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Intermediate Accounting, 16e Chapter 16 Homework Dilutive Securities and Earnings Per Share ACTG 382

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Brief Exercise 16-1
Indigo Inc. issued $4,190,000 par value, 7% convertible bonds at 95 for cash. If the bonds had not
included the conversion feature, they would have sold for 95.
Prepare the journal entry to record the issuance of the bonds. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is required,
select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Cash
3,980,500
Discount on B
209,500
Bonds Payable
Credit
4,190,000
Brief Exercise 16-2
Bonita Corporation has outstanding 1,800 $1,000 bonds, each convertible into 60 shares of
$10 par value common stock. The bonds are converted on December 31, 2017, when the
unamortized discount is $26,900 and the market price of the stock is $21 per share.
Record the conversion using the book value approach. (Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Bonds Payable
Debit
Credit
1,800,000
Paid-in Capital
693,100
Common Stock
1,080,000
Discount on B
26,900
Common Stock = (1,800 × 60 × $10) = $1,080,000
Brief Exercise 16-3
Blossom Corporation issued 2,200 shares of $10 par value common stock upon conversion
of 1,100 shares of $50 par value preferred stock. The preferred stock was originally issued at
$56 per share. The common stock is trading at $27 per share at the time of conversion.
Record the conversion of the preferred stock. (Credit account titles are automatically indented
when amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Preferred Stoc
55,000
Paid-in Capital
6,600
Credit
Common Stock
22,000
Paid-in Capital
39,600
Preferred Stock
= (1,100 × $50)
= $55,000
Paid-in Capital in Excess of Par—Preferred Stock = ($56 – $50) × 1,100
= $6,600
Common Stock
= (2,200 × $10)
= $22,000
Paid-in Capital in Excess of Par—Common Stock = ($56 × 1,100) – (2,200 × $10) = $39,600
Brief Exercise 16-4
Larkspur Corporation issued 2,200 $1,000 bonds at 103. Each bond was issued with one
detachable stock warrant. After issuance, the bonds were selling in the market at 98, and the
warrants had a market price of $45.
Use the proportional method to record the issuance of the bonds and warrants. (Credit account
titles are automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts. Round intermediate
calculations to 5 decimal places, e.g. 1.24687 and final answers to 0 decimal places, e.g. 5,125.)
Account Titles and Explanation
Debit
Cash
2,266,000
Discount on B
33,483
Credit
Paid-in Capital
99,483
Bonds Payable
2,200,000
Discount on Bonds Payable = ($2,200,000 – $2,166,517) = $33,483
Fair value of bonds (2,200 × $1,000 × 0.98)
Fair value of warrants (2,200 × $45)
$2,156,000
99,000
Aggregate fair value
$2,255,000
Allocated to bonds
[($2,156,000/$2,255,000) × $2,266,000] $2,166,517
Allocated to warrants [($99,000/$2,255,000) × $2,266,000]
99,483
$2,266,000
Brief Exercise 16-5
Waterway Corporation issued 1,800 $1,000 bonds at 101. Each bond was issued with one
detachable stock warrant. After issuance, the bonds were selling separately at 98. The market price
of the warrants without the bonds cannot be determined.
Use the incremental method to record the issuance of the bonds and warrants. (Credit account
titles are automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Cash
1,818,000
Discount on B
36,000
Credit
Paid-in Capital
54,000
Bonds Payable
1,800,000
Discount on Bonds Payable
= [$1,800,000 × (1 – 0.98)] = $36,000
Paid-in Capital—Stock Warrants = [$1,800,000 × (1.01 – 0.98)] = $54,000
Brief Exercise 16-6
On January 1, 2017, Splish Corporation granted 5,300 options to executives. Each option entitles
the holder to purchase one share of Splish’s $5 par value common stock at $50 per share at any
time during the next 5 years. The market price of the stock is $60 per share on the date of grant.
The fair value of the options at the grant date is $160,000. The period of benefit is 2 years.
Prepare Splish’s journal entries for January 1, 2017, and December 31, 2017 and 2018. (Credit
account titles are automatically indented when amount is entered. Do not indent manually. If no
entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
Account Titles and Explanation
Debit
Credit
1/1/17
No Entry
0
No Entry
12/31/17
Compensation
0
80,000
Paid-in Capital
12/31/18
Compensation
80,000
80,000
Paid-in Capital
80,000
Brief Exercise 16-7
On January 1, 2017, Riverbed Corporation granted 2,200 shares of restricted $5 par value
common stock to executives. The market price (fair value) of the stock is $63 per share on the date
of grant. The period of benefit is 2 years.
Prepare Riverbed’s journal entries for January 1, 2017, and December 31, 2017 and 2018. (Credit
account titles are automatically indented when amount is entered. Do not indent manually. If no
entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
Date
1/1/17
12/31/17
Account Titles and Explanation
Unearned Com
Debit
138,600
Common Stock
11,000
Paid-in Capital
127,600
Compensation
69,300
Unearned Com
12/31/18
Credit
Compensation
Unearned Com
69,300
69,300
69,300
1/1/17 Common Stock
= (2,200 × $5)
= $11,000
Paid in Capital in Excess of Par—Common Stock = [($63 – $5) × 2,200] = $127,600
Unearned Compensation
= (2,200 × $63)
= $138,600
Brief Exercise 16-8
On January 1, 2017 (the date of grant), Pronghorn Corporation issues 2,000 shares of restricted
stock to its executives. The fair value of these shares is $102,000, and their par value is $10,000.
The stock is forfeited if the executives do not complete 3 years of employment with the company.
Prepare journal entries for January 1, 2017, and on December 31, 2017, assuming the service
period is 3 years. (Credit account titles are automatically indented when amount is entered. Do not
indent manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
Date
1/1/17
12/31/17
Account Titles and Explanation
Unearned Com
Debit
Credit
102,000
Common Stock
10,000
Paid-in Capital
92,000
Compensation
34,000
Unearned Com
34,000
12/31/17 Unearned Compensation = ($102,000 ÷ 3) = $34,000
Brief Exercise 16-9
Sheridan Corporation had 2017 net income of $1,017,000. During 2017, Sheridan paid a dividend
of $2 per share on 244,500 shares of preferred stock. During 2017, Sheridan had
outstanding 176,000 shares of common stock.
Compute Sheridan’s 2017 earnings per share. (Round answer to 2 decimal places, e.g. 3.56.)
Earnings per share
$
3.00
per share
$1,017,000 – (244,500 × $2)
= $3.00 per share
176,000 shares
Brief Exercise 16-10
Sandhill Corporation had 116,400 shares of stock outstanding on January 1, 2017. On May 1,
2017, Sandhill issued 63,600 shares. On July 1, Sandhill purchased 9,120 treasury shares, which
were reissued on October 1.
Compute Sandhill’s weighted-average number of shares outstanding for 2017.
Weighted-average number of shares outstanding
$
156,520
Dates
Shares
Fraction Weighted
Outstanding Outstanding of Year Shares
1/1–5/1
116,400
4/12
38,800
5/1–7/1
180,000
2/12
30,000
7/1–10/1
170,880
3/12
42,720
10/1–12/31
180,000
3/12
45,000
$156,520
Brief Exercise 16-11
Bramble Corporation had 291,000 shares of common stock outstanding on January 1, 2017. On
May 1, Bramble issued 31,200 shares.
(a) Compute the weighted-average number of shares outstanding if the 31,200 shares were issued
for cash.
Weighted-average number of shares outstanding
$
311,800
(b) Compute the weighted-average number of shares outstanding if the 31,200 shares were issued
in a stock dividend.
Weighted-average number of shares outstanding
$
322,200
(a) (291,000 × 4/12) + (322,200 × 8/12) = $311,800
(b) $322,200 (The 31,200 shares issued in the stock dividend are assumed outstanding from the
beginning of the year.)
Either add 31,200 to 291,000 and multiply by the fraction of the year or find the percent of the
stock dividend.
Stock dividend %: (31,200 / 291,000)
Dates
Outstanding
1/1-5/1
Shares
Outstanding
291,000
Fraction of
Year
4/12
Stock Dividend
Weighted
Shares
(1+(31,200/291,000)) 107,400
5/1-12/31
322,200
8/12
-
214,800
322,200
Brief Exercise 16-12
The 2017 income statement of Marigold Corporation showed net income of $476,000 and a loss
from discontinued operations of $114,000. Marigold had 100,000 shares of common stock
outstanding all year.
Prepare Marigold’s income statement presentation of earnings per share. (Round answers to 2
decimal places, e.g. 3.55.)
Marigold Corporation
Income Statement
For the Year Ended December 31, 2017
Earnings Per Share
$
Income from Continuing Operations
5.90
Discontinued Operations (Loss)
1.14
$
Net Income / (Loss)
4.76
Income from continuing operations = ($590,000/100,000) = $5.90
Discontinued operations (loss)
= ($114,000/100,000) = ($1.14)
Net income
= ($476,000/100,000) = $4.76
Brief Exercise 16-13
Crane Corporation earned net income of $370,000 in 2017 and had 108,000 shares of common stock
outstanding throughout the year. Also outstanding all year was $840,000 of 9% bonds, which are
convertible into 20,000 shares of common. Crane’s tax rate is 40 percent.
Compute Crane’s 2017 diluted earnings per share. (Round answer to 2 decimal places, e.g.
3.55.)
Diluted earnings per share
Net income
$
3.25
$370,000
Adjustment for interest, net of tax [$75,600* × (1 – 0.40)]
45,360
Adjusted net income
$415,360
Weighted-average number of shares outstanding adjusted for dilutive securities
(108,000 + 20,000)
÷128,000
Diluted EPS
$3.25
*$840,000 x 0.09
Brief Exercise 16-14
Wildhorse Corporation reported net income of $338,000 in 2017 and had 54,200 shares of common
stock outstanding throughout the year. Also outstanding all year were 5,400 shares of cumulative
preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual
dividend of $5 per share. Wildhorse’s tax rate is 30%.
Compute Wildhorse’s 2017 diluted earnings per share. (Round answer to 2 decimal places, e.g.
3.55.)
Diluted earnings per share
$
5.20
Net income
$338,000
Weighted-average number of shares adjusted for dilutive securities (54,200 + 10,800) ÷ 65,000
Diluted EPS
$5.20
Net income=$338,000-27,000+27,000
Brief Exercise 16-15
Marigold Corporation reported net income of $374,500 in 2017 and had 198,000 shares of common
stock outstanding throughout the year. Also outstanding all year were 48,000 options to purchase
common stock at $10 per share. The average market price of the stock during the year was $15.
Compute diluted earnings per share. (Round answer to 2 decimal places, e.g. 3.55.)
Diluted earnings per share
$
1.75
Proceeds from assumed exercise of 48,000 options (48,000 × $10) $480,000
Shares issued upon exercise
48,000
Treasury shares purchasable ($480,000 ÷ $15)
Incremental shares
Diluted EPS =
$374,500
198,000 + 16,000
(32,000)
16,000
= $1.75
Exercise 16-1
For each of the unrelated transactions described below, present the entries required to record each
transaction.
1. Pronghorn Corp. issued $20,300,000 par value 10% convertible bonds at 98. If the bonds had
not been convertible, the company’s investment banker estimates they would have been sold at
95.
2. Stellar Company issued $20,300,000 par value 10% bonds at 97. One detachable stock
purchase warrant was issued with each $100 par value bond. At the time of issuance, the
warrants were selling for $5.
3. Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the
transaction. The 11%, $9,500,000 par value bonds were converted into 950,000 shares of $1
par value common stock on July 1, 2017. On July 1, there was $50,000 of unamortized
discount applicable to the bonds, and the company paid an additional $79,000 to the
bondholders to induce conversion of all the bonds. The company records the conversion using
the book value method.
(Credit account titles are automatically indented when amount is entered. Do not indent manually.
If no entry is required, select "No Entry" for the account titles and enter 0 for the amounts.)
No. Account Titles and Explanation
1.
Debit
Cash
19,894,000
Discount on B
406,000
Bonds Payable
2.
3.
Credit
20,300,000
Cash
19,691,000
Discount on B
1,624,000
Paid-in Capital
1,015,000
Bonds Payable
20,300,000
Bonds Payable
9,500,000
Debt Conversi
79,000
Paid-in Capital
8,500,000
Common Stock
950,000
Cash
79,000
Discount on B
50,000
1. Cash = ($20,300,000 × 0.98) = $19,894,000
2. Value of bonds plus warrants ($20,300,000 × 0.97) $19,691,000
Value of warrants
(203,000 × $5)
(1,015,000)
Value of bonds
$18,676,000
3. Paid-in Capital in Excess of Par—Common Stock = [($9,500,000 – $50,000) –
$950,000] = $8,500,000
Exercise 16-4
On January 1, 2016, when its $30 par value common stock was selling for $80 per share, Grouper
Corp. issued $10,600,000 of 8% convertible debentures due in 20 years. The conversion option
allowed the holder of each $1,000 bond to convert the bond into five shares of the corporation’s
common stock. The debentures were issued for $11,448,000. The present value of the bond
payments at the time of issuance was $9,010,000, and the corporation believes the difference
between the present value and the amount paid is attributable to the conversion feature. On
January 1, 2017, the corporation’s $30 par value common stock was split 2 for 1, and the
conversion rate for the bonds was adjusted accordingly. On January 1, 2018, when the
corporation’s $15 par value common stock was selling for $135 per share, holders of 30% of the
convertible debentures exercised their conversion options. The corporation uses the straight-line
method for amortizing any bond discounts or premiums.
(a) Prepare the entry to record the original issuance of the convertible debentures. (Credit account
titles are automatically indented when amount is entered. Do not indent manually. If no entry is
required, select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Cash
Debit
Credit
11,448,000
Premium on Bo
848,000
Bonds Payable
10,600,000
(b) Prepare the entry to record the exercise of the conversion option, using the book value
method. (Credit account titles are automatically indented when amount is entered. Do not indent
manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
Account Titles and Explanation
Debit
Credit
Bonds Payable
3,180,000
Premium on Bo
228,960
Common Stock
477,000
Paid-in Capital
2,931,960
(b)
Schedule 1
Computation of Unamortized Premium on Bonds Converted
Premium on bonds payable on January 1, 2016
$848,000
Amortization for 2016 ($848,000 ÷ 20)
$42,400
Amortization for 2017 ($848,000 ÷ 20)
42,400
84,800
Premium on bonds payable on January 1, 2018
Bonds converted
Unamortized premium on bonds converted
763,200
× 30%
$228,960
Schedule 2
Computation of Common Stock Resulting from Conversion
Number of shares convertible on January 1, 2016:
Number of bonds ($10,600,000 ÷ $1,000)
10,600
Number of shares for each bond
×5
Stock split on January 1, 2017
Number of shares convertible after the stock split
% of bonds converted
Number of shares issued
Par value/per share
Total par value
53,000
×2
106,000
× 30%
31,800
× $15
$477,000
Exercise 16-9
On May 1, 2017, Nash Company issued 2,500 $1,000 bonds at 102. Each bond was issued with
one detachable stock warrant. Shortly after issuance, the bonds were selling at 98, but the fair value
of the warrants cannot be determined.
(a) Prepare the entry to record the issuance of the bonds and warrants. (Credit account titles are
automatically indented when amount is entered. Do not indent manually. If no entry is required,
select "No Entry" for the account titles and enter 0 for the amounts.)
Account Titles and Explanation
Debit
Cash
2,550,000
Discount on B
50,000
Credit
Paid-in Capital
100,000
Bonds Payable
2,500,000
(b) Assume the same facts as part (a), except that the warrants had a fair value of $28. Prepare the
entry to record the issuance of the bonds and warrants. (Credit account titles are automatically
indented when amount is entered. Do not indent manually. If no entry is required, select "No
Entry" for the account titles and enter 0 for the amounts. Round intermediate calculations to 5
decimal places, e.g. 1.24687 and final answers to 0 decimal places, e.g. 5,125.)
Account Titles and Explanation
Debit
Cash
2,550,000
Discount on B
20,833
Credit
Paid-in Capital
70,833
Bonds Payable
2,500,000
(a)
Cash
= ($2,500,000 × 1.02)
= $2,550,000
Discount on Bonds Payable
= [(1 – 0.98) × $2,500,000]
= $50,000
Paid-in Capital—Stock Warrants = $2,550,000 – ($2,500,000 × 0.98) = $100,000
(b)
Market value of bonds without warrants ($2,500,000 × 0.98) $2,450,000
Market value of warrants
(2,500 × $28)
70,000
Total market value
$2,520,000
$2,450,000
$2,520,000
× $2,550,000 = $2,479,167 Value assigned to bonds
$70,000
$70,833 Value assigned to warrants
× $2,550,000 =
$2,520,000
$2,550,000 Total value assigned
Exercise 16-11
On January 1, 2018, Oriole Inc. granted stock options to officers and key employees for the
purchase of 17,000 shares of the company’s $10 par common stock at $23 per share. The options
were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ
of the company, and expiring December 31, 2024. The service period for this award is 2 years.
Assume that the fair value option-pricing model determines total compensation expense to be
$363,600.
On April 1, 2019, 1,700 options were terminated when the employees resigned from the company.
The market price of the common stock was $34 per share on this date.
On March 31, 2020, 10,200 options were exercised when the market price of the common stock
was $39 per share.
Prepare journal entries to record issuance of the stock options, termination of the stock options,
exercise of the stock options, and charges to compensation expense, for the years ended
December 31, 2018, 2019, and 2020. (Credit account titles are automatically indented when
amount is entered. Do not indent manually. If no entry is required, select "No Entry" for the
account titles and enter 0 for the amounts.)
Date
Jan. 1, 2018
Account Titles and Explanation
No Entry
Debit
0
No Entry
Dec. 31, 2018
Compensation
0
181,800
Paid-in Capital
April 1, 2019
Paid-in Capital
181,800
18,180
Compensation
Dec. 31, 2019
Compensation
18,180
163,620
Paid-in Capital
Mar. 31, 2020
163,620
Cash
234,600
Paid-in Capital
218,160
Common Stock
Credit
102,000
Paid-in Capital
350,760
12/31/18 Paid-in Capital—Stock Options = ($363,600 × 1/2)
4/1/19
Compensation Expense
= $181,800
= ($181,800 × 1,700/17,000) = $18,180
12/31/19 Paid-in Capital—Stock Options = ($363,600 × 1/2 × 18/20)
3/31/20
= $163,620
Cash
= (10,200 × $23)
= $234,600
Paid-in Capital—Stock Options = ($363,600 × 10,200/17,000) = $218,160
Note: There are 5,100 options unexercised as of March 31, 2020 (17,000 – 1,700 – 10,200)
Exercise 16-13
Sandhill Company issues 4,200 shares of restricted stock to its CFO, Dane Yaping, on January 1,
2017. The stock has a fair value of $131,000 on this date. The service period related to this
restricted stock is 4 years. Vesting occurs if Yaping stays with the company for 4 years. The par
value of the stock is $6. At December 31, 2018, the fair value of the stock is $143,000.
(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant),
and December 31, 2018. (Credit account titles are automatically indented when amount is entered.
Do not indent manually. If no entry is required, select "No Entry" for the account titles and enter 0
for the amounts.)
Date
1/1/17
12/31/18
Account Titles and Explanation
Unearned Com
Debit
Credit
131,000
Common Stock
25,200
Paid-in Capital
105,800
Compensation
32,750
Unearned Com
32,750
(b) On March 4, 2019, Yaping leaves the company. Prepare the journal entry to account for this
forfeiture. (Credit account titles are automatically indented when amount is entered. Do not indent
manually. If no entry is required, select "No Entry" for the account titles and enter 0 for the
amounts.)
Date Account Titles and Explanation
Debit
Credit
3/4/19
Common Stock
25,200
Paid-in Capital
105,800
Compensation
65,500
Unearned Com
65,500
(a) 1/1/17
Common Stock
= (4,200 × $6)
= $25,200
12/31/18 Unearned Compensation = ($131,000 ÷ 4) = $32,750
(b) 3/4/19
Compensation Expense = (2 × $32,750) = $65,500
Exercise 16-23
On June 1, 2015, Shamrock Company and Bridgeport Company merged to form Indigo Inc. A
total of 769,000 shares were issued to complete the merger. The new corporation reports on a
calendar-year basis.
On April 1, 2017, the company issued an additional 580,000 shares of stock for cash.
All 1,349,000 shares were outstanding on December 31, 2017.
Indigo Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2017. Each
$1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been
converted to date.
Indigo Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The
annual report will show earnings per share figures based upon a reported after-tax net income of
$1,577,000. (The tax rate is 40%.)
Determine the following for 2017.
(a) The number of shares to be used for calculating: (Round answers to 0 decimal places, e.g.
$2,500.)
(1) Basic earnings per share
1,204,000
shares
(2) Diluted earnings per share
1,216,000
shares
(b) The earnings figures to be used for calculating: (Round answers to 0 decimal places, e.g.
$2,500.)
(1) Basic earnings per share
(2) Diluted earnings per share
$
1,577,000
$
1,591,400
(a)
(1) Number of shares for basic earnings per share.
Shares
Fraction Weighted
Outstanding
of Year
Shares
Jan. 1–April 1
769,000
3/12 192,250
April 1–Dec. 31
1,349,000
9/12 1,011,750
Weighted-average number of shares outstanding 1,204,000
Dates Outstanding
OR
Number of shares for basic earnings per share:
Initial issue of stock
769,000 shares
April 1, 2017 issue (3/4 × 580,000)
435,000 shares
Total
1,204,000 shares
(2) Number of shares for diluted earnings per share:
Dates
Outstanding
Shares
Fraction Weighted
Outstanding
of Year
Shares
Jan. 1–April 1
769,000
3/12 192,250
April 1–July 1
1,349,000
3/12 337,250
July 1–Dec. 31
1,373,000*
6/12 686,500
Weighted-average number of shares outstanding 1,216,000
*1,349,000 + [($600,000 ÷ 1,000) × 40] = $1,373,000
(b)
(1)
Earnings for basic earnings per share:
After-tax net income
$1,577,000
(2)
Earnings for diluted earnings per share:
After-tax net income
$1,577,000
Add back interest on convertible bonds (net of tax):
Interest ($600,000 × 8% × 1/2)
$24,000
Less income taxes (40%)
9,600
14,400
Total
$1,591,400