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Chapter 16 Extra Credit Homework
1.Amy Chang of the controller’s office of Thompson Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2017. Amy has complied the information listed below.
1. The after-tax net income for the year ended December 31, 2017, was $15,000,000. The income tax rate is 40%.
2. The company is authorized to issue 10,000,000 shares of $10 par value common stock. As of December 31, 2016, 2,000,000 shares had been issued and were outstanding.
3. A total of 1,000,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on August 1, 2016. The stock was issued at its par value of $25, and it has a stated dividend of $3 per share per year. 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 semiannually on July 1 and January 1 to all stockholders of record on June 29 and December 29 respectively.
4. The company issued a 10% convertible debenture bonds sold at 100 (total $100,000) on January 1, 2017 and convertible into 30,000 common shares. The interest is paid annually on December 31. The rate of conversion is to be automatically adjusted for stock splits and stock dividends.
5. The common stock options were granted and exercisable in 2016 to purchase 60,000 shares of common stock at the option price of $25 per share. The average market price of common stock is $30 per share in 2017. Assume the market price, option price and granted number of shares are to be automatically adjusted for stock dividend and split.
The following specific activities took place during 2017.
(1) February 1: A 5% common stock dividend was issued. The dividend had been declared on December 1, 2016, to all stockholders of record on December 31, 2016.
(2) April 1: A 2-for-1 split of the common stock became effective on this date.
(3) August 1: A total of 300,000 shares of common stock were issued to acquire a building.
(4) October 1: 50% of the convertible debenture bonds were converted to common shares.
(5) November 1: A 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, 2017.
(6) Preferred stock cash dividends – Cash dividends to preferred stockholders were declared and paid as scheduled.
(a) Compute the basic earnings per share for the year ended December 31, 2017.
(b) Compute the diluted earnings per share for the year ended December 31, 2017.
Extra Credit Homework Assignment (Due on July 30)
3. On January 1, 2017, Phelps Corporation received a charter granting the right to issue 5,000 shares of $100 par value, 8% cumulative and nonparticipating preferred stock, and 80,000 shares of $10 par value common stock. It then completed these transactions.
1) On 1/11/17, issued 20,000 shares of common stock at $16 per share.
2) On 5/1/17, declared and issued a 10% stock dividend when the market price of the common stock is $14.
3) On 6/1/17, repurchased 1,000 shares of common stock at $17 per share. (use cost method)
4) On 8/1/17, sold the 500 treasury shares at $14 per share.
5) On 12/1/17, declared but not yet issued a 40% stock dividend when the market price of the common stock is $14.
6) On 12/31/17, A 2-for-1 split of the common stock is effective on this date.
7) On 12/31/17, the balance of accumulated other comprehensive income is $5,000.
8) In 2017, Phelps Corporation adopted a stock option plan for top executives whereby each might receive rights to purchase up to 10,000 shares of common stock at $30 per share. The options were granted to each of five executives on the same day. The options were non-transferable and the executive had to remain an employee of the company to exercise the option. The options expire on 1/1/18. It is assumed that the options were for services performed equally in 2017 and 2018 (period of benefit). The Black-Scholes option pricing model determines total compensation expense to be $130,000.
Answer is as follows (We will cover in the chapter 16):
Compensation Expense 65,000
Paid-in Capital—Stock Options 65,000
(a) Record the journal entries and adjusting entries needed at the end of year for the transactions listed above.
(b) Prepare the stockholder’s equity section of Phelps Corporation’s balance sheet as of December 31, 2017. Assume the beginning balance of retained earnings is $100,000 and net income for the year is $250,000.
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