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Chapter 16: 11Q (page 874)

Cordero Corporation has an employee stock-purchase plan which permits all full-time employees to purchase 10 shares of common stock on the third anniversary of their employment and an additional 15 shares on each subsequent anniversary date. The purchase price is set at the market price on the date purchased and no commission is charged. Discuss whether this plan would be considered compensatory.

Short Answer

Expert verified

No, the conditions of non-compensatory plan are met here.

Step by step solution

01

The given statement follows non-compensatory concept

This arrangement won鈥檛 be considered compensatory since it meets the states of a non-compensatory plan.

02

Three non-compensatory conditions are as follows

(1) Full-time representatives might take part on inequitable premise,

(2) the markdown from market cost is little, and

(3) the arrangement offers no substantive option highlight.

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Most popular questions from this chapter

Where can authoritative IFRS be found related to dilutive securities, stock-based compensation, and earnings per share?

(Conversion of Bonds) 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 \(1,000 bond is convertible into 20 shares of preferred stock of parvalue of \)50 per share. All bonds are converted into preferred stock.

Which of the following statements is correct?

a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

b) Both IFRS and GAAP assume that when there is a choice of settlement of an option for cash or shares, share settlement is assumed.

c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.

d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

(Issuance and Conversion of Bonds) For each of the unrelated transactions described below, present the entry(ies) required to record each transaction.

1. Grand Corp. issued \(20,000,000 par value 10% convertible bonds at 99. If the bonds had not been convertible, the company鈥檚 investment banker estimates they would have been sold at 95.

2. Hoosier Company issued \)20,000,000 par value 10% bonds at 98. One detachable stock purchase warrant was issued with each \(100 par value bond. At the time of issuance, the warrants were selling for \)4.

3. Suppose Sepracor, Inc. called its convertible debt in 2017. Assume the following related to the transaction. The 11%, \(10,000,000 par value bonds were converted into 1,000,000 shares of \)1 par value common stock on July 1, 2017. On July 1, there was \(55,000 of unamortized discount applicable to the bonds, and the company paid an additional \)75,000 to the bondholders to induce conversion of all the bonds. The company records the conversion using the book value method.

(Basic EPS: Two-Year Presentation) Melton Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2017, and May 31, 2018. The income from operations for thefiscal year ended May 31, 2017, was \(1,800,000 and income from continuing operations for the fiscal year ended May 31, 2018, was \)2,500,000. In both years, the company incurred a 10% interest expense on \(2,400,000 of debt, an obligation that requires interestonly payments for 5 years. The company experienced a loss from discontinued operations of \)600,000 on February 2018. The company uses a 40% effective tax rate for income taxes.

The capital structure of Melton Corporation on June 1, 2016, consisted of 1 million shares of common stock outstanding and 20,000 shares of \(50 par value, 6%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants.

On October 1, 2016, Melton sold an additional 500,000 shares of the common stock at \)20 per share. Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2017. On December 1, 2017, Melton was able to sell an additional 800,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years.

Instructions

(a) Identify whether the capital structure at Melton Corporation is a simple or complex capital structure and explain why.

(b) Determine the weighted-average number of shares that Melton Corporation would use in calculating earnings per share for the fiscal year ended: (1) May 31, 2017. (2) May 31, 2018.

(c) Prepare, in good form, a comparative income statement, beginning with income from operations, for Melton Corportion for the fiscal years ended May 31, 2017, and May 31, 2018. This statement will be included in Melton鈥檚 annual report and should display the appropriate earnings per share presentations.
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