Stockholders Equity Paper 3

1

On January 2, year 1, Kine Co. granted Morgan, its president, compensatory stock options to buy 1,000 shares of Kine’s $10 par common stock. The options call for a price of $20 per share and are exercisable for three years following the grant date. Morgan exercised the options on December 31, year 1. The market price of the stock was $50 on January 2, year 1, and $70 on December 31, year 1. The fair value of a similar stock option with the same terms was $28 on the grant date. By what net amount should stockholders’ equity increase as a result of the grant and exercise of the options?






2

On January 2, year 1, Morey Corp. granted Dean, its president, 20,000 stock appreciation rights for past services. Those rights are exercisable immediately and expire on January 1, year 4. On exercise, Dean is entitled to receive cash for the excess of the stock’s market price on the exercise date over the market price on the grant date. Dean did not exercise any of the rights during year 1. The market price of Morey’s stock was $30 on January 2, year 1, and $45 on December 31, year 1. As a result of the stock appreciation rights, Morey should recognize compensation expense for year 1 of






3

In accounting for stock-based compensation, what interest rate is used to discount both the exercise price of the option and the future dividend stream?






4

In what circumstances is compensation expense immediately recognized?






5

Compensation cost for a share-based payment to employees that is classified as a liability is measured as






6

What is the measurement date for a share-based payment to employees that is classified as a liability?






7

Shafer Corporation (a nonpublic company) established an employee stock option plan on January 1, year 1. The plan allows its employees to acquire 20,000 shares of its $5 par value common stock at $70 per share, when the market price is $75. The options may not be exercised until five years from the grant date. The risk-free interest rate is 6%, and the stock is expected to pay dividends of $3 annually. The fair value of a similar option at the grant date is $6.40. What is the amount of deferred compensation expense that should be recorded in year one?






8

Galaxy has a tax benefit and cash retained of $20,000 as a result of share-based payments to employees. How is this tax benefit disclosed in the financial statements?






9

On July 1, year 1, Jordan Corp. granted employees sharebased payments in the form of compensatory stock options. How should Jordan account for the outstanding options in calculating earnings per share for year 1 if the options are not antidilutive?






10

The following information pertains to Jet Corp.’s outstanding stock for year 1:
Common stock, $5 par value
Shares outstanding, 1/1/Y1 20,000
2-for-1 stock split, 4/1/Y1 20,000
Shares issued, 7/1/Y1 10,000
Preferred stock, $10 par value, 5% cumulative
Shares outstanding, 1/1/Y1 4,000
What are the number of shares Jet should use to calculate year 1 basic earnings per share?






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