Concept explainers
EPS; options; restricted stock; additional components for “proceeds” in
• LO19–1, LO19–2, LO19–4, LO19–8, LO19–11
Witter House is a calendar-year firm with 300 million common shares outstanding throughout 2018 and 2019. As part of its executive compensation plan, at January 1, 2017, the company had issued 30 million executive stock options permitting executives to buy 30 million shares of stock for $10 within the next eight years, but not prior to January 1, 2020. The fair value of the options was estimated on the grant date to be $3 per option.
In 2018, Witter House began granting employees stock awards rather than stock options as part of its equity compensation plans and granted 15 million restricted common shares to senior executives at January 1, 2018. The shares vest four years later. The fair value of the stock was $12 per share on the grant date. The average price of the common shares was $12 and $15 during 2018 and 2019, respectively.
The stock options qualify for tax purposes as an incentive plan. The restricted stock does not. The company’s net income was $150 million and $160 million in 2018 and 2019, respectively. Its income tax rate is 40%.
Required:
1. Determine basic and diluted earnings per share for Witter House in 2018.
2. Determine basic and diluted earnings per share for Witter House in 2019.
(1)
Earnings per share (EPS): The amount of earnings made available to each common share is referred to as earnings per share. Dilutive securities like convertible bonds, convertible preferred stock, and stock options, reduce the EPS by increasing the common shares.
Use the following formula to determine EPS:
Explanation of Solution
Determine basic EPS of W House for the year 2018.
Determine diluted EPS of W House for the year 2018.
Step 1: Compute the total compensation cost of stock options to W House.
Step 2: Compute the compensation expense allocated each year.
Note: Refer to Equation (1) for the value and computation of compensation cost.
Step 3: Compute the value of exercisable options.
Step 4: Compute the hypothetical proceeds of options in 2018.
Note: Refer to Equations (3) and (2) for the value and computation of exercisable options and compensation expense.
Step 5: Compute the number of shares assumed to be reacquired.
Note: Refer to Equation (4) for the value and computation of hypothetical proceeds of options.
Step 6: Compute the total compensation cost of stock awards to W House.
Step 7: Compute the compensation expense allocated each year.
Note: Refer to Equation (6) for the value and computation of compensation cost.
Step 8: Compute the hypothetical proceeds of awards in 2018.
Note: There are no cash proceeds until the completion of the vesting years. Refer to Equation (7) for the value and computation of compensation expense for one year.
Step 9: Compute the number of shares assumed reacquired.
Note: Refer to Equation (8) for the value and computation of hypothetical proceeds of awards.
Step 10: Compute the total weighted average number of common shares.
Details | Number of Shares |
Weighted average number of shares held in 2018 | 300,000,000 |
Number of exercisable options granted as shares | 30,000,000 |
Number of shares assumed reacquired as treasury stock | (27,500,000) |
Number of exercisable awards granted as shares | 15,000,000 |
Number of shares assumed reacquired as treasury stock | (11,250,000) |
Total weighted average number of shares | 306,250,000 shares |
Table (1)
Note: Refer to Equation (5) for the value and computation of number of options assumed reacquired as treasury stock, and Equation (9) for number of awards assumed reacquired as treasury stock.
Step 11: Compute diluted EPS of W House for the year 2018.
Note: Refer to Table (1) for value and computation of weighted average number of common shares outstanding.
(2)
Explanation of Solution
Determine basic EPS of W House for the year 2019.
Determine diluted EPS of W House for the year 2019.
Step 1: Compute the hypothetical proceeds in 2019.
Note: Refer to Equation (3) for the value and computation of exercisable options value. Do not add any compensation expense because options could be exercised after December 31, 2019.
Step 2: Compute the number of shares assumed to be reacquired.
Note: Refer to Equation (10) for the value and computation of hypothetical proceeds of options.
Step 3: Compute the hypothetical proceeds of awards in 2019.
Note: Since the vesting period is 4 years, there are no cash proceeds. Refer to Equation (7) for the value and computation of compensation expense for one year.
Step 4: Compute excess tax benefit per share.
Step 5: Compute the number of shares assumed to be reacquired.
Note: Refer to Equations (12) and (13) for the value and computation of hypothetical proceeds and excess tax benefit.
Step 6: Compute the total weighted average number of common shares.
Details | Number of Shares |
Weighted average number of shares held in 2016 | 300,000,000 |
Number of exercisable options granted as shares | 30,000,000 |
Number of shares assumed reacquired as treasury stock | (20,000,000) |
Number of exercisable awards granted as shares | 15,000,000 |
Number of shares assumed reacquired as treasury stock | (7,200,000) |
Total weighted average number of shares | 317,800,000 shares |
Table (2)
Note: Refer to Equation (11) for the values and computation of number of options assumed reacquired as treasury stock, and Equation (14) for number of awards assumed reacquired as treasury stock.
Step 7: Compute diluted EPS of W House for the year 2019.
Note: Refer to Table (2) for value and computation of weighted average number of common shares outstanding.
Want to see more full solutions like this?
Chapter 19 Solutions
INTERMEDIATE ACCOUNTING CONNECT ONLY
- 65. The stockholders’ equity of A Company at the end of 2023 and 2022 are as follows: 2023 2022 Preferred stock, P100 par, 12% P1,000,000 P 600,000 Common stock, P20 par 2,000,000 1,800,000 Paid in capital in excess of par Preferred 16,000 - Common 4,350,000 3,750,000 Retained earnings 80,000 180,000 At what price per share are the shares of preferred stock issued in 2023?arrow_forward51. What is the amount of dividend per share that MOONSTONE paid on March 31, 2021? 1.50 0.85 1.59 1.70 No answer from the given choices. 52. How much is the ordinary share capital, December 31, 2021? 24,531,000 24,498,800 18,870,000 17,000,000 No answer from the given choices. 53. How much will is the total cash dividends paid during the year 2021? 9,000,000 6,750,000 12,399,900 12,439,800 No answer from the given choices. 54. Number of fractional warrants outstanding as of December 31, 2021 66,100 13,220 52,880 0 No answer from the given choices. 55. How much is the retained earnings appropriated for contingency loss? 300,000 200,000 250,000arrow_forwardSh.27. On January 1, 2023, Bre-x Inc. had 600,000 common shares outstanding. On March 1, the corporation issued 60,000 new common shares to raise additional capital. On July 1, the corporation declared and distributed a 12% stock dividend on its common shares. On October 1, the corporation repurchased on the market 20,000 of its own outstanding common shares to make them available for issuances related to its key executives' outstanding stock options. Required: a. Calculate the weighted average number of shares outstanding as at December 31, 2023. Round to the nearest share. b. Assume that Bre-X Inc. had a 1-for-10 reverse stock split instead of a 10% stock dividend on July 1, 2023. Calculate the weighted average number of shares outstanding as at December 31, 2023. Round to the nearest share.arrow_forward
- B Question 13 - M8: Assessment... ssment - HW 8 i Lingenburger Cheese Corporation has 7.3 million shares of common stock outstanding, 265,000 shares of 4.5 percent preferred stock outstanding, and 150,000 bonds with a semiannual coupon rate of 5.4 percent outstanding, par value $2,000 each. The common stock currently sells for $64 per share and has a beta of 1.20 , the preferred stock has a par value of $100 and currently sells for $92 per share, and the bonds have 16 years to maturity and sell for 106 percent of par. The market risk premium is 7.4 percent, T-bills are yielding 3.2 percent, and the company's tax rate is 22 percent. a. What is the firm's market valuearrow_forwardQUESTION 7 At December 31, 2019, Bixby Corporation had 30,000 shares outstanding of $10 par value common stock. The shares were originally issued for $26 per share. On January 1, 2020, Bixby split its common stock 4 for 1 with a corresponding reduction in the stock’s par value. The market price of the stock just before the split was $60 per share. After the split, the balance of the common stock account is: A. $ 900,000 B. $ 780,000 C. $1,800,000 D. $ 300,000arrow_forwardExercise 19-17 (Algo) EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options [LO19-5, 19-6, 19-7, 19-8] On December 31, 2020, Berclair Inc. had 480 million shares of common stock and 5 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 136 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2021. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2021, was $850 million. Also outstanding at December 31 were 30 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2020, for 30 million common shares at an exercise price of $56 per share. During 2021, the market price of the common shares averaged $70 per share. Required: Compute Berclair's basic and diluted earnings per share for the year ended…arrow_forward
- Print by: Tanvi Varma374275:374275: Intermediate Accounting Theory and Practice MGMT X 120B (Summer 2020) / Ch. 15 HW *Exercise 15-18 Nash Company reported the following amounts in the stockholders’ equity section of its December 31, 2019, balance sheet. Preferred stock, 9%, $100 par (10,000 shares authorized, 1,800 shares issued) $180,000 Common stock, $5 par (96,000 shares authorized, 19,200 shares issued) 96,000 Additional paid-in capital 113,000 Retained earnings 449,000 Total $838,000 During 2020, Nash took part in the following transactions concerning stockholders’ equity. 1. Paid the annual 2019 $9 per share dividend on preferred stock and a $2 per share dividend on common stock. These dividends had been declared on December 31, 2019. 2. Purchased 1,800 shares of its own outstanding common stock for $42 per share. Nash uses the cost method. 3. Reissued 800 treasury shares for land valued at $34,500. 4.…arrow_forwardExercise 19-19 (Algo) EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options; convertible bonds [LO19-5,19-6, 19-7, 19-8, 19-9] On December 31, 2020, Berclair Inc. had 280 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2021. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2021, was $250 million. The income tax rate is 25%. Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2016. The options are exercisable as of September 13, 2020, for 30 million common shares at an exercise price of $56 per share. During 2021, the market price of the common shares averaged $70 per share. In 2017, $50.0 million of 8% bonds, convertible…arrow_forwardQuestion 1On 1st January 2021, Nkana Plc issued 80 million K1 preferred shares at a premium of K0.5 each. Issue Costs totalled K1.5 million. The shares carry a fixed dividend of 6%. The dividend is paid annually in arrears on the 31st of December. The shares will be redeemed on 1st January 2026 at a premium of K73.6m. The effective rate of interest on these shares is 9%.Required:Show how these shares will be reported in the financial Statements of Nkana plc for the years 2021 to 2025. Nkana plc’s year-end is 31st December.arrow_forward
- Question no 3The market price of the ordinary shares at 31 December 2020 was Rs1.60. The dividend yield on ordinary shares was 2.5 per cent. The creditor for taxation at 31 December 2019 was Rs25 000. Taxation paid in the year ended 31 December 2020 amounted to Rs22 000. The liability for taxation on the profit of the year ended 31 December 2020 is Rs31 000 and is carried forward on the Taxation account. The retained profit for the year ended 31 December 2020 was Rs60 000. The debentures were issued in 2016. The preference shares were issued at par. The summarized Balance Sheet at 31 December 2020 of Iqra Ltd was as: Fixed assets 2550000, Net current assets 950000, 6% debentures 2019/2020 150000, Ordinary shares of Rs1, 2500000, 10% redeemable preference shares of Rs1, 300000, Share Premium account 200000 Profit and Loss Account 350000. REQUIRED Prepare Iqra Ltd’s Profit and Loss Account for the year ended 31 December 2020 in as much detail as possible. The Profit and Loss Account…arrow_forwardExercise 19-19 (Algo) EPS; stock dividend; nonconvertible preferred stock; treasury shares; shares sold; stock options; convertible bonds [LO19-5,19-6, 19-7, 19-8, 19-9] On December 31, 2023, Berclair Incorporated had 480 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2024, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2024. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2024, was $750 million. The income tax rate is 25%. Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2019. The options are exercisable as of September 13, 2023, for 30 million common shares at an exercise price of $56 per share. During 2024, the market price of the common shares averaged $70 per share. In 2020, $50.0 million of 8% bonds,…arrow_forwardItem3 Item 3 Feldmann Corporation permits any of its employees to buy shares directly from the company through payroll deduction. There are no brokeragefees and shares can be purchased at a 10% discount. During 2024, employees purchased 26 million shares; during this same period, the shares had a marketprice of S20 per share at the end of the year. Feldmann's 2024 pretax earnings will be reduced by: Multiple Choice S52 million. S468 million. S520 million. SO .arrow_forward
- Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage Learning