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)

Adjusted net income = $405,021

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

Shares outstanding adjusted = 206,000

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.

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

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

 
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