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Chapter 16: 14Q (page 874)

How is compensation expense computed using the fair value approach?

Short Answer

Expert verified

Using the fair value methodology, all out remuneration cost is registered in light of the fair worth of choices on the date the choices are allowed to the representatives. Fair worth is assessed utilizing a satisfactory option pricing model.

Step by step solution

01

Fair value approach for the accounting of compensation expense

Fair value methodology is an accounting approach that perceives the assets and liabilities at current market esteems that they would be sold for or agreed to respectively. It accepts that there exists a market where a deliberate exchange to an outsider in view of the predominant economic situations can give the best assessed of the worth the resources can be sold for or liabilities can be made due with. The methodology is favoured on the grounds that it is supposed to be sane and fair-minded.

02

Ind AS guidelines regarding Fair market approach

Whether the asset or liability is an independent resource or risk, a group of resources, a gathering of liabilities or a group of resources and liabilities for acknowledgment or divulgence purposes relies upon its unit of record. The unit of record for the resource or responsibility not set in stone as per the Ind AS that requires or allows the fair value estimation, besides as given in this Ind AS.

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Most popular questions from this chapter

On July 1, 2017, Roberts Corporation issued \(3,000,000 of 9% bonds payable in 20 years. The bonds include detachable warrants giving the bondholder the right to purchase for \)30 one share of \(1 par value common stock at any time during the next 10 years. The bonds were sold for \)3,000,000. The value of the warrants at the time of issuance was $100,000. Prepare the journal entry to record this transaction.

GROUPWORK (Computation of Basic and Diluted EPS) Charles Austin of the controller鈥檚 office of Thompson

Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending

December 31, 2018. Austin has compiled the information listed below.

1. The company is authorized to issue 8,000,000 shares of \(10 par value common stock. As of December 31, 2017, 2,000,000

shares had been issued and were outstanding.

2. The per share market prices of the common stock on selected dates were as follows.

Price per Share

July 1, 2017 \)20.00

January 1, 2018 21.00

April 1, 2018 25.00

July 1, 2018 11.00

August 1, 2018 10.50

November 1, 2018 9.00

December 31, 2018 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2017.

The stock was issued at its par value of \(25, and it has a cumulative dividend of \)3 per share. The stock is convertible into

common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be

automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31,

March 31, and June 30.

4. Thompson Corporation is subject to a 40% income tax rate.

5. The after-tax net income for the year ended December 31, 2018, was \(11,550,000.

The following specific activities took place during 2018.

1. January 1鈥擜 5% common stock dividend was issued. The dividend had been declared on December 1, 2017, to all stockholders

of record on December 29, 2017.

2. April 1鈥擜 total of 400,000 shares of the \)3 convertible preferred stock was converted into common stock. The company

issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2018.

3. July 1鈥擜 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split

on June 1.

4. August 1鈥擜 total of 300,000 shares of common stock were issued to acquire a factory building.

5. November 1鈥擜 total of 24,000 shares of common stock were purchased on the open market at \(9 per share. These shares

were to be held as treasury stock and were still in the treasury as of December 31, 2018.

6. Common stock cash dividends鈥擟ash dividends to common stockholders were declared and paid as follows.

April 15鈥擻)0.30 per share

October 15鈥�$0.20 per share

7. Preferred stock cash dividends鈥擟ash dividends to preferred stockholders were declared and paid as scheduled.

Instructions

(a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2018.

(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2018.

(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year

ended December 31, 2018.

How is antidilution determined when multiple securities are involved?

(EPS with Convertible Bonds and Preferred Stock) On January 1, 2017, Crocker Company issued 10-year, \(2,000,000 face value, 6% bonds, at par. Each \)1,000 bond is convertible into 15 shares of Crocker common stock. Crocker鈥檚 net income in 2017 was \(300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

Instructions

(a) Compute diluted earnings per share for 2017.

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that \)1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.

(Issuance of Bonds with Warrants) Illiad Inc. has decided to raise additional capital by issuing \(170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each \)100 bond sold. The value of the bonds without the warrants is considered to be \(136,000, and the value of the warrants in the market is \)24,000. The bonds sold in the market at issuance for $152,000.

Instructions

(a) What entry should be made at the time of the issuance of the bonds and warrants?

(b) If the warrants were nondetachable, would the entries be different? Discuss.
See all solutions

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