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Chapter 16: Q25Q (page 874)
What type of earnings per share presentation is required in a complex capital structure?
An organization with a complex capital structure report both basic EPS and diluted EPS in the financial statements.
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IFRS16-3 Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of \(400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of \)35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS.
(a) Prepare the entry to record issuance of the bonds at par under GAAP.
(b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance.
(c) Which approach provides the better accounting? Explain.
Briefly explain why corporations issue convertible securities.
Explain how the conversion feature of convertible debt has a value (a) to the issuer and (b) to the purchaser.
Ferraro, Inc. established a stock-appreciation rights (SARs) program on January 1, 2017, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of \(20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be \)4 on December 31,2017, and $9 on December 31, 2018. Compute Ferraro’s compensation expense for 2017 and 2018.
(EPS: Simple Capital Structure) At January 1, 2017, Langley Company’s outstanding shares included the following.
280,000 shares of \(50 par value, 7% cumulative preferred stock
900,000 shares of \)1 par value common stock
Net income for 2017 was \(2,530,000. No cash dividends were declared or paid during 2017. On February 15, 2018, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2017.
On April 1, 2017, 450,000 shares of common stock were sold for \)10 per share, and on October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.
Instructions
Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in March 2018.
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