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Chapter 16: Q4P (page 882)

(Stock-Based Compensation) Assume that Amazon.com has a stock-option plan for top management. Each

stock option represents the right to purchase a share of Amazon \(1 par value common stock in the future at a price equal to the

fair value of the stock at the date of the grant. Amazon has 5,000 stock options outstanding, which were granted at the beginning

of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the stock-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted

stock were granted at the beginning of 2017.

(c) Now assume that the market price of Amazon stock on the grant date was $45 per share. Repeat the requirements for

(a) and (b).

(d) Amazon would like to implement an employee stock-purchase plan for rank-and-file employees, but it would like to

avoid recording expense related to this plan. Which of the following provisions must be in place for the plan to avoid

recording compensation expense?

(1) Substantially all employees may participate.

(2) The discount from market is small (less than 5%).

(3) The plan offers no substantive option feature.

(4) There is no preferred stock outstanding

Short Answer

Expert verified

The compensation expense for the first year is $6,000.

Step by step solution

01

Entry for the first year stock-option plan

Date

Particulars

Debit

Credit

January 1, 2017

No Entry

December 31, 2017

Compensation Expense

$6,000

Paid in Capital- Stock Option

$6,000

(Being entry for the record compensation expense)

02

Entry for first-year plan

Date

Particulars

Debit

Credit

January 1, 2017

Unearned Compensation

$28,000

Common Stock

700

Paid in Capital more than Par

$27,300

(Being entry for the shares granted)

December 31, 2017

Compensation Expense

$5,600

Unearned Compensation

$5,600

(Being entry for compensation expense)

03

Journal entry when the price is changed

No change in the part (a) unless the fair value of the option changed

For part (b)

Date

Particulars

Debit

Credit

January 1, 2017

Unearned Compensation

$31,500

Common Stock

700

Paid in Capital in Excess of Par

$30,800

(Being entry for the shares granted)

December 31, 2017

Compensation Expense

$6,300

Unearned Compensation

$6,300

(Being entry for compensation expense)

04

Correct criteria

The first three criteria are the criteria that must be met for an employee stock purchase plan to be non-compensatory. The fourth provision is irrelevant.

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Most popular questions from this chapter

Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary shares (par value \(1 per share) at a 20% discount. The purchase price must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on average 80 shares at \)22 per share (market price \(27.50). Under IFRS, Anazazi Co. will record:

(a) no compensation since the plan is used to raise capital, not compensate employees.

(b) compensation expense of \)5,500,000.

(c) compensation expense of \(18,700,000.

(d) compensation expense of \)3,740,000.

Rockland Corporation earned net income of \(300,000 in 2017 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was \)800,000 of 9% bonds, which are convertible into 16,000 shares of common. Rockland鈥檚 tax rate is 40%. Compute Rockland鈥檚 2017 diluted earnings per share.

IFRS16-12 Assume the same information in IFRS16-11, except that Angela Corporation converts its convertible bonds on January 1, 2017.

Instructions

(a) Compute the carrying value of the bond payable on January 1, 2017.

(b) Prepare the journal entry to record the conversion on January 1, 2017.

(c) Assume that the bonds were repurchased on January 1, 2017, for \(1,940,000 cash instead of being converted. The net present value of the liability component of the convertible bonds on January 1, 2017, is \)1,900,000. Prepare the journal entry to record the repurchase on January 1, 2017.

(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.

(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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