Transcript Slide 1

Vargo Company has bonds payable outstanding in the amount of $500,000 and
the Premium on Bonds Payable account has a balance of $7,500. Each $1,000
bond is convertible into 20 shares of preferred stock of par value of $50 per share.
All bonds are converted into preferred stock.
A.
Assuming that the book value method was used, what entry
would be made?
$500,000 / $1,000 = 500 units x 20 shares = 10,000 shares of p/s
x $50/par = $500,000 p/s
Bonds payable.......... $500,000
Premium on b/p...... $ 7,500
Preferred stock................$500,000
APIC(PS).........................$ 7,500
On September 1, 2007 Sands Company sold at 104 (plus accrued interest)
4,000 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with
detachable stock warrants. Each bond carried two detachable warrants; each
warrant was for one share of common stock at a specified option price of $15/sh.
Shortly after issuance, the warrants were quoted on the market for $3 each.
No market value can be determined for the Sands Co. bonds. Interest is payable
on December 1 and June 1. Bond issue costs of $30,000 were incurred.
PREPARE in general journal format the entry to record the ISSUANCE of
the bonds.
Sale price of the bonds
Face value of the bonds
Overage...................
-value assigned to stock
warrants
4,000 bonds x $1,000 face x 1.04 = $4,160,000
$4,000,000
$160,000
$24,000
$136,000
PREMIUM
4,000 x 2 = 8,000 warrants x $3 mkt =
$24,000
On September 1, 2007 Sands Company sold at 104 (plus accrued interest)
4,000 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with
detachable stock warrants. Each bond carried two detachable warrants; each
warrant was for one share of common stock at a specified option price of $15/sh.
Shortly after issuance, the warrants were quoted on the market for $3 each.
No market value can be determined for the bonds above. Interest is payable
on December 1 and June 1. Bond issue costs of $30,000 were incurred.
ACCRUED INTEREST TO DATE OF SALE
3 months is accrued at point of sale (june, july, august)
4,000 x $1,000 x .09 x 3/12 = $90,000 accrued interest
On September 1, 2007 Sands Company sold at 104 (plus accrued interest)
4,000 of its 9%, 10-year, $1,000 face value, nonconvertible bonds with
detachable stock warrants. Each bond carried two detachable warrants; each
warrant was for one share of common stock at a specified option price of $15/sh.
Shortly after issuance, the warrants were quoted on the market for $3 each.
No market value can be determined for the bonds above. Interest is payable
on December 1 and June 1. Bond issue costs of $30,000 were incurred.
Cash.............. $4,220,000
Unamortized
bond issue csts... $30,000
Bonds payable............ $4,000,000
Premium on b/p......... $136,000
APIC-stock warrants... $24,000 (value of stock warrants)
Bond interest expense.. $90,000 (accrued )
(could also credit payable)
WHICH METHOD was used to allocate costs?
INCREMENTAL
•security for which the market value is determinable is used, and the
remainder of the purchase price is allocated to the security for which
the market value is not known.
11-1-07 Columbo adopted stock option plan.
• Key execs could purchase 30,000 shares of $10 par c/s.
• Granted 1-2-08
• Exercisable 2 years after date of grant if still an employee
• Expired 6 years from date of grant.
•Option price $40. Value option pricing model
determines total compensation expense $450,000.
(like Black - Scholes).
All options exercised during 2010;
• 20,000 on 1/3 mkt $67
• 10,000 on 5/1 when mkt $77
Prepare entries related to the stock option plan in
2008, 2009, 2010. Assume service performed
equally in 2008 and 2009
January 2, 2008: GRANT DATE
No entry--Just determine total compensation cost
of $450,000.
December 31, 2008: End of the first service year
Compensation expense………….. $225,000
APIC-Stock Options……………… $225,000
* 450,000/2 = $225,000
December 31, 2009: End of the second service year
Compensation expense………….. $225,000
APIC-Stock Options……………… $225,000
* 450,000/2 = $225,000
January 3, 2010: 20,000 options exercised when mkt $67;
option price $40.
Cash………….. $800,000 (20,000 x $40)
APIC-stock options.. $300,000 (20000/30000 x $450K)
Common stock……….. $200,000 (20K x $10 par)
APIC-C/S……………. $900,000 (plug)
MARKET HAS NO MEANING HERE
May 1, 2010: 10,000 options exercised when mkt $77;
option price $40.
Cash………….. $400,000 (10,000 x $40)
APIC-stock options.. $150,000 (10000/30000 x $450K)
Common stock……….. $100,000 (10K x $10 par)
APIC-C/S……………. $450,000 (plug)
MARKET HAS NO MEANING HERE
This answer reflects the NEW FAS 123(R) rules known
as the “Fair Value Method”.
What were the INTRINSIC VALUE RULES?.
Those rules call for recognizing as an expense ONLY
the difference between the EXERCISE price and MKT
price ON THE GRANT DATE.
VALUING THE STOCK OPTIONS USING THE INSTRINSIC
VALUE METHOD.
The problem didn’t give us the mkt value on the grant date
so let’s assume it was $40.
Mkt value of 30,000 shares at grant date ($40/sh) = $1,200,000
Option price of 30,000 shares at grant date ($40) = 1,200,000
Total option expense using OLD RULES…. $000,000
compares to $450,000 using the new rules.
On January 1, 2006 Nichols Corporation granted 10,000 options to key
executives. Each option allows the executive to purchase one share of
Nichols’ $5 par value common stock at a price of $20/share. The options
were exercisable within a 2-year period beginning January 1, 2008, if the
grantee is still employed by the company at the time of the exercise.
On the grant date, Nichol’s stock was trading at $25/share, and a fair value
of option pricing model determines total compensation to be $400,000.
On May 1, 2008, 8000 options were exercised when the market price of
Nichol’s stock was $30 per share. The remaining options lapsed in 2010
because executives decided not to exercise their options.
PREPARE THE NECESSARY JOURNAL ENTRIES TO THE STOCK
OPTIONS PLAN FOR THE YEARS 2006 THROUGH 2010.
1/1/06 Stock options are granted.
NO ENTRY
12/31/06 End of first year of service period.
Total cost $400,000/2 = $200,000 per year
Compensation expense..... $200,000
APIC-stock options.......$200,000
12/31/06 End of second year of service period.
Compensation expense...... $200,000
APIC-stock options......$200,000
5/1/08
Exercise of 8000 options
8000 x $20 each = $160,000 cash received
Cash......... $160,000
APIC-stk opt.. $320,000 (8000/10,000 x $400,000)
Common stock....... $40,000 (8000 x $5 par)
APIC.............................$440,000 (plug)
1/1/10 rest of options lapse
APIC-stock options........$80,000
APIC from expired stock options.....$80,000
WHAT ACCOUNT EFFECTIVELY ENDED UP PAYING
FOR THE NEW APIC from expired stock options?
RETAINED EARNINGS from
the closed compensation expense
NOTE: page 790. Under “Adjustment”.
Talks about how compensation is NOT readjusted to reflect unused
options (because they are still a company expense). However, if service
requirements are not met requiring forfeiture of options, then compensation
expense IS reversed (in the period of forfeiture).
APIC- stock options…XX
Compensation Expense…XX
On January 1, 2008, Wilke Corp. had 480,000 shares of c/s outstanding. During
2008, it had the following transactions that affected the common stock account.
2/1/08
Issued 120,000 shares
3/1/08
Issued a 10% stock dividend
5/1/08
Acquired 100,000 shares of TS
6/1/08
Issued a 3-for-1 split
10/1/08
Reissued 60,000 shares of TS
(a)
Determined the WEIGHTED-AVERAGE NUMBER OF SHARES
outstanding as of 12/31/08
1/1/08-2/1/08
480,000
x 1/12 x 1.10 x 3 = 132,000 sh
2/1/08-3/1/08
600,000
x 1/12 x 1.10 x 3 = 165,000 sh
3/1/08-5/1/08
660,000
x 2/12 x
x 3 = 330,000 sh
5/1/08-6/1/08
560,000
x 1/12 x
x 3 = 140,000 sh
6/1/08-10/1/08
1,680,000
x 4/12
= 560,000 sh
10/1/08-12/31/08
1,740,000
x 3/12
= 435,000 sh
1,762,000 weighted average
shares
b. Assume Wilke earned NI = $3,456,000 during 2008.
It also had 100,000 shares of 9%, $100 par nonconvertible, noncumulative
preferred stock outstanding for the entire year. They did not declare
and pay preferred dividend in 2008.
What is EPS?
$3,456,000
----------------1,762,000 weighted average shares =
$1.96
c.
What is EPS if the same preferred stock were cumulative?
100,000 x $100 x .09 = $900,000 ps dividends
$3,456,000 - $900,000
-------------------------------1,762,000 weighted average shares =
$1.45
d. Assume same facts as (b), except NI included extraordinary gain of
$864,000 and a loss from discontinued operation of $432,000.
Both amounts are already NET of income tax. What is EPS for 2008?
$864,000
----------------1,762,000 weighted average shares =
$.49 EXTRA GAIN
$(432,000)
----------------1,762,000 weighted average shares =
($.25) DISC SEG
Income from continuing operations...........$1.72
-Loss from discontinued seg...................... (.25)
---------------------------------------------------------------------Income before extraordinary item....
$1.47
Extraordinary gain.............................
.49
--------------------------------------------------------------------NET INCOME......................................
$1.96 (same as in part B)
Ace Company had 200,000 shares of c/s outstanding on December 31, 2008.
During the year 2009 the company:
- issued 8,000 sh on May 1
-and retired 14,000 shares on October 31.
For the year 2009, Ace Company reported NI of $249,690
after a casualty loss of $40,600 (net of tax).
What EPS data should be reported at the bottom of
its income statement, assuming the casualty loss
is extraordinary?
WT AVE SHARES:
1/1/09-5/1/09
200,000 x 4/12 = 66,667 sh
5/1/09-11/1/09
208,000 x 6/12 = 104,000 sh
11/1/09-12/31/09
194,000 x 2/12 = 32,333 sh
---------------203,000 sh
Extraordinary loss:
$40,600
-----------203,000 = (.20) sh
Income per share before extraordinary item
$249,690 + $40,600 = $290,290/203K.................... $1.43
- Extraordinary loss................................................. (.20)
----------------------------------------------------------------------------Net income per share.......................................... $1.23
At 1/1/08, Langley Company’s outstanding shares included the following:
280,000 sh of $50 par, 7% cumulative p/s
900,000 sh of $1 par, c/s
NI for 2008 $2,530,000
- No cash dividends declared/paid
2/15/09 all preferred dividends in arrears
were paid, together with 5%
stock dividend on c/s.
No dividends in arrears prior to 2008.
4/1/08 450,000 c/s shares SOLD for $10 share
10/1/08 110,000 c/s purchased for TS at $20/sh.
COMPUTE EPS for 2008. Assume financials for 08 issued March 2009
WEIGHTED AVERAGE SHARES for 2008
1/1/08-1/1/08
900,000 x 3/12
225,000 sh (then issued 450K new sh 4-1)
4/1/08-10/1/08
1,350,000 x 6/12 =
675,000 sh (then bought 110K TS 10/1)
10/1/08-12/31/08
1,240,000 x 3/12 =
310,000 sh
------------------1,210,000 WT SHARES
IF ISSUED IN 2009 then you need to present in EOY 2009 denomination
which means adjust for STOCK DIVIDEND. DIV done by time financials are issued in
March (stock dividend is in FEB).
1,210,000 x 1.05 = 1,270,500 WT SH
$2,530,000
- $980,000
NI – ps dividends
(even if not declared because cumulative)
------------------------------------------------------------------------------------WT1,270,500
SHARES
ps dividends 280,000 x $50 x .07 = $980,000
=
$1.22
EPS