Practice Exam, Chapters 19-21

Problem I
Vacaro Corporation provides a variety of share-based compensation plans to its employees.
Under its executive stock option plan, Vacaro granted incentive stock options on January 1,
2011, that permit executives to acquire 20 million of the company’s $1 par common shares
within the next 8 years, but not before December 31, 2014 (the vesting date). The exercise price
is the market price of the shares on the date of grant, $18.50 per share. The fair value of the 20
million options, estimated by an appropriate option pricing model, is $5 per option. No
forfeitures are anticipated. Ignore taxes.

Required:

1. Determine the total compensation cost pertaining to the options at fair value. Show
calculations.

2. Prepare the appropriate journal entry (if any) to record the award of options on January 1,
2011.

3. Prepare the appropriate journal entry (if any) to record Vacaro’s compensation expense on
December 31, 2011.
Problem II
On January 1, 2011, Field Company had outstanding 200 million shares of common stock and
20 million shares of 7.5% cumulative preferred stock (par $10).
On March 1, 2011, Field sold and issued an additional 24 million shares of common stock.
The company distributed a 10% common stock dividend on May 5. On November 1, six million
shares were retired in keeping with the company‘s long-term share repurchase plan.
Net income was $465 million. The tax rate for the year was 40%.

• At year-end, there were incentive stock options outstanding for 12 million shares of
common stock (adjusted for the stock dividend). The options were issued at January 1,
2011 and are exercisable one year from the date of grant. The exercise price was $25.
The market price of the common stock averaged $30 for the year.

• Also outstanding were $600 million face amount of 10% convertible bonds issued in
2006 and convertible into 24 million common shares (adjusted for the stock dividend).

Required: Compute basic and diluted EPS for the year ended December 31, 2011.
Problem III
Following are selected balance sheet accounts of Bayou Industries at December 31, 2011
and 2010, and the increases or decreases in each account from 2010 to 2011. Also presented is
selected income statement information for the year ended December 31, 2011, and additional
information.
Increase
Selected balance sheet accounts 2011 2010 (Decrease)
Assets:
Accounts receivable $ 34,000 $ 24,000 $10,000
Property, plant, and equipment 277,000 247,000 30,000
Accumulated depreciation (178,000) (167,000) (11,000)

Liabilities and stockholders' equity:

Bonds payable 49,000 46,000 3,000
Dividends payable 8,000 5,000 3,000
Common stock, $1 par 22,000 19,000 3,000
Additional paid-in capital 9,000 3,000 6,000
Retained earnings 104,000 91,000 13,000
Selected income statement information for the year ended December 31, 2011
Sales revenue $155,000
Depreciation 33,000
Gain on sale of equipment 13,000
Net income 28,000
Additional information
• Accounts receivable relate to sales of merchandise.
• During 2011, equipment costing $40,000 was sold for cash.
• During 2011, $20,000 of bonds payable were issued in exchange for property, plant, and
equipment. There was no amortization of bond discount or premium.

Required:
Items 1 through 5 represent activities that will be reported in Bayou's statement of cash flows for
the year ended December 31, 2011. The following two responses are required for each item:

• Determine the amount that should be reported in Bayou's 2011 statement of cash flows.
• Using the list below, determine the category in which the amount should be reported in the
statement of cash flows
O. Operating activity
I. Investing activity
F. Financing activity
Amount Category
1. Cash collections from customers (direct method). _______ _______
2. Payments for purchase of property, plant, and
equipment. _______ _______
3. Proceeds from sale of equipment. _______ _______
4. Cash dividends paid. _______ _______
5. Redemption of bonds payable. _______ _______
Multiple Choice
Determine the response which best completes the statements or questions.

__ 1. Fully vested, incentive stock options to obtain 30,000 shares of common stock at an
exercise price of $20 were outstanding during a period when the average market price of
the common stock was $25. When computing diluted earnings per share, the weighted
average number of common shares outstanding will increase by:
a. 6,000
b. 12,000
c. 24,000
d. 30,000

Items 2 and 3 are based on the following:

At December 31, 2010, Destin Sports Equipment had 200,000 common shares issued
and outstanding. On May 31, 2011, Destin issued a 15% stock dividend. Fully vested,
incentive stock options issued in 2009 and exercisable for 40,000 shares (adjusted for the
stock dividend) were outstanding at the end of 2011, with an exercise price of $40 per
share. The market price of Destin’s common stock averaged $50 per share during 2011.
Also outstanding since 2007 were $100,000 of 10% bonds issued at face value and
convertible into 30,000 common shares. Destin’s tax rate is 40% and 2011 net income
was $550,000.

__ 2. What is Destin’s 2011 basic earnings per share?

a. $2.31
b. $2.39
c. $2.50
d. $2.75

__ 3. What is Destin’s 2011 diluted earnings per share?

a. $2.07
b. $2.09
c. $2.14
d. $2.31

__ 4. On November 12, 2011, Avid Technologies purchased a 3-month U.S. Treasury bill. The
stated policy of Avid is to consider all highly liquid investments with original maturities
of three months or less when purchased to be cash equivalents. In its 2011 statement of
cash flows, Avid will report the purchase as a cash outflow from:
a. operating activities.
b. investing activities.
c. financing activities.
d. not reported.
Items 5 and 6 are based on the following:
The accounting records of Ruhl Products at December 31, 2010 and 2011 included the
following:

2010 2011
Long-term notes payable $141,000 $150,000

During 2011, Ruhl issued $60,000 of long-term notes in exchange for computer software.
During 2011, there was no amortization of premium or discount on notes. In its 2011 statement
of cash flows, Ruhl should report for redemption of notes payable:
__ 5. a cash outflow of:
a. $ 9,000
b. $51,000
c. $60,000
d. $69,000

__ 6. as a (an):
a. operating activity.
b. investing activity.
c. financing activity.
d. not reported.