3 Bonds payable.......... $500,000 Premium on b/p...... $ 7,500 Vargo Company has bonds payable outstanding in the amount of $500,000 andthe Premium on Bonds Payable account has a balance of $7,500. Each $1,000bond 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 entrywould be made?$500,000 / $1,000 = 500 units x 20 shares = 10,000 shares of p/sx $50/par = $500,000 p/sBonds payable $500,000Premium on b/p $ 7,500Preferred stock $500,000APIC(PS) $ 7,500
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 withdetachable stock warrants. Each bond carried two detachable warrants; eachwarrant 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 payableon December 1 and June 1. Bond issue costs of $30,000 were incurred.PREPARE in general journal format the entry to record the ISSUANCE ofthe bonds.Sale price of the bonds4,000 bonds x $1,000 face x 1.04 = $4,160,000Face value of the bonds$4,000,000Overage $160,000value assigned to stockwarrants$24,0004,000 x 2 = 8,000 warrants x $3 mkt =$24,000$136,000PREMIUM
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 withdetachable stock warrants. Each bond carried two detachable warrants; eachwarrant 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 payableon December 1 and June 1. Bond issue costs of $30,000 were incurred.ACCRUED INTEREST TO DATE OF SALE3 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 withdetachable stock warrants. Each bond carried two detachable warrants; eachwarrant 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 payableon December 1 and June 1. Bond issue costs of $30,000 were incurred.Cash $4,220,000Unamortizedbond issue csts... $30,000Bonds payable $4,000,000Premium on b/p $136,000APIC-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?INCREMENTALsecurity for which the market value is determinable is used, and theremainder of the purchase price is allocated to the security for whichthe market value is not known.
9 11-1-07 Columbo adopted stock option plan. Key execs could purchase 30,000 shares of $10 par c/s.GrantedExercisable 2 years after date of grant if still an employeeExpired 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 $6710,000 on 5/1 when mkt $77Prepare entries related to the stock option plan in2008, 2009, Assume service performedequally in 2008 and 2009
10 January 2, 2008: GRANT DATENo entry--Just determine total compensation costof $450,000.December 31, 2008: End of the first service yearCompensation expense………….. $225,000APIC-Stock Options……………… $225,000* 450,000/2 = $225,000December 31, 2009: End of the second service yearCompensation expense………….. $225,000APIC-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 ONLYthe difference between the EXERCISE price and MKTprice 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 dateso let’s assume it was $40.Mkt value of 30,000 shares at grant date ($40/sh) = $1,200,000Option price of 30,000 shares at grant date ($40) = 1,200,000Total option expense using OLD RULES…. $000,000compares to $450,000 using the new rules.
16 On January 1, 2006 Nichols Corporation granted 10,000 options to key executives. Each option allows the executive to purchase one share ofNichols’ $5 par value common stock at a price of $20/share. The optionswere exercisable within a 2-year period beginning January 1, 2008, if thegrantee 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 valueof option pricing model determines total compensation to be $400,000.On May 1, 2008, 8000 options were exercised when the market price ofNichol’s stock was $30 per share. The remaining options lapsed in 2010because executives decided not to exercise their options.PREPARE THE NECESSARY JOURNAL ENTRIES TO THE STOCKOPTIONS PLAN FOR THE YEARS 2006 THROUGH 2010.
17 1/1/06 Stock options are granted. NO ENTRY12/31/06 End of first year of service period.Total cost $400,000/2 = $200,000 per yearCompensation expense..... $200,000APIC-stock options $200,00012/31/06 End of second year of service period.Compensation expense $200,000APIC-stock options......$200,0005/1/08 Exercise of 8000 options8000 x $20 each = $160,000 cash receivedCash $160,000APIC-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 $80,000APIC from expired stock options.....$80,000WHAT ACCOUNT EFFECTIVELY ENDED UP PAYING FOR THE NEW APIC from expired stock options?RETAINED EARNINGS fromthe closed compensation expenseNOTE: page Under “Adjustment”.Talks about how compensation is NOT readjusted to reflect unusedoptions (because they are still a company expense). However, if servicerequirements are not met requiring forfeiture of options, then compensationexpense IS reversed (in the period of forfeiture).APIC- stock options…XXCompensation Expense…XX
20 3/1/08 Issued a 10% stock dividend On January 1, 2008, Wilke Corp. had 480,000 shares of c/s outstanding. During2008, it had the following transactions that affected the common stock account.2/1/08 Issued 120,000 shares3/1/08 Issued a 10% stock dividend5/1/08 Acquired 100,000 shares of TS6/1/08 Issued a 3-for-1 split10/1/08 Reissued 60,000 shares of TS(a) Determined the WEIGHTED-AVERAGE NUMBER OF SHARESoutstanding as of 12/31/081/1/08-2/1/ ,000 x 1/12 x x 3 = 132,000 sh2/1/08-3/1/ ,000 x 1/12 x x 3 = 165,000 sh3/1/08-5/1/ ,000 x 2/12 x x 3 = 330,000 sh5/1/08-6/1/ ,000 x 1/12 x x 3 = 140,000 sh6/1/08-10/1/08 1,680, x 4/ = 560,000 sh1,762,000 weighted averageshares10/1/08-12/31/08 1,740, x 3/ = 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, noncumulativepreferred stock outstanding for the entire year. They did not declareand pay preferred dividend in 2008.What is EPS?$3,456,0001,762,000 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 - $900,0001,762,000 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?$864,0001,762,000 weighted average shares = $.49 EXTRA GAIN$(432,000)1,762,000 weighted average shares = ($.25) DISC SEGIncome from continuing operations $1.72-Loss from discontinued seg (.25)Income before extraordinary item $1.47Extraordinary gainNET INCOME $1.96 (same as in part B)
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 $249,690after a casualty loss of $40,600 (net of tax).What EPS data should be reported at the bottom ofits income statement, assuming the casualty lossis extraordinary?WT AVE SHARES:1/1/09-5/1/09 200,000 x 4/12 = 66,667 sh5/1/09-11/1/ ,000 x 6/12 = 104,000 sh11/1/09-12/31/ ,000 x 2/12 = 32,333 sh203,000 sh
26 Extraordinary loss:$40,600203,000 = (.20) shIncome per share before extraordinary item$249,690 + $40,600 = $290,290/203K $1.43- Extraordinary loss (.20)Net income per share $1.23
28 At 1/1/08, Langley Company’s outstanding shares included the following: 280,000 sh of $50 par, 7% cumulative p/s900,000 sh of $1 par, c/sNI for 2008 $2,530,000- No cash dividends declared/paid2/15/09 all preferred dividends in arrearswere 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 share10/1/08 110,000 c/s purchased for TS at $20/sh.COMPUTE EPS for Assume financials for 08 issued March 2009
29 WEIGHTED AVERAGE SHARES for 2008 1/1/08-1/1/08 900,000 x 3/ ,000 sh (then issued 450K new sh 4-1)4/1/08-10/1/ ,350,000 x 6/12 = ,000 sh (then bought 110K TS 10/1)10/1/08-12/31/ ,240,000 x 3/12 = 310,000 sh1,210,000 WT SHARESIF ISSUED IN 2009 then you need to present in EOY 2009 denominationwhich means adjust for STOCK DIVIDEND. DIV done by time financials are issued inMarch (stock dividend is in FEB).1,210,000 x 1.05 = 1,270,500 WT SH$2,530,000- $980,000NI – ps dividends (even if not declared because cumulative)WT SHARES1,270,500= $1.22 EPSps dividends 280,000 x $50 x .07 = $980,000