Brief Exercise 16-11

Tomba Corporation had 531,900 shares of common stock outstanding on January 1, 2014. On May 1, Tomba issued 57,900 shares.

(a) Compute the weighted-average number of shares outstanding if the 57,900 shares were issued for cash.

(531,900×4/12) + (589,800×8/12) = 177,300 + 393,200 = 570,500

(b) Compute the weighted-average number of shares outstanding if the 57,900 shares were issued in a stock dividend.

=589,800 (The 57,900 shares issued in the stock dividend are assumed outstanding from the beginning of the year.)

Exercise 16-25

On January 1, 2014, Crocker Company issued 10-year, \$3,637,000 face value, 6% bonds, at par. Each \$1,000 bond is convertible into 18 shares of Crocker common stock. Crocker’s net income in 2014 was \$285,000, and its tax rate was 45%. The company had 103,000 shares of common stock outstanding throughout 2014. None of the bonds were converted in 2014.

(a) Compute diluted earnings per share for 2014.

Net income                                                 \$285,000

Add interest savings (Net tax)                     \$120,021

(3,637,000×0.06) × (1-0.45)

3,637,000/1,000 = 3,637 bonds×18 = 65,466 shares.

Diluted EPS: 405,021/(103,000+65,466)

=405,021/168,466 = 2.40

(b) Compute diluted earnings per share for 2014, assuming the same facts as above, except that \$1,030,000 of 6% convertible preferred stock was issued instead of the bonds. Each \$100 preferred share is convertible into 10 shares of Crocker common stock.

Outstanding shares = 103,000

Add shares assumed to be issued (10,300×10) = 103,000

1,030,000/100 = 10,300

Diluted EPS= (\$285,000-\$0)/206,000 = 1.38

Exercise 16-29

On December 31, 2010, Beckford Company issues 125,600 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 \$9. The fair value of the SARs is estimated to be \$4 per SAR on December 31, 2011; \$1 on December 31, 2012; \$10 on December 31, 2013; and \$9 on December 31, 2014. The service period is 4 years, and the exercise period is 7 years.

(a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stock-appreciation rights plan.

 Date Fair Value Cumulative Compensation % Accrued Compensation Accrued to Date Expense 2011 Expense 2012 Expense 2013 Expense 2014 12/31/2011 12/31/2012 12/31/2013 12/31/2014 \$4 \$1 \$10 \$9 \$502,400 \$125,600 \$1,256,000 \$1,130,400 25% 50% 75% 100% \$125,600 \$62,800 \$942,000 \$1,130,400 \$125,600 (\$62,800) \$879,200 \$188,400

(b) Prepare the entry at December 31, 2014, to record compensation expense, if any, in 2014.

 Account Title and Explanation Debit Credit Compensation Expense Liability Under Stock Appreciation Plan \$188,400 \$188,400

(c) Prepare the entry on December 31, 2014, assuming that all 125,600 SARs are exercised.

 Account Title and Explanation Debit Credit Liability Under Stock Appreciation Plan Cash (125,600×9) \$1,130,400 \$1,130,400

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