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Chapter 16 Homework Day 1

Chapter 16 Homework Day 1. Exercise 16-3. 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.

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Chapter 16 Homework Day 1

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  1. Chapter 16 Homework Day 1

  2. Exercise 16-3

  3. 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. • 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

  4. Exercise 16-8

  5. 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 carriedtwo 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 4,000 bonds x $1,000 face x 1.04 = $4,160,000 Face value of the bonds $4,000,000 Overage................... $160,000 • value assigned to stock • warrants $24,000 4,000 x 2 = 8,000 warrants x $3 mkt = $24,000 $136,000 PREMIUM

  6. 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

  7. 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) INCREMENTAL WHICH METHOD was used to allocate costs? • 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.

  8. Exercise 16-10

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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.

  14. 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.

  15. Exercise 16-12

  16. 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.

  17. 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)

  18. 1/1/10 rest of options lapse APIC-stock options........$80,000 APIC from expired stock options.....$80,000 WHAT ACCOUNT EFFECTIVELY ENDED UP PAYINGFOR 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

  19. Exercise 16-14

  20. 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 1,762,000 weighted average shares 10/1/08-12/31/08 1,740,000 x 3/12 = 435,000 sh

  21. 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

  22. 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

  23. 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)

  24. E 16-15

  25. 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

  26. 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

  27. E 16-19

  28. 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

  29. 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) ------------------------------------------------------------------------------------- WT SHARES 1,270,500 = $1.22 EPS ps dividends 280,000 x $50 x .07 = $980,000

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