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Chapter 16: Question 22 (page 874)

Explain the treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data.

Short Answer

Expert verified

The treasury-stock method diluted earnings per share ought not to set in options as though outstanding options and warrants were practiced toward the start of the year. The assets acquired under this method were utilized to buy the normal stock at the normal market cost for the period.

Step by step solution

01

The treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data

Under the treasury-stock method, diluted earnings per share ought not entirely to settle as outstanding choices, and warrants were practiced toward the start of the year (or date of issue if later). The assets acquired in this manner were utilized to buy the normal stock at the average market cost for the period.

For instance, on the off chance that an enterprise has 10,000 warrants outstanding exerciser at $54, and the normal market cost of the normal stock during the announced period is $60, the $540,000 which would be acknowledged from the exercise of warrants and issuance of 10,000 shares would be a sum adequate to secure 9,000 offers. Hence, 1,000 offers to the remarkable common shares in processing would weaken the profit per share for the period.

02

The method to avoid a gradual constructive outcome upon income per offer

However, to avoid a gradual constructive outcome upon income per offer, options and warrants should go into the calculation when the normal market cost of the common stock exceeds the activity cost of the choice or warrant.

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Most popular questions from this chapter

(Conversion of Bonds) On January 1, 2016, when its \(30 par value common stock was selling for \)80 per share, Plato Corp. issued \(10,000,000 of 8% convertible debentures due in 20 years. The conversion option allowed the holder of each \)1,000 bond to convert the bond into five shares of the corporation’s common stock. The debentures were issued for \(10,800,000.The present value of the bond payments at the time of issuance was \)8,500,000, and the corporation believes the difference between the present value and the amount paid is attributable to the conversion feature. On January 1, 2017, the corporation’s \(30 par value common stock was split 2 for 1, and the conversion rate for the bonds was adjusted accordingly. On January 1, 2018, when the corporation’s \)15 par value common stock was selling for $135 per share, holders of 30% of the convertible debentures exercisedtheir conversion options. The corporation uses the straight-line method for amortizing anybond discounts or premiums.

a) Prepare in general journal form the entry to record the original issuance of the convertible debentures.

(b) Prepare in general journal form the entry to record the exercise of the conversion option, using the book value method.

Show supporting computations in good form.

(Issuance, Exercise, and Termination of Stock Options) On January 1, 2018, Titania Inc. granted stock options to officers and key employees for the purchase of 20,000 shares of the company’s \(10 par common stock at \)25 per share. The options were exercisable within a 5-year period beginning January 1, 2020, by grantees still in the employ of the company, and expiring December 31, 2024. The service period for this award is 2 years. Assume that the fair value option-pricing model determines total compensation expense to be \(350,000.On April 1, 2019, 2,000 options were terminated when the employees resigned from the company. The market price of the common stock was \)35 per share on this date.On March 31, 2020, 12,000 options were exercised when the market price of the common stock was $40 per share.

Instructions

Prepare journal entries to record issuance of the stock options, termination of the stock options, exercise of the stock options, and charges to compensation expense, for the years ended December 31, 2018, 2019, and 2020.

What are stock rights? How does the issuing company account for them?

Explain how convertible securities are determined to be potentially dilutive common shares and how those convertible securities that are not considered to be potentially dilutive common shares enter into the determination of earnings per share data.

Four years after issue, debentures with a face value of \(1,000,000 and book value of \)960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at \(14 per share (par value \)10). The company records the conversion as follows. Bonds Payable 1,000,000 Discount on Bonds Payable 40,000 Common Stock 800,000 Paid-in Capital in Excess of Par— Common Stock 160,000 Discuss the propriety of this accounting treatment.
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