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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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slide1

Chapter 16

Homework

Day 1

slide3

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

slide5

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

slide6

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

slide7

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.
slide9

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

slide10

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

slide11

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

slide12

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

slide13

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.

slide14

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.

slide16

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.

slide17

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)

slide18

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

slide20

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

slide21

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

slide22

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

slide23

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)

slide25

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

slide26

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

slide28

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

slide29

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