Kieso IFRS Test Bank Ch16 PDF

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CHAPTER 16DILUTIVE SECURITIES AND EARNINGS PER SHARECHAPTER LEARNING OBJECTIVES Describe the accounting for the issuance, conversion, and retirement of convertible securities. Explain the accounting for convertible preference shares. Contrast the accounting for share warrants and share warrants issu...

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CHAPTER 16 DILUTIVE SECURITIES AND EARNINGS PER SHARE CHAPTER LEARNING OBJECTIVES 1.

Describe the accounting for the issuance, conversion, and retirement of convertible securities.

2.

Explain the accounting for convertible preference shares.

3.

Contrast the accounting for share warrants and share warrants issued with other securities.

4.

Describe the accounting for share compensation plans.

5.

Discuss the controversy involving share compensation plans.

6.

Compute earnings per share in a simple capital structure.

7.

Compute earnings per share in a complex capital structure.

*8.

Explain the accounting for share-appreciation rights plans.

*9.

Compute earnings per share in a complex situation.

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Test Bank for Intermediate Accounting, IFRS Edition, 2e

TRUE-FALSE—Conceptual 1.

IFRS requires that convertible debt be separated into its liability and equity components for accounting purposes.

2.

Companies recognize a gain or loss on the conversion of convertible debt before maturity.

3.

When an issuer offers some form of additional consideration (a sweetener) to encourage of its convertible debt, it reports the sweetener as a current period expense.

4.

The issuer of convertible preference shares uses the fair value method to record the conversion of the shares.

5.

Companies recognize a gain or loss when shareholders exercise convertible preference shares.

6.

A company should allocate the proceeds from the sale of debt with detachable share warrants between the two securities based on their a fair values.

7.

Non-detachable warrants, unlike detachable warrants, are not considered a compound instrument for accounting purposes.

8.

The intrinsic value of a share option is the difference between the market price of the shares and the exercise price of the options at the grant date.

9.

Under the fair value method, companies compute total compensation expense based on the fair value of options on the date of exercise.

10.

The service period in share option plans is the time between the grant date and the vesting date.

11.

If an employee fails to exercise a share option before its expiration date, the company should decrease compensation expense.

12.

If a service condition exists, the company is not permitted to adjust the estimate of compensation expense.

13.

If preference shares are cumulative and no dividends are declared, the company subtracts the current year preference dividend in computing earnings per share.

14.

When share dividends or share splits occur, companies must restate the shares outstanding after the share dividend or split, in order to compute the weighted-average number of shares.

15.

If a share dividend occurs after year-end, but before the financial statements, are authorized for issuance, a company must restate the weighted-average number of shares outstanding for the year.

16.

Preference dividends are subtracted from net income but not income from continuing operations in computing earnings per share.

Dilutive Securities and Earnings per Share

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17.

When a company has a complex capital structure, it must report both basic and diluted earnings per share.

18.

In computing diluted earnings per share, share options are considered dilutive when their option price is greater than the market price.

19.

The number of contingent shares to be included in diluted earnings per share is based on the number of shares that would be issuable as if the end of the period were the end of the contingency period.

20.

A company should report per share amounts for income from continuing operations, but not for discontinued operations.

True-False Answers—Conceptual Item 1. 2. 3. 4. 5.

Ans. T F T F F

Item 6. 7. 8. 9. 10.

Ans. T F T F T

Item 11. 12. 13. 14. 15.

Ans. F F T F T

Item 16. 17. 18. 19. 20.

Ans. F T F T F

MULTIPLE CHOICE—Dilutive Securities, Conceptual 21.

Convertible bonds a. have priority over other indebtedness. b. are usually secured by a first or second mortgage. c. pay interest only in the event earnings are sufficient to cover the interest. d. may be exchanged for equity securities.

22.

The conversion of bonds is most commonly recorded by the a. incremental method. b. proportional method. c. fair value method. d. book value method.

23.

When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounted for as a(n) a. equity item. b. expense. c. loss. d. None of these a are correct.

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S

Test Bank for Intermediate Accounting, IFRS Edition, 2e

24.

Corporations issue convertible debt for two main reasons. One is the desire to raise equity capital that, assuming conversion, will arise when the original debt is converted. The other is a. the ease with which convertible debt is sold even if the company has a poor credit rating. b. the fact that equity capital has issue costs that convertible debt does not. c. that many corporations can obtain financing at lower rates. d. that convertible bonds will always sell at a premium.

25.

When convertible debt is not converted at maturity a. a gain or loss is recorded for the difference between the book value of the debt and the present value of the cash flows. b. the amount originally allocated to equity is recorded as a gain on retirement. c. the amount allocated to the equity component at the issuance date is recorded as a loss on retirement. d. the carrying value of the bond equals its face value and it is removed from the books.

26.

Convertible bonds a. Are separated into the bond component and the expense component. b. Allow a company to issue debt financing at cheaper rates. c. Are separated into their components based on relative fair values. d. All of these answer choices are correct.

27.

Mae Jong Corp issues $1,000,000 of 10% bonds payable which may be converted into 10,000 shares of $2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will a. First assign a value to the equity component, then determine the liability component. b. Assign no value to the equity component since the conversion privilege is not separable from the bond. c. First assign a value to the liability component based on the face amount of the bond. d. Use the “with-and-without” method to value the compound instrument.

28.

Convertible preference shares a. Are compound instruments with both a liability and an equity component. b. Include an option for the holder to convert preference shares into a fixed number of ordinary shares. c. Use the “with-and-without” method to value the compound instrument. d. All of these answer choices are correct.

29.

The conversion of preference shares into ordinary shares requires that any excess of the par value of the ordinary shares issued over the carrying amount of the preference shares being converted should be a. reflected currently in income. b. reflected currently in other comprehensive income. c. treated as a prior period adjustment. d. treated as a direct reduction of retained earnings.

S

Dilutive Securities and Earnings per Share

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30.

The conversion of preference shares may be recorded by the a. incremental method. b. book value method. c. market value method. d. par value method.

31.

When the cash proceeds from bonds issued with detachable share warrants exceed the fair value of the bonds without the warrants, the excess should be credited to a. Share Premium—Ordinary. b. Retained Earnings. c. A share liability account. d. Share Premium-Share Warrants.

32.

Proceeds from an issue of debt securities having share warrants should not be allocated between debt and equity features when a. the fair value of the warrants is not readily available. b. exercise of the warrants within the next few fiscal periods seems remote. c. the warrants issued with the debt are non-detachable. d. Proceeds should be allocated between debt and equity for all of these.

P

33.

A corporation issues bonds with detachable warrants. The amount to be recorded as share premium is preferably a. zero. b. calculated as the excess of the proceeds over the face value of the bonds. c. equal to the market value of the warrants. d. calculated as the excess of the proceeds over the fair value of the bonds.

P

34.

The distribution of share rights to existing ordinary shareholders will increase share premium at the

a. b. c. d. S

Date of Issuance of the Rights Yes Yes No No

Date of Exercise of the Rights Yes No Yes No

35.

The major difference between convertible debt and share warrants is that upon exercise of the warrants a. the shares are held by the company for a defined period of time before they are issued to the warrant holder. b. the holder has to pay a certain amount of cash to obtain the shares. c. the shares involved are restricted and can only be sold by the recipient after a set period of time. d. no share premium can be a part of the transaction.

36.

According to IFRS, a company makes only a memorandum entry when a. companies give warrants to executives and employees as a form of compensation. b. companies include warrants to make a security more attractive. c. companies issue rights to existing shareholders.

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Test Bank for Intermediate Accounting, IFRS Edition, 2e d. All of these answer choices are correct.

37.

According to IFRS, once the total compensation is measured at the date of grant a. it can be changed in future periods related to a change in market conditions. b. it can be changed to reflect the rise or fall in the market price of the company’s ordinary shares. c. a company is permitted to adjust the number of share options expected to the actual number of instruments vested. d. All of these answer choices are correct.

38.

Restricted shares a. better align the employee incentives with the companies’ incentives. b. result in less dilution to existing shareholders. c. never become completely worthless. d. All of these choices are correct.

Dilutive Securities and Earnings per Share S

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39.

Which of the following is not a characteristic of a noncompensatory stock option plan? a. Substantially all full-time employees may participate on an equitable basis. b. The plan offers no substantive option feature. c. Unlimited time period permitted for exercise of an option as long as the holder is still employed by the company. d. Discount from the market price of the stock no greater than would be reasonable in an offer of stock to stockholders or others.

40.

The date on which to measure the compensation element in a share option granted to a corporate employee ordinarily is the date on which the employee a. is granted the option. b. has performed all conditions precedent to exercising the option. c. may first exercise the option. d. exercises the option.

41.

Compensation expense resulting from a compensatory share option plan is generally a. recognized in the period of exercise. b. recognized in the period of the grant. c. allocated to the periods benefited by the employee's required service. d. allocated over the periods of the employee's service life to retirement.

42.

The date on which total compensation expense is computed in a share option plan is the date a. of grant. b. of exercise. c. that the market price coincides with the option price. d. that the market price exceeds the option price.

43.

Employee share purchase plans (ESPP) a. Permit all employees to purchase shares at a discounted price. b. Are generally considered noncompensatory and result in no compensation expense being recorded. c. Distribute restricted shares to employees for a short period of time. d. All of these answer choices are correct regarding ESPP.

*44.

In accounting for share-appreciation rights plans, compensation expense is generally a. not recognized because no excess of market price over the option price exists at the date of grant. b. recognized in the period of the grant. c. allocated over the service period of the employees. d. recognized in the period of exercise.

*45.

For share appreciation rights that are a liability award, the measurement date for computing compensation is the date a. the rights mature. b. the share’s price reaches a predetermined amount. c. of grant. d. of exercise.

*46.

An executive pays no taxes at time of exercise in a(an) a. share appreciation rights plan. b. incentive share option plan. c. nonqualified share option plan. d. Taxes would be paid in all of these.

16 - 8 *47.

Test Bank for Intermediate Accounting, IFRS Edition, 2e A company estimates the fair value of SARs, using an option-pricing model, for a. share-based equity awards. b. share-based liability awards. c. both equity awards and liability awards. d. neither equity awards or liability awards.

Multiple Choice Answers—Dilutive Securities, Conceptual Item

21. 22. 23. 24. 25.

Ans.

d d b c d

Item

26. 27. 28. 29. 30.

Ans.

b d b d b

Item

31. 32. 33. 34. 35.

Ans.

d d d c b

Item

36. 37. 38. 39. 40.

Ans.

Item

Ans.

Item

Ans.

c c d c a

41. 42. 43. *44. *45.

c a a c d

*46. *47.

b c

MULTIPLE CHOICE—Dilutive Securities, Computational 48.

Fogel Co. has $2,500,000 of 8% convertible bonds outstanding. Each $1,000 bond is convertible into 30 shares of $30 par value ordinary shares. The bonds pay interest on January 31 and July 31. On July 31, 2016, the holders of $800,000 bonds exercised the conversion privilege. On that date the market price of the bonds was 105 and the market price of the ordinary shares was $36. The total unamortized bond premium at the date of conversion was $175,000. Fogel should record, as a result of this conversion, a a. credit of $136,000 to Share Premium—Ordinary. b. credit of $120,000 to Share Premium—Ordinary. c. credit of $56,000 to on Bonds Payable. d. loss of $8,000.

49.

On July 1, 2016, an interest payment date, $60,000 of Parks Co. bonds were converted into 1,200 ordinary shares of Parks Co. each having a par value of $45 and a fair value of $54. There is $2,400 unamortized discount on the bonds. Parks would record a. no change in share premium. b. a $3,600 increase in share premium. c. a $7,200 increase in share premium. d. a $4,800 increase in share premium.

50.

Morgan Corporation had two issues of securities outstanding: ordinary shares and an 8% convertible bond issue in the face amount of $16,000,000. Interest payment dates of the bond issue are June 30th and December 31st. The conversion clause in the bond indenture entitles the bondholders to receive forty shares of $20 par value ordinary shares in exchange for each $1,000 bond. On June 30, 2015, the holders of $2,400,000 face value bonds exercised the conversion privilege. The market price of the bonds on that date was $1,100 per bond and the market price of the shares was $35. The total unamortized bond discount at the date of conversion was $1,000,000. What amount should Morgan credit to the account “Share Premium—Ordinary,” as a result of this conversion? a. $330,000. b. $160,000. c. $1,440,000.

Dilutive Securities and Earnings per Share

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d. $720,000. 51.

Litke Corporation issued at a premium of $5,000 a $100,000 bond issue convertible into 2,000 ordinary shares (par value $40). At the time of the conversion, the unamortized premium is $2,000, the market value of the bonds is $110,000, and the shares are quoted on the market at $60 per share. If the bonds are converted into ordinary shares, what is the amount of share premium to be recorded on the conversion of the bonds? a. $25,000 b. $22,000 c. $32,000 d. $40,000

52.

Mae Jong Corp. issues 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. Compute the liability component of Mae Jong’s convertible debt. The following present value factors are available: PV Ordinary Annuity–4 periods 6% 3.46511 9% 3.23972 PV of 1–4 periods 6% .79209 9% .70843 a. b. c. d.

53.

€1,000,000 €750,000 €902,813 €916,337

Mae Jong Corp. issues 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. When Mae Jong records the issuance of these bonds, how much will it credit to Share Premium—Conversion Equity? The following present value factors are available: PV Ordinary Annuity – 4 periods 6% 3.46511 9% 3.23972 PV of 1 – 4 periods 6% .79209 9% .70843 a. b. c. d.

€ -0€97,187 €83,663 €250,000

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Test Bank for Intermediate Accounting, IFRS Edition, 2e

Dilutive Securities and Earnings per Share

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54.

Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated rate of interest of 6 percent, and are issued at par with a face value of €1,000 per bond (the total proceeds received from issuance of the bonds are €1,000,000). Interest is payable annually at December 31. Each bond is convertible into 250 ordinary shares with a par value of €1. The market rate of interest on similar nonconvertible debt is 9 percent. Assume that at the issuance date, €97,187 was credited to Share Premium—Conversion Equity and that the bonds were not converted until maturity. What amount will Mae Jong credit to Share Premium—Ordinary at the maturity date? a. €750,000 b. €652,813 c. €847,187 d. €347,187

55.

Mae Jong Corp. issued 1,000 convertible bonds at the beginning of 2015. The bonds have a four-year term with a stated ra...