity because IE will settle in shares of IE stock at exercise
January 1, 2009
No entry
Calculate total compensation expense:
$ 3estimated fair value per SAR
x 24 millionSARs granted
= $72 milliontotal compensation
The total compensation is allocated to expense over the 4-year service (vesting) period: 2009 – 2012
$72 million ÷ 4 years = $18 million per year
Requirement 2
December 31, 2009, 2010, 2011, 2012 ($ in millions)
Compensation expense ($72 million ÷ 4 years) 18
Paid-in capital – SAR plan 18
Requirement 3
The total compensation is measured once – at the grant date – and is not re-measured subsequently.
Requirement 4
June 6, 2014
Paid-in capital – SAR plan (account balance) 72
Common stock ($1 par per share x [$96 million*\ $50]) 1.92
Paid-in capital – in excess of par (to balance) 70.08
*$50 – 46 = $4 appreciation per share times 24 million units = $96 million
Exercise 19-24
Requirement 1
The SARs are considered to be a liability because employees can elect to receive cash at exercise.
January 1, 2009
No entry
Requirement 2
December 31, 2009 ($ in millions)
Compensation expense($4 x 24 million x 1/4) 24
Liability – SAR plan 24
December 31, 2010
Compensation expense ([$3 x 24 million x 2/4] - 24) 12
Liability – SAR plan 12
December 31, 2011
Compensation expense ([$4 x 24 million x 3/4] – 24 – 12) 36
Liability – SAR plan 36
December 31, 2012
Liability – SAR plan 12
Compensation expense ([$2.50 x 24 million x 4/4] –24 –12 –36) 12
Requirement 3
December 31, 2013
Compensation expense ([$3 x 24 million x all] –24 –12 –36 +12) 12
Liability – SAR plan 12
Requirement 4
June 6, 2014
Compensation expense ([($50-46) x 24 million x all] –24–12–36+12–12) 24
Liability – SAR plan 24
Liability – SAR plan (account balance) 96
Cash 96
Problem 19-2
Requirement 1
The measurement date is always is the date of grant.
Requirement 2
$ 6estimated fair value per option
x 20 millionoptions granted
= $120 millionfair value of award
The total compensation is to be allocated to expense over the 3-year service (vesting) period: 2009 - 2011
$120 million ÷ 3 years = $40 million per year
Requirement 3
Ensor should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes.
2010
Compensation expense ([$120 x 90% x 2/3] – $40) 32
Paid-in capital –stock options 32
2011
Compensation expense ([$120 x 90% x 3/3] – $40 – $32) 36
Paid-in capital –stock options 36
Problem 19-2 (concluded)
Requirement 4
This approach is contrary to the usual way companies account for changes in estimates. For instance, assume a company acquires a 3-year depreciable asset having no estimated residual value for $120 million. The $120 million depreciable cost would be depreciated straight-line at $40 million over the three-year useful life. If the estimated residual value changes after one year to 10% of cost, the new estimated depreciable cost of $108 would be reduced by the $40 million depreciation recorded the first year, and the remaining $68 million would be depreciated equally, $34 million per year, over the remaining two years.
Requirement 5
Cash ($15 x 80% = $12 exercise price x 18 million shares) 216
Paid-in capital - stock options (account balance of $108 million) 108
Common stock (2 million shares at $1 par per share) 18
Paid-in capital – excess of par (remainder) 306
Note: The market price at exercise is irrelevant.
Problem 19-11
The options issued in 2008 are not considered when calculating 2009 EPS because the exercise price ($33) is not less than the 2008 average market price of $32 (although they would have been considered when calculating 2008 EPS if the average price that year had been more than $33).
The options issued in 2009 do not affect the calculation of 2009 EPS because they were issued at December 31. Options are assumed exercised at the beginning of the year or when granted, whichever is later — when granted, in this case. So, the fraction of the year the shares are assumed outstanding is 0/12, meaning no increase in the weighted-average shares.
The options issued in 2007 are considered exercised for 8,000 shares when calculating 2009 EPS because the exercise price ($24) is less than the 2009 average market price of $32. Treasury shares are assumed repurchased at the average price for diluted EPS:
8,000 shares
x $24 (exercise price)
$192,000
÷ $32 (average market price)
6,000 shares
Problem 19-11 (concluded)
(amounts in thousands, except per share amounts)
Basic EPS
netpreferred
income dividends
$2,100 – $75$2,025
——————————————————————————— = —— = $3.00
600 (1.04)+ 60 (10/12) (1.04) – 2 (6/12) 675
sharesnewshares
at Jan. 1sharesretired
___ stock dividend ___
adjustment
Diluted EPS
netpreferredafter-tax
income dividendsinterest savings
$2,100 – $75+ $80 – 40%($80)$2,073
———————————————————————————— = — = $2.86
600 (1.04)+ 60(10/12) (1.04)– 2 (6/12) + (8 – 6) + 23* + 24** 724
sharesnewsharesexercisecontingentconversion
at Jan. 1sharesretiredof optionssharesof bonds
___ stock dividend ___
adjustment
* The contingently issuable shares are considered issued when calculating diluted EPS because the condition for issuance (Merrill net income > $500,000) currently is being met.
** The bonds are considered converted when calculating diluted EPS: 800 bonds x 30 shares = 24,000 shares upon conversion. Interest = $800,000 x 10% = $80,000.
Problem 19-12
Requirement 1
(amounts in thousands, except per share amount)
Basic EPS:
preferred
net incomedividends
$150 – $77$73
———————————————— = ——— = $1.83
4040
weighted-average
shares
With conversion of preferred stock
(Diluted EPS):
net income
$150 $150
———————————————— = ——— = $2.50
40+ 2060
weighted-averageconversion
sharesof preferred
shares
Since the assumed conversion of the convertible preferred stock causes EPS to increase, it is antidilutive and therefore ignored when calculating EPS.
Problem 19-12 (concluded)
Requirement 2
Basic EPS:
net income
$150
————————— = $3.75
40
weighted-average
shares
With conversion of bonds:
after-tax
net incomeinterest savings
$150+ $40 – 40% ($40)$174
———————————————— = ——— = $3.87
40+ 545
weighted-averageconversion
sharesof bonds
Since the assumed conversion of the convertible bonds causes EPS to increase, it is antidilutive and therefore ignored when calculating EPS.
Requirement 3
Since the exercise price is less than average market price, the options are not antidilutive and therefore assumed exercised when calculating diluted EPS.
Requirement 4
Since the exercise price is higher than the average market price, the warrants are antidilutive and therefore ignored when calculating diluted EPS.
Requirement 5
The 5,000 shares are added to the denominator when calculating diluted EPS since 2009 net income is higher than the conditional amount. Since only the denominator is increased, the effect is not antidilutive.
Problem 19-13
(amounts in millions, except per share amounts)
Basic EPS
net
income
$560 $560
—————————————————————— = —— = $1.44
400– 30 (4/12)390
sharesnew
at Jan. 1shares
Diluted EPS
netafter-tax*
income interest savings
$560 + $30 – 40% ($30)$578
—————————————————————— = —— = $1.36
400– 30 (4/12)+ 36426
sharesnewconversion
at Jan. 1sharesof bonds
*Interest on the bonds = $300 million x 10% = $30 million. If the bonds were not outstanding, interest expense would have been $30 million lower, and tax expense would have been 40% x $30 million, or $12 million higher, a net after-tax savings of $18 million.
Problem 19-14
(amounts in thousands, except per share amounts)
Basic EPS
netpreferred
income dividends
$650 – $40*$610
—————————————————————————————————— = ——— = $1.37
440+ 16 (3/12) 444
sharesnew
at Jan. 1shares
Diluted EPS
netpreferredpreferred
income dividendsdividends
$650 – $40*+ 40*$650
————————————————————————————————— = ——— = $1.33
440+ 16 (3/12)+ (20 – 15**) + 40 489
sharesnewexerciseconversion
at Jan. 1sharesof optionsof preferred
shares
* 4,000 shares x $100 par x 10% = $40,000
**Assumed purchase of treasury shares
20,000 shares
x $30 (exercise price)
$600,000
÷ $40 (average market price)
15,000 shares
Problem 19-15
(amounts in millions, except per share amounts)
Basic EPS
netpreferred
income dividends
$1,476 – $60* $1,416
——————————————————————————————————————— = ——— = $2.27
600+ 72 (4/12)624
sharesnew
at Jan. 1shares
Diluted EPS
netpreferredafter-tax
income dividendsInterest savings
$1,476 – $60* + $160 - 40% ($160)$1,512
——————————————————————————————————————— = ——— = $2.09
600+ 72 (4/12)+ (60 – 40)**+ 80724
sharesnewexerciseconversion
at Jan. 1sharesof optionsof bonds
*Preferred dividends: 6% x $50 x 20 million shares = $60 million
**Computation of Treasury Shares:
60 millionshares
x $12exercise price
$720 millionproceeds
÷ $18average share price
40 milliontreasury shares