Intermediate Accounting Assignment

Intermediate Accounting Assignment Words: 6150

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com CHAPTER 16 Dilutive Securities and Earnings Per Share ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Convertible debt and preference shares. Warrants and debt. Share options, restricted share. Earnings Per Share (EPS)—terminology. EPS—Determining potentially dilutive securities. EPS—Treasury share method. EPS—Weightedaverage computation. EPS—General objectives. EPS—Comprehensive calculations. EPS—Contingent shares. Convergence issues. Share appreciation rights. 6, 27 16 30, 31 Questions 1, 2, 3, 4, 5, 6, 7, 27 3, 8, 9 1, 10, 11, 12, 13, 14, 15 17, 18, 24 19, 20, 21 Brief Exercises 1, 2, 3 Exercises 1, 2, 3, 4, 5, 6, 7, 25, 26 7, 8, 9, 10, 29 11, 12, 13, 14, 15 1, 2, 3 Problems Concepts for Analysis 1 2. 3. 4, 5 6, 7, 8 1, 3 2, 4 4. 5. 15 12, 13, 14 23, 24, 25, 26, 27, 28 29 10, 11 9, 15 20, 21, 22, 23, 24, 25, 27, 28, 29 29 4, 6, 7, 8 16, 17, 18, 19, 22 4, 5, 6, 7,8 6 5, 7 6. 7. 8. 9. 22, 23 16, 17 24, 25 26, 28 1, 5, 7 5, 6, 7 4, 5 10. 11. *12. *This material is dealt with in an Appendix to the chapter. Copyright © 2011 John Wiley & Sons, Inc.

Kieso Intermediate: IFRS Edition, Solutions Manual 16-1 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. Explain the accounting for convertible preference shares. 3. Contrast the accounting for share warrants and for share warrants issued with other securities. 4. Describe the accounting for share compensation plans. 5. Discuss the controversy involving share compensation plans. . Compute earnings per share in a simple capital structure 7. Compute earnings per share in a complex capital structure. *8. Explain the accounting for share-appreciation rights plans. *9. Compute earnings per share in a complex situation. *This material is dealt with in an Appendix to the chapter. 9, 10, 11, 15 12, 13, 14 16 16, 17, 18, 19, 20, 21, 22 23, 24, 25, 26, 27, 28, 29 30, 31 5, 8 4, 6, 7 Brief Exercises 1, 2 Exercises 1, 2, 3, 4, 5, 6, 7 25, 26 7, 8, 9, 10 11, 12,13, 14, 15 1 1, 2, 3 Problems 1 3 4, 5 6, 7, 8 16-2 Copyright © 2011 John Wiley & Sons, Inc.

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Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com ASSIGNMENT CHARACTERISTICS TABLE Item E16-1 E16-2 E16-3 E16-4 E16-5 E16-6 E16-7 E16-8 E16-9 E16-10 E16-11 E16-12 E16-13 E16-14 E16-15 E16-16 E16-17 E16-18 E16-19 E16-20 E16-21 E16-22 E16-23 E16-24 E16-25 E16-26 E16-27 E16-28 E16-29 *E16-30 *E16-31 P16-1 P16-2 P16-3 P16-4 P16-5 P16-6 P16-7 P16-8 CA16-1 CA16-2 CA16-3 CA16-4 CA16-5 CA16-6 CA16-7 Description Issuance and repurchase of convertible bonds. Issuance and repurchase of convertible bonds. Issuance and repurchase of convertible bonds.

Issuance, conversion, repurchase of convertible bonds. Conversion of bonds. Conversion of bonds. Issuance and conversion of bonds. Issuance of bonds with warrants. Issuance of bonds with share warrants. Issuance of bonds with share warrants. Issuance and exercise of share options. Issuance, exercise, and forfeiture of share options. Issuance, exercise, and expiration of share options. Accounting for restricted shares. Accounting for restricted shares. Weighted-average number of shares. EPS: Simple capital structure. EPS: Simple capital structure. EPS: Simple capital structure.

EPS: Simple capital structure. EPS: Simple capital structure. EPS: Simple capital structure. EPS with convertible bonds, various situations. EPS with convertible bonds. EPS with convertible bonds and preference shares. EPS with convertible bonds and preference shares. EPS with options, various situations. EPS with contingent issuance agreement. EPS with warrants. Share-appreciation rights. Share-appreciation rights. Entries for various dilutive securities. Share-option plan. Share-based compensation. EPS with complex capital structure. Basic EPS: Two-year presentation. Computation of basic and diluted EPS.

Computation of basic and diluted EPS. EPS with share dividend and discontinued operations. Dilutive securities, EPS. Ethical issues—compensation plan. Share warrants—various types. Share compensation plans. EPS: Preferred dividends, options, and convertible debt. EPS concepts and effect of transactions on EPS. EPS, antidilution. Level of Difficulty Moderate Moderate Moderate Moderate Simple Simple Simple Simple Simple Moderate Moderate Moderate Moderate Simple Simple Moderate Simple Simple Simple Simple Simple Simple Complex Moderate Moderate Moderate Moderate Simple Moderate Moderate Moderate Moderate

Moderate Moderate Moderate Moderate Moderate Moderate Complex Moderate Simple Moderate Moderate Moderate Moderate Moderate Time (minutes) 10–15 15–20 15–20 15–20 15–20 10–15 15–20 10–15 10–15 15–20 15–25 15–25 15–25 10–15 10–15 15–25 10–15 10–15 10–15 20–25 10–15 10–15 20–25 15–20 20–25 10–15 20–25 10–15 15–20 15–25 15–25 35–40 30–35 25–30 30–35 30–35 35–45 25–35 30–40 15–20 15–20 15–20 25–35 25–35 25–35 25–35 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-3 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com

ANSWERS TO QUESTIONS 1. Securities such as convertible debt or share options are dilutive because their features indicate that the holders of the securities can become shareholders. When the ordinary shares are issued, there will be a reduction—dilution—in earnings per share. Corporations issue convertible securities for two reasons. One is to raise equity capital without giving up more ownership control than necessary. A second reason is to obtain financing at cheaper rates. The conversion privilege attracts investors willing to accept a lower interest rate than on a straight debt issue.

Convertible debt and debt issued with share warrants are similar in that: (1) both allow the issuer to issue debt at a lower interest cost than would generally be available for straight debt; (2) both allow the holders to purchase the issuer’s shares at less than market value if the shares appreciates sufficiently in the future; (3) both provide the holder the protection of a debt security if the value of the shares does not appreciate; and (4) both are complex securities which contain elements of debt and equity at the time of issue. The accounting treatment of the €160,000 ? weetener? to induce conversion of the bonds into ordinary shares represents a departure from IFRS because the IASB views the transaction as the retirement of debt. Therefore, the IASB requires that the ? sweetener? of €160,000 be reported as an expense. (a) From the point of view of the issuer, the conversion feature of convertible debt results in a lower cash interest cost than in the case of nonconvertible debt. In addition, the issuer in planning its long-range financing may view the convertible debt as a means of raising equity capital over the long term.

Thus, if the market value of the underlying shares increases sufficiently after the issue of the debt, the issuer will usually be able to force conversion of the convertible debt into shares by calling the issue for redemption. Under the market conditions, the issuer can effectively eliminate the debt. On the other hand, if the market value of the shares does not increase sufficiently to result in the conversion of the debt, the issuer will have received the benefit of the cash proceeds to the scheduled maturity dates at a relatively low cash interest cost. b) The purchaser obtains an option to receive either the face amount of the debt upon maturity or the specified number of shares upon conversion. If the market value of the underlying shares increases above the conversion price, the purchaser (either through conversion or through holding the convertible debt containing the conversion option) receives the benefits of appreciation. On the other hand, should the value of the underlying company shares not increase, the purchaser could nevertheless expect to receive the principal and (lower) interest. . The view that separate accounting recognition should be accorded the conversion feature of convertible debt is based on the premise that there is an economic value inherent in the conversion feature or call on the ordinary shares and that the value of this feature should be recognized for accounting purposes by the issuer. It may be argued that the call is not significantly different in nature from the call contained in an option or warrant and its issue is thus a type of capital transaction.

The fact that the conversion feature coexists with certain senior security characteristics in a complex security and cannot be physically separated from these elements or from the instrument does not constitute a logical or compelling reason why the values of the various elements should not receive separate accounting recognition. The fact that the eventual outcome of the option granted the purchaser of the convertible debt cannot be determined at date of issuance is not relevant to the question of effectively reflecting in the accounting records the various elements of the complex document at the date f issuance. The conversion feature has a value at date of issuance and should be recognized. Moreover, the difficulties of implementation are not insurmountable and should not be relied upon to govern the conclusion. 2. 3. 4. 5. 16-4 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-5 Visit Free Slides and Ebooks : http://downloadslide. blogspot. om Questions Chapter 16 (Continued) 7. The method used by the company to record the exchange of convertible debentures for ordinary shares can be supported on the grounds that when the company issued the convertible debentures, the proceeds could represent consideration received for the shares. Therefore, when conversion occurs, the book value of the obligation is simply transferred to the shares exchanged for it. Further justification is that conversion represents a transaction with shareholders which should not give rise to a gain or loss.

On the other hand, recording the issue of the ordinary shares at the book value of the debentures is open to question. It may be argued that the exchange of the shares for the debentures completes the transaction cycle for the debentures and begins a new cycle for the shares. The consideration or value used for this new transaction cycle should then be the amount which would be received if the debentures were sold rather than exchanged, or the amount which would be received if the related shares were sold, whichever is more clearly determinable at the time of the exchange.

This method recognizes changes in values which have occurred and subordinates a consideration determined at the time the debentures were issued. 8. Cash …………………………………………………………………………………… Bonds Payable ………………………………………………………………. Share Premium-Share Warrants ………………………………………. 3,000,000 2,900,000 100,000 9. If a corporation decides to issue new shares, the old shareholders generally have the right, referred to as a share right, to purchase newly issued shares in proportion to their holdings.

No entry is required when rights are issued to existing shareholders. Only a memorandum entry is needed to indicate that the rights have been issued. If exercised, the corporation simply debits Cash for the proceeds received, credits Share Capital—Ordinary for the par value, and any difference is recorded with a credit to Share Premium—Ordinary. Companies are required to use the fair value method to recognize compensation cost. For most share option plans compensation cost is measured at the grant date and allocated to expense over the service period, which typically ends on the vesting date.

Gordero would account for the discount as a reduction of the cash proceeds and an increase in compensation expense. The IASB concluded that this benefit represents employee compensation. The profession recommends that the fair value of a share option be determined on the date on which the option is granted to a specific individual. At the date the option is granted, the corporation foregoes the alternative of selling the shares at the then prevailing price. The market price on the date of grant may be presumed to be the value which the employer had in mind.

It is the value of the option at the date of grant, rather than the grantor’s ultimate gain or loss on the transaction, which for accounting purposes constitutes whatever compensation the grantor intends to pay. 10. 11. 12. 13. IFRS requires that compensation expense be recognized over the service period. Unless otherwise specified, the service period is the vesting period—the time between the grant date and the vesting date. Using the fair value approach, total compensation expense is computed based on the fair value of the options on the date the options are granted to the employees.

Fair value is estimated using an acceptable option pricing model (such as the Black-Scholes option-pricing model). 14. 16-6 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Questions Chapter 16 (Continued) 15. The advantages of using restricted shares to compensate employees are: (1) The restricted shares never become completely worthless; (2) they generally result in less dilution than share options; and (3) they better align the employee incentives with the companies incentives.

Weighted-average shares outstanding Outstanding shares (all year) = ………………………………………………. October 1 to December 31 (200,000 X 1/4) = …………………………… Weighted average ………………………………………………………………… Net income …………………………………………………………………………………. Preference dividends…………………………………………………………………….

Income available to common shareholders ……………………………………… Earnings per share = 17. $1,350,000 450,000 = $3. 00 16. 400,000 50,000 450,000 $1,750,000 400,000 $1,350,000 The computation of the weighted-average number of shares requires restatement of the shares outstanding before the share dividend or split. The additional shares outstanding as a result of a share dividend or split are assumed to have been outstanding since the beginning of the year.

Shares outstanding prior to the share dividend or split are adjusted so that these shares are stated on the same basis as shares issued after the share dividend/split. (a) Basic earnings per share is the amount of earnings for the period available to each ordinary share outstanding during the reporting period. (b) A potentially dilutive security is a security which can be exchanged for or converted into ordinary shares and therefore upon conversion or exercise could dilute (or decrease) earnings per share. Included in this category are convertible securities, options, warrants, and other rights. c) Diluted earnings per share is the amount of earnings for the period available to each ordinary share outstanding and to each share that would have been outstanding assuming the issuance of ordinary shares for all dilutive potential ordinary shares outstanding during the reporting period. 18. (d) A complex capital structure exists whenever a company’s capital structure includes dilutive securities. (e) Potential ordinary shares are not ordinary shares in form but do enable their holders to obtain ordinary shares upon exercise or conversion. 9. Convertible securities are potentially dilutive securities and part of diluted earnings per share if their conversion increases the EPS numerator less than it increases the EPS denominator; i. e. , the EPS after conversion is less than the EPS before conversion. The concept that a security may be the equivalent of common stock has evolved to meet the reporting needs of investors in corporations that have issued certain types of convertible securities, options, and warrants.

A potentially dilutive security is a security which is not, in form, common stock but which enables its holder to obtain common stock upon exercise or conversion. The holders of these securities can expect to participate in the appreciation of the value of the common stock resulting principally from the earnings and earnings potential of the issuing corporation. This participation is essentially the same as that of a common stockholder except that the security may carry a specified dividend yielding a return different from that received by a common stockholder.

The attractiveness to investors of this type of security is often based principally upon this potential right to share in increases in the earnings potential of the issuing corporation rather than upon its fixed return or upon other senior security characteristics. In addition, the call characteristic of the stock options and warrants gives Kieso Intermediate: IFRS Edition, Solutions Manual 20. Copyright © 2011 John Wiley & Sons, Inc. 16-7 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com the investor potential control over a far greater number of shares per dollar of investment than if the investor owned the shares outright.

Questions Chapter 16 (Continued) 21. Convertible securities are considered to be potentially dilutive securities whenever their conversion would decrease earnings per share. If this situation does not result, conversion is not assumed and only basic EPS is reported. Under the treasury share method, diluted earnings per share should be determined as if outstanding options and warrants were exercised at the beginning of year (or date of issue if later) and the funds obtained thereby were used to purchase ordinary shares at the average market price for the period.

For example, if a corporation has 10,000 warrants outstanding exercisable at $54, and the average market price of the ordinary shares during the reported period is $60, the $540,000 which would be realized from exercise of warrants and issuance of 10,000 shares would be an amount sufficient to acquire 9,000 shares; thus, 1,000 shares would be added to the outstanding ordinary shares in computing diluted earnings per share for the period.

However, to avoid an incremental positive effect upon earnings per share, options and warrants should enter into the computation only when the average market price of the ordinary shares exceeds the exercise price of the option or warrant. Yes, if warrants or options are present, an increase in the market price of the ordinary shares can increase the number of potentially dilutive ordinary shares by decreasing the number of shares repurchasable. In addition, an increase in the market price of ordinary shares can increase the compensation expense reported in a share appreciation rights plan.

This would decrease net income and, consequently, earnings per share. Antidilution is an increase in earnings per share resulting from the assumption that convertible securities have been converted or that options and warrants have been exercised, or other shares have been issued upon the fulfillment of certain conditions. For example, an antidilutive condition would exist when the dividend or interest requirement (net of tax) of a convertible security exceeds the current EPS multiplied by the number of ordinary shares issuable upon conversion of the security.

This may be illustrated by assuming a company in the following situation: Net income ………………………………………………………………………………………………… Outstanding ordinary shares ………………………………………………………………………… Interest expense on convertible bonds payable (convertible into 5,000 ordinary shares) ……………………………………………………… Tax rate ………………………………………………………………….. …………………………………

Basic earnings per share = $10,000/20,000 shares = $. 50 Earnings per share assuming conversion of the bonds: Net income …………………………………………………………………………………………. Bond interest (net of tax) = (1 – . 40) ($100,000 X . 06) ……………………………… Adjusted net income ……………………………………………………………………………. Earnings per share assuming conversion = $13,600 20,000 + 5,000 = $. 54 $ 10,000 20,000 $6,000 40% 22. 23. 24. $10,000 3,600 $13,600

This antidilutive effect occurs because the bond interest (net of tax) of $3,600 is greater than the current EPS of $. 50 multiplied by the number of shares issuable upon conversion of the bonds (5,000 shares). 25. Both basic earnings per share and diluted earnings per share must be presented in a complex capital structure. When discontinued operations are reported, per share amounts should be shown for income from continuing operations, and net income. 16-8 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. logspot. com IFRS and U. S. GAAP are substantially the same in the accounting for share-based compensation. For example, both IFRS and U. S. GAAP follow the same model for recognizing share-based compensation. That is, the fair value of shares and options awarded to employees is recognized over the period to which the employees’ services relate. Questions Chapter 16 (Continued) 27. (a) Under IFRS, Norman must ? bifurcate? (split out) the equity component—the value of the conversion option—of the bond issue. Under iGAAP, the convertible bond issue is recorded as follows.

Cash ………………………………………………………………………………………………… Bonds Payable ……………………………………………………………………………… Share Premium—Conversion Equity ……………………………………………….. (b) Norman makes the following entry to record the issuance under U. S. GAAP. Cash ………………………………………………………………………………………………… Bonds Payable ……………………………………………………………………………… c) 400,000 400,000 400,000 365,000 35,000 26. IFRS provides a more faithful representation of the impact of the bond issue, by recording separately its debt and equity components. However, there are concerns about reliability of the models used to estimate the equity portion of the bond issue. *28. Antidilution when multiple securities are involved is determined by ranking the securities for maximum possible dilution in terms of per share effect. Starting with the most dilutive, earnings per share is reduced until one of the securities maintains or increases earnings per share.

When an increase in earnings per share occurs, the security that causes the increase in earnings per share is excluded. The previous computation therefore provided the maximum dilution. Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-9 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 Cash (? 4,000,000 X . 99) ……………………………………….. Bonds Payable …………………………………………….. Share Premium—Conversion Equity……………… 3,960,000 3,800,000 160,000

BRIEF EXERCISE 16-2 Share Premium—Conversion Equity ……………………. Bonds Payable ……………………………………………………. Share Capital—Ordinary (2,000 X 50 X €10) ……. Share Premium—Ordinary ……………………………. 20,000 1,950,000 1,000,000 970,000 BRIEF EXERCISE 16-3 Share Capital—Preference (1,000 X $50) ………………. Share Premium—Conversion Equity ($60 – $50) X 1,000 ……………………………………………. Share Capital—Ordinary (2,000 X $10) …………… Share Premium—Ordinary ($60 X 1,000) – (2,000 X $10) ……………………….. 0,000 10,000 20,000 40,000 BRIEF EXERCISE 16-4 Cash [2,000 X ($1,000 X 1. 01)] ………………………………. Bonds Payable …………………………………………….. Share Premium-Share Warrants ……………………. BRIEF EXERCISE 16-5 Cash 3,000 X (€1,000 X . 98) ………………………………….. Bonds Payable …………………………………………….. Share Premium—Stock Warrants ………………….. 2,940,000 2,910,000 30,000 2,020,000 1,970,000 50,000 16-10 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com BRIEF EXERCISE 16-6 1/1/10 12/31/10 No entry Compensation Expense ………………………….. Share Premium—Share Options ……………………………………….. Compensation Expense ………………………….. Share Premium—Share Options ……………………………………….. 75,000 75,000 75,000 75,000 12/31/11 BRIEF EXERCISE 16-7 1/1/10 Unearned Compensation ………………………… Share Capital—Ordinary (2,000 X $5) …………………………………..

Share Premium—Ordinary [($65 – $5) X 2,000] ……………………….. Compensation Expense ………………………….. Unearned Compensation …………………. Compensation Expense ………………………….. Unearned Compensation …………………. 130,000 10,000 120,000 65,000 65,000 65,000 65,000 12/31/10 12/31/11 BRIEF EXERCISE 16-8 1/1/10 Unearned Compensation ………………………… Share Capital—Ordinary ………………….. Share Premium—Ordinary ……………….. Compensation Expense …………………………..

Unearned Compensation ($75,000 ? 3) …………………………………. 75,000 10,000 65,000 25,000 25,000 12/31/10 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-11 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com BRIEF EXERCISE 16-9 €1,000,000 – (100,000 X €2) 250,000 shares = €3. 20 per share BRIEF EXERCISE 16-10 Dates Outstanding 1/1–5/1 5/1–7/1 7/1–10/1 10/1–12/31 Shares Outstanding 120,000 180,000 170,000 180,000 Fraction of Year 4/12 2/12 3/12 3/12 Weighted Shares 40,000 30,000 42,500 45,000 157,500

BRIEF EXERCISE 16-11 (a) (300,000 X 4/12) + (330,000 X 8/12) = 320,000 (b) 330,000 (The 30,000 shares issued in the share dividend are assumed outstanding from the beginning of the year. ) BRIEF EXERCISE 16-12 Net income………………………………………………………………………… Adjustment for interest, net of tax [R64,000 X (1 – . 40)] ……….. Adjusted net income ………………………………………………………….. Weighted average number of shares adjusted for dilutive securities (100,000 + 16,000) ……………………………….

Diluted EPS……………………………………………………………………….. R300,000 38,400 R338,400 ? 116,000 R2. 92 BRIEF EXERCISE 16-13 Net income……………………………………………………………………….. Weighted average number of shares adjusted for dilutive securities (50,000 + 10,000) ………………………….. Diluted EPS………………………………………………………………………. $270,000 ? 60,000 $4. 50 16-12 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com BRIEF EXERCISE 16-14 Proceeds from assumed exercise of 45,000 options (45,000 X $10) …………………………………………………… Shares issued upon exercise ……………………………………………. Treasury shares purchasable ($450,000 ? $15) ………………….. Incremental shares …………………………………………………………… Diluted EPS = $300,000 = 200,000 + 15,000 $450,000 45,000 30,000 15,000 $1. 40 BRIEF EXERCISE 16-15 Earnings per share Income from continuing operations (€600,000/100,000) …….

Discontinued operations loss (€120,000/100,000) …………….. Net income (€480,000/100,000) ………………………………………… € 6. 00 (1. 20) € 4. 80 *BRIEF EXERCISE 16-16 2010: 2011: (5,000 X $4) X 50% = $10,000 (5,000 X $9) – $10,000 = $35,000 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-13 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com SOLUTIONS TO EXERCISES EXERCISE 16-1 (10–15 minutes) (a) Present Value of Principal: (€2,000,000 X . 79383) …………………………………………………….

Present Value of Interest Payments: (€120,000 X 2. 57710) …………………………………………………….. Present Value of the Liability Component ……………………….. Fair Value of Convertible Debt ………………………………………… Less: Fair Value of Liability Component ………………………….. Fair Value of Equity Component ……………………………………… (b) Cash ………………………………………………………….. Bonds Payable……………………………………… Share Premium—Conversion Equity ……… c) Bonds Payable …………………………………………… Cash ……………………………………………………. 2,000,000 1,896,912 103,088 2,000,000 2,000,000 €1,587,660 309,252 €1,896,912 €2,000,000 1,896,912 € 103,088 EXERCISE 16-2 (15–20 minutes) (a) Carrying Value of Bonds, 1-1-11 (from Ex. 16–1(a)) ………………………………………………………….. Discount Amortized in 2011 [(€1,896,912 X . 08) – €120,000)] ………………………………………. Carrying Value of Bonds, 1-1-12 ……………………………………….. b) Share Premium—Conversion Equity………… Bonds Payable ……………………………………….. Share Capital—Ordinary ……………………. Share Premium—Ordinary ………………… *€103,088 + €1,928,665 – €500,000 103,088 1,928,665 500,000 1,531,753* €1,896,912 31,753 €1,928,665 16-14 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-2 (Continued) (c) Share Premium—Conversion Equity ……….. Bonds Payable ………………………………………..

Cash ………………………………………………… Gain on Repurchase …………………………. 40,000* 1,928,665 1,940,000 28,665** * €1,940,000 – €1,900,000 (Fair value of convertible bond issue (both liability and equity components less the fair value of the liability component). The remaining balance in this account could be transferred to Share Premium—Ordinary. **€1,928,665 – €1,900,000 (Angela has a gain because the repurchase amounts of the liability component is less than the carrying value of the liability component. ) EXERCISE 16-3 (15–20 minutes) (a) Present Value of Principal: (? 00,000 X . 59345) ………………………………………… Present Value of Interest Payments: (? 10,000 X 3. 69590) ………………………………………… Present Value of the Liability Component ………….. Fair Value of the convertible bonds (including both the liability and equity components) ……………………………………….. Less: Fair value of liability component (from above) ………………………………………….. Equity component ……………………………………………. Cash …………………………………………………………………

Bonds Payable …………………………………………… Share Premium—Conversion Equity …………… (b) Date 1/1/11 12/31/11 12/31/12 12/31/13 Cash Paid ? 10,000 ? 10,000 ? 10,000 Interest Expense ? 10,593 10,659 10,731 Discount Amortized ? 593 659 731 ? 59,345 36,959 ? 96,304 ?100,000 96,304 ? 3,696 100,000 96,304 3,696 Carrying Value of Bonds ? 96,304 96,897 97,556 98,287 16-15 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com

EXERCISE 16-3 (Continued) Computation of gain or loss: Present value of liability component at 1/1/14 (n=7, I = 8%) ………………………………….. Carrying value (from above) ……………………….. Loss ………………………………………………………….. * 10,000 X 5. 20637 = ? 52,064 100,000 X . 58349 = 58,349 ? 110,413 Adjustment to equity: Fair value of convertible bonds (with both liability and equity) ………………….. Less: Liability component …………………………. Adjustment to Share Premium— Conversion Equity……………………………………

Share Premium—Conversion Equity…………………. Bonds Payable ………………………………………………… Loss on Repurchase ………………………………………… Cash …………………………………………………………. ?110,413* 98,287 ? 12,126 ?112,000 110,413 ? 1,587 1,587* 98,287 12,126 112,000 *The remaining balance in this account could be transferred to Share Premium—Ordinary. EXERCISE 16-4 (15–20 minutes) (a) Cash ……………………………………………………………….. Bonds Payable……………………………………………

Share Premium—Conversion Equity …………… (b) Interest Expense ……………………………………………… Bonds Payable ………………………………………………… Cash …………………………………………………………. (c) Share Premium—Conversion Equity…………………. Bonds Payable ………………………………………………… Share Capital—Ordinary (6,000 X $1) ………….. Share Premium—Ordinary …………………………. 16-16 Copyright © 2011 John Wiley & Sons, Inc. 60,000 53,993 6,007 4,265 735 5,000 6,007 51,783 6,000 51,790

Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-4 (Continued) (d) Computation of gain or loss: Present value of liability component at 12/31/13 ……………………………………………….. Less: Carrying value (from above) ……………… Loss ………………………………………………………….. Adjustment to equity: Fair value of convertible bonds (with both liability and equity) ………………….. Less: Liability component…………………………..

Adjustment to Share Premium—Conversion Equity ……………………………………………………… Share Premium—Conversion Equity …………………. Bonds Payable …………………………………………………. Loss on Repurchase ………………………………………… Cash ………………………………………………………….. (e) Interest Expense ………………………………………………. Bonds Payable …………………………………………………. Cash …………………………………………………………..

Bonds Payable …………………………………………………. Cash ………………………………………………………….. $54,000 51,783 $ 2,217 $55,500 54,000 $ 1,500 1,500 51,783 2,217 55,500 4,074 926 5,000 50,000 50,000 EXERCISE 16-5 (15–20 minutes) (a) Cash (€3,000,000 X . 98) …………………………………….. Bonds Payable …………………………………………… Share Premium—Conversion Equity …………… (b) Interest Expense (€2,800,000 X 11% ? 2) ……………… Bonds Payable …………………………………………… Cash (€3,000,000 X 10% ? ) ……………………….. (c) Interest Expense (€2,804,000 X 11% ? 2) ……………. Bonds Payable …………………………………………… Cash ………………………………………………………….. 2,940,000 2,800,000 140,000 154,000 4,000 150,000 154,220 4,220 150,000 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-17 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-5 (Continued) Share Premium—Conversion Equity (140,000 X 1/3) …………………………………………….

Bonds Payable ……………………………………………… Share Capital—Ordinary (30,000 X €20) …… Share Premium—Ordinary ………………………. *(€2,804,000 + €4,220) X 1/3 EXERCISE 16-6 (10–15 minutes) Conversion recorded at book value of the bonds: Share Premium—Conversion Equity …………………….. Bonds Payable …………………………………………………….. Share Capital—Preference (400 X 20 X $50) ……. Share Premium—Preference ………………………….. EXERCISE 16-7 (15–20 minutes) 1. Cash (€10,000,000 X . 99) …………………………………

Bonds Payable (10,000,000 X . 95) …………….. Share Premium—Conversion Equity ………… Cash (€10,000,000 X . 98) ………………………………… Bonds Payable………………………………………… Share Premium—Share Warrants …………….. Share Premium—Conversion Equity………………. Conversion Expense ……………………………………… Bonds Payable ……………………………………………… Share Capital—Ordinary ………………………….. Share Premium—Ordinary ………………………. Cash ………………………………………………………. [(€9,700,000 + €200,000) – €1,000,000] 9,900,000 9,500,000 400,000 9,800,000 9,600,000 200,000 200,000 75,000 9,700,000 1,000,000 8,900,000* 75,000 3,500 406,000 400,000 2,500 46,667 936,073* 600,000 382,740 2. 3. 16-18 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-8 (10–15 minutes) (a) Cash …………………………………………………………….. Bonds Payable ……………………………………….. Share Premium—Share Warrants ……………. 150,000 136,000 14,000 b) Even if the warrants were nondetachable, the entry in (a) would be the same. Any debt issued with warrants is considered a compound instrument for accounting purposes. EXERCISE 16-9 (10–15 minutes) LIN COMPANY Journal Entry September 1, 2010 Cash (? 312,000,000 + ? 6,000,000) ………………………… 318,000,000 Bonds Payable (3,000 X ? 1,000) ……………….. 290,000,000 Share Premium—Share Warrants— Schedule 1 ……………………………………………. 22,000,000 Bond Interest Expense—Schedule 2 ………… 6,000,000 (To record the issuance of the bonds) Schedule 1 Value of Share Warrants Sales price (30,000 X ? 0,400) ………………………………………….. Present value of bonds ……………………………………………………. Net value of share warrants……………………………………………… Schedule 2 Accrued Bond Interest to Date of Sale Face value of bonds ………………………………………………………… Interest rate …………………………………………………………………….. Annual interest ……………………………………………………………….. Accrued interest for 3 months – (? 4,000,000 X 3/12) ………… ?300,000,000 X 8% ? 24,000,000 ? 6,000,000 ? 312,000,000 290,000,000 ? 22,000,000 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-19 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-10 (15–20 minutes) (a) Cash (€3,000,000 X 1. 02) ……………………………….. Bonds Payable ………………………………………… Share Premium—Share Warrants ……………… *$3,060,000 – ($2,940,000) (b) Cash …………………………………………………………….

Bonds Payable ………………………………………… Share Premium—Share Warrants ……………… 3,060,000 2,940,000 120,000* 3,060,000 2,940,000 120,000* *Note: IFRS requires determining the equity component as a residual. Answer is same as (a). EXERCISE 16-11 (15–25 minutes) 1/2/10 No entry (total compensation cost is $600,000) 12/31/10 Compensation Expense …………………………….. Share Premium—Share Options …………. [To record compensation expense for 2010 (1/2 X $600,000)] Compensation Expense …………………………….. Share Premium—Share Options …………. To record compensation expense for 2011 (1/2 X $600,000)] 300,000 300,000 12/31/11 300,000 300,000 1/3/12 Cash (30,000 X $40) …………………………………… 1,200,000 Share Premium—Share Options ($600,000 X 30,000/40,000) ………………………. 450,000 Share Capital—Ordinary (30,000 X $10) ………………………………….. Share Premium—Ordinary ………………….. (To record issuance of 30,000 $10 par value shares upon exercise of options at option price of $40) 300,000 1,350,000 16-20 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-11 (Continued) (Note to instructor: The market price of the shares has no relevance in the prior entry and the following one. ) 5/1/12 Cash (10,000 X $40) …………………………………… Share Premium—Share Options ($600,000 X 10,000/40,000) ……………………… Share Capital—Ordinary …………………….. Share Premium—Ordinary ………………….. (To record issuance of 10,000 $10 par value shares upon exercise of options at option price of $40) 400,000 150,000 100,000 450,000

EXERCISE 16-12 (15–25 minutes) 1/1/10 12/31/10 No entry (total compensation cost is €400,000) Compensation Expense ………………………………. Share Premium—Share Options ………… (€400,000 X 1/2) (To recognize compensation expense for 2010) Share Premium—Share Options ………………….. Compensation Expense (€200,000 X 3,000/20,000) ………………… (To record forfeiture of share options held by resigned employees) Compensation Expense ………………………………. Share Premium—Share Options ………… €400,000 X 1/2 X 17/20) (To recognize compensation expense for 2011) Cash (12,000 X €25) …………………………………….. Share Premium—Share Options (€400,000 X 12,000/20,000) ………………………… Share Capital—Ordinary ……………………. Share Premium—Ordinary…………………. (To record exercise of share options) Kieso Intermediate: IFRS Edition, Solutions Manual 200,000 200,000 4/1/11 30,000 30,000 12/31/11 170,000 170,000 3/31/12 300,000 240,000 120,000 420,000 Copyright © 2011 John Wiley & Sons, Inc. 16-21 Visit Free Slides and Ebooks : http://downloadslide. logspot. com Note: There are 5,000 options unexercised as of 3/31/12 (20,000 – 3,000 – 12,000). EXERCISE 16-13 (15–25 minutes) 1/1/09 12/31/09 No entry (total compensation cost is $450,000) Compensation Expense …………………………….. Share Premium—Share Options ($450,000 X 1/2) …………………………………………. Compensation Expense …………………………….. Share Premium—Share Options ………………… Cash (9,000 X $20) …………………………………….. Share Premium—Share Options ………………… Share Capital—Ordinary (9,000 X $5) …….

Share Premium—Ordinary …………………… *($450,000 X 9,000/10,000) 1/1/13 Paid-in Capital—Share Options ………………….. Share Premium—Expired Share Options ($450,000 – $405,000) …………… 45,000 45,000 225,000 225,000 225,000 225,000 180,000 405,000* 45,000 540,000 12/31/10 5/1/11 EXERCISE 16-14 (10–15 minutes) (a) 1/1/10 Unearned Compensation …………………………… Share Capital—Ordinary (4,000 X $5) ……. Share Premium—Ordinary …………………… 120,000 20,000 100,000 30,000 30,000 20,000 100,000 60,000 60,000 12/31/11 Compensation Expense ……………………………..

Unearned Compensation ($120,000 ? 4) ….. (b) 3/4/12 Share Capital—Ordinary ……………………………. Share Premium—Ordinary …………………………. Unearned Compensation ……………………… Compensation Expense (2 X $30,000) …… EXERCISE 16-15 (10–15 minutes) (a) 1/1/10 Unearned Compensation …………………………… Share Capital—Ordinary (€10 X 10,000) … Share Premium—Ordinary …………………… 500,000 100,000 400,000 100,000 12/31/11 Compensation Expense (€500,000 ? 5) ……….. 16-22 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com Unearned Compensation ………………………. EXERCISE 16-15 (Continued) (b) 1/1/15 Share Capital—Ordinary ……………………………. Share Premium—Ordinary ………………………… Compensation Expense ………………………. 100,000 400,000 100,000 500,000 EXERCISE 16-16 (15–25 minutes) (a) 2,640,000 shares Jan. 1, 2010–Sept. 30, 2010 (2,400,000 X 9/12) …….. Retroactive adjustment for share dividend …………. Jan. 1, 2010–Sept. 30, 2010, as adjusted …………….. Oct. 1, 2010–Dec. 31, 2010 (2,640,000 X 3/12)………. ,800,000 X 1. 10 1,980,000 660,000 2,640,000 Another way to view this transaction is that the 2,400,000 shares at the beginning of the year must be restated for the share dividend regardless of where in the year the share dividend occurs. (b) 4,140,000 shares Jan. 1, 2011–Mar. 31, 2011 (2,640,000 X 3/12)………. Apr. 1, 2011–Dec. 31, 2011 (4,640,000 X 9/12) ……… 660,000 3,480,000 4,140,000 (c) 8,280,000 shares 2011 weighted-average number of shares previously computed ……………………………………… Retroactive adjustment for share split ……………….. 4,140,000 X 2 8,280,000 d) 9,280,000 shares Jan. 1, 2012–Mar. 31, 2012 (4,640,000 X 3/12) …………… Retroactive adjustment for share split …………………….. Jan. 1, 2012–Mar. 31, 2012, as adjusted …………………… Apr. 1, 2012–Dec. 31, 2012 (9,280,000 X 9/12) …………… 1,160,000 X 2 2,320,000 6,960,000 9,280,000 Another way to view this transaction is that the 4,640,000 shares at the beginning of the year must be restated for the share split regardless of where in the year the share split occurs. Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-23

Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-17 (10–15 minutes) (a) Event Beginning balance Issued shares Share dividend Reacquired shares Share split Reissued shares Dates Outstanding Jan. 1–Feb. 1 Feb. 1–Mar. 1 Mar. 1–May 1 May 1–June 1 June 1–Oct. 1 Oct. 1–Dec. 31 Shares Outstanding 480,000 600,000 720,000 620,000 1,860,000 1,920,000 Restatement 1. 2 X 3. 0 1. 2 X 3. 0 3. 0 3. 0 Fraction of Year 1/12 1/12 2/12 1/12 4/12 3/12 Weighted Shares 144,000 180,000 360,000 155,000 620,000 480,000 1,939,000 Weighted-average number of shares outstanding (b) (c) Earnings Per Share = 3,256,000,000 (Net Income) 1,939,000 (Weighted-Average Shares) ? 3,256,000,000 – ? 900,000 1,939,000 = ? 1,679. 22 Earnings Per Share = = ? 1,678. 75 (d) Income from continuing operationsa ……………………….. Loss from discontinued operationsb ……………………….. Net income …………………………………………………………….. a ? ? 1,902. 01 (222. 80) 1,679. 21 Net income……………………………………………………………. Add loss from discontinued operations ………………….. Income from continuing operations ………………………… 3,688,000,000 1,939,000 b ?3,256,000,000 432,000,000 ? 3,688,000,000 = ? 1,902. 01 ? (432,000,000) = ? 222. 80 1,939,000 16-24 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-18 (10–15 minutes) Dates Shares Event Outstanding Outstanding Beginning balance Jan. 1–May 1 210,000 Issued shares May 1–Oct. 31 218,000 Reacquired shares Oct. 31–Dec. 31 204,000 Weighted-average number of shares outstanding Fraction of Year 4/12 6/12 2/12 Weighted Shares 70,000 109,000 34,000 213,000

Income per share before discontinued operations loss ($229,690 + $40,600 = $270,290; $270,290 ? 213,000 shares) ………………………………………………. Discontinued operations loss per share, net of tax ($40,600 ? 213,000) …………………………………………………………… Net income per share ($229,690 ? 213,000) …………………………… $1. 27 (. 19) $1. 08 EXERCISE 16-19 (10–15 minutes) Event Dates Outstanding Shares Outstanding Restatement 2 2 2 Fraction of Year 4/12 3/12 5/12 Weighted Shares 400,000 450,000 625,000 1,475,000 Beginning balance Jan. –May 1 600,000 Issued shares May 1–Aug. 1 900,000 Reacquired shares Aug. 1–Dec. 31 750,000 Weighted-average number of shares outstanding Net income …………………………………………………………………………. Preference dividend (50,000 X ? 100 X 8%) ……………………………. ?2,200,000 (400,000) ? 1,800,000 Net income applicable to ordinary shares = ? 1,800,000 = ? 1. 22 Weighted-average number of shares outstanding 1,475,000 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-25 Visit Free Slides and Ebooks : http://downloadslide. blogspot. om EXERCISE 16-20 (20–25 minutes) Earnings per ordinary share: Income from continuing operations*…………………………….. Discontinued operations loss, net of tax** ……………………. Net income*** ………………………………………………………………. Income data: Income from continuing operations ……………………………… Deduct 6% dividend on preference shares ……………………. Ordinary share income from discontinued operations ….. Deduct discontinued operations loss, net of tax …………… Net income available for ordinary shareholders …………….

Dates Outstanding Shares Outstanding Fraction of Year $1. 89 (. 17) $1. 72 $15,000,000 300,000 14,700,000 1,340,000 $13,360,000 Weighted Shares 1,750,000 6,000,000 7,750,000 January 1–April 1 7,000,000 3/12 April 1–December 31 8,000,000 9/12 Weighted-average number of shares outstanding *$14,700,000 ? 7,750,000 shares = $1. 89 per share (income from continuing operations) **$1,340,000 ? 7,750,000 shares = ($. 17) per share (discontinued operations loss net of tax) ***$13,360,000 ? 7,750,000 shares = $1. 72 per share (net income) EXERCISE 16-21 (10–15 minutes) Income from continuing operations before axes…………………. Income taxes ……………………………………………………………………… Income from continuing operations …………………………………….. Discontinued operations gain, net of applicable income tax of €36,000 ………………………………………………………. Net income…………………………………………………………………………. Per ordinary share: Income from continuing operations* …………………………….. Discontinued operations gain, net of tax** ……………………..

Net income*** ………………………………………………………………. 16-26 Copyright © 2011 John Wiley & Sons, Inc. €300,000 120,000 180,000 54,000 €234,000 €. 41 . 18 €. 59 Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-21 (Continued) Dates Outstanding Shares Outstanding Fraction of Year Weighted Shares 50,000 65,000 85,000 92,500 292,500 January 1–April 1 200,000 3/12 April 1–July 1 260,000 3/12 July 1–Oct. 1 340,000 3/12 Oct. 1–Dec. 31 370,000 3/12 Weighted-average number of shares outstanding 300,000 – income tax of €120,000 – preference dividends of €60,000 (6% of €1,000,000) = €120,000 (income available to ordinary shareholders) ***€120,000 ? 292,500 shares = €. 41 per share (income from continuing operations) ***€54,000 ? 292,500 shares = €. 18 per share (discontinued operations gain, net of tax) ***€174,000 ? 292,500 shares = €. 59 per share (net income) EXERCISE 16-22 (10–15 minutes) Dates Outstanding Jan. 1–April 1 April 1–Oct. 1 Oct. 1–Dec. 31 Shares Outstanding 800,000 1,250,000 1,140,000 Fraction of Year 3/12 6/12 3/12 Weighted Shares 200,000 625,000 285,000 Event Beginning balance Issued shares Reacquired shares

Weighted-average number of shares outstanding— unadjusted ……………………………………………………………………….. Share dividend, 2/15/11 …………………………………………………………. Weighted-average number of shares outstanding—adjusted….. Net income …………………………………………………………………………… Preference dividend (280,000 X $50 X 7%) ……………………………… Earnings per share for 2010: Net income applicable to ordinary shares Weighted-average number of ordinary shares outstanding = $1,850,000 1,165,500 1,110,000 X 1. 5 1,165,500 $2,830,000 (980,000) $1,850,000 = $1. 59 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-27 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-23 (20–25 minutes) (a) Revenues Expenses: Other than interest ………………………………….. Bond interest (75 X $950 X . 10) ………………… Income before income taxes …………………………… Income taxes (40%) …………………………………. Net income …………………………………………………….. Diluted earnings per share: $1,185 + (1 – . 0)($7,125) = $5,460 = 2,000 + 7,500 9,500 (b) Revenues ………………………………………………………. Expenses: Other than interest ………………………………….. Bond interest (75 X $950 X . 10 X 4/12)……………… Income before income taxes …………………………… Income taxes (40%) …………………………………. Net income …………………………………………………….. Diluted earnings per share: $4,035 + (1 – . 40)($2,375) = $5,460 = 2,000 + (7,500 X 1/3 yr. ) 4,500 (c) Revenues ……………………………………………………….

Expenses: Other than interest ………………………………….. Bond interest (75 X $950 X . 10 X 1/2) ………… Bond interest (50 X $950 X . 10 X 1/2) ………… Income before income taxes …………………………… Income taxes (40%) …………………………………. Net income …………………………………………………….. Diluted earnings per share (see note): $1,897 + (1 – . 40)($5,938) 2,000 + (2,500 X 1/2 yr. ) + 5,000 + (2,500 X 1/2) = $5,460 9,500 = $. 57 $1. 21 $17,500 $8,400 3,563 2,375 $. 57 $17,500 $8,400 2,375 10,775 6,725 2,690 $ 4,035 $17,500 $8,400 7,125 15,525 1,975 790 $ 1,185 4,338 3,162 1,265 $ 1,897 Note: The answer is the same as (a). In both (a) and (c), the bonds are assumed converted for the entire year. 16-28 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-24 (15–20 minutes) (a) 1. Number of shares for basic earnings per share. Dates Outstanding Shares Outstanding Fraction of Year Weighted Shares 200,000 1,050,000 1,250,000 Jan. 1–April 1 800,000 3/12 April 1–Dec. 1 1,400,000 9/12 Weighted-average umber of shares outstanding OR Number of shares for basic earnings per share: Initial issue of shares ………………………………….. April 1, 2011 issue (3/4 X 600,000) ……………….. Total ……………………………………………………. 2. Number of shares for diluted earnings per share: Dates Outstanding Shares Outstanding Fraction of Year 800,000 shares 450,000 shares 1,250,000 shares Weighted Shares 200,000 350,000 712,000 1,262,000 Jan. 1–April 1 800,000 3/12 April 1–July 1 1,400,000 3/12 July 1–Dec. 31 1,424,000* 6/12 Weighted-average number of shares outstanding *1,400,000 + [(€600,000 ? ,000) X 40] (b) 1. Earnings for basic earnings per share: After-tax net income ……………………………… Earnings for diluted earnings per share: After-tax net income ……………………………… Add back interest on convertible bonds (net of tax): Interest …………………………………………………. Less income taxes (40%) ……………………….. Total …………………………………………………….. €1,540,000 €1,540,000 €30,000 12,000 2. 18,000 €1,558,000 [Note to instructor: In this problem, the earnings per share computed for basic earnings per share is €1. 23 (€1,540,000 ? ,250,000) and the diluted earnings per share is €1. 23. As a result, only one earnings per share number would be presented. ] Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-29 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-25 (20–25 minutes) (a) Net income for year ………………………………………………………… Add: Adjustment for interest (net of tax) ………………………… $7,500,000 208,000* $7,708,000 $ 320,000 X . 65 $ 208,000 *Interest expense ………………………………………………………….. – tax rate (35%) …………………………………………………………… After-tax interest …………………………………………………………… $4,000,000/$1,000 = 4,000 debentures Increase in diluted earnings per share denominator: 4,000 X 18 72,000 Earnings per share: Basic EPS Diluted EPS $7,500,000 ? 2,000,000 = $3. 75 $7,708,000 ? 2,072,000 = $3. 72 (b) If the convertible security were preference shares, basic EPS would be the same assuming there were no preference dividends declared or the preference shares were noncumulative.

For diluted EPS, the numerator would be the net income amount of $7,500,000 and the denominator would be 2,072,000. EXERCISE 16-26 (10–15 minutes) (a) Net income …………………………………………………………………….. Add: Interest savings (net of tax) [$210,000 X (1 – . 40)] ……………………………………………… Adjusted net income ………………………………………………………. $3,000,000 ? $1,000 = 3,000 bonds X 15 45,000 shares Diluted EPS: $366,000 ? (100,000 + 45,000) = $2. 52 $240,000 126,000 $366,000 16-30

Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-26 (Continued) (b) Shares outstanding ………………………………………………………… Add: Shares assumed to be issued (10,000* X 5) …………….. Shares outstanding adjusted for dilutive securities …………. *$1,000,000 ? $100 Diluted EPS: ($240,000 – $0) ? 150,000 = $1. 60 Note: Preference dividends are not deducted since preference shares were assumed converted into ordinary shares. 100,000 50,000 150,000

EXERCISE 16-27 (20–25 minutes) (a) Shares assumed issued on exercise ……………………………….. Proceeds (1,000 X ? 8 = ? 8,000) ………………………………………… Less: Treasury shares purchased (? 8,000/? 20) ……………….. Incremental shares………………………………………………….. Diluted EPS = (b) Shares assumed issued on exercise ……………………………….. Proceeds = ? 8,000 Less: Treasury shares purchased (? 8,000/? 20) ……………….. ?40,000 = ? 3. 77 (rounded) 10,000 + 600 Diluted 1,000 400 600 X 3/12 Diluted 1,000 400 600

Incremental shares …………………………………………………………. Diluted EPS = ? 40,000 = ? 3. 94 (rounded) 10,000 + 150 150 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual 16-31 Visit Free Slides and Ebooks : http://downloadslide. blogspot. com EXERCISE 16-28 (10–15 minutes) (a) The contingent shares would have to be reflected in diluted earnings per share because the earnings level is currently being attained. (b) Because the earnings level is not being currently attained, contingent shares are not included in the computation of diluted earnings per share.

EXERCISE 16-29 (15–20 minutes) (a) The warrants are dilutive because the option price ($10) is less than the average market price ($15). Incremental shares = $15 – $10 X 30,000 = $15 OR Proceeds from assumed exercise: (30,000 warrants X $10 exercise price)……………………. Treasury shares purchasable with proceeds: ($300,000 ? $15 average market price) ……………………. Incremental shares issued: (30,000 shares issued less 20,000 purchased) ………… (b) Basic EPS = $2. 60 ($260,000 ? 100,000 shares) (c) Diluted EPS = $2. 36 ($260,000 ? 110,000 shares) $300,000 20,000 10,000 Diluted 0,000 16-32 Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual *EXERCISE 16-30 (15–25 Minutes) 16-32 (a) Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual Schedule of Compensation Expense Share Appreciation Rights Fair Value $4 1 11 9 Cumulative Compensation Recognizable $480,000 120,000 1,320,000 1,080,000 Percentage Accrued 25% 50% 75% 100% Compensation Accrued to Date $ 120,000 (60,000) 60,000 930,000 990,000 90,000 $1,080,000 Expense 2008 $120,000 Expense 2009 $(60,000) $930,000 $90,000 Expense 2010 Expense 2011

Date 12/31/08 12/31/09 12/31/10 12/31/11 (b) Compensation Expense …………………………………………………….. Liability Under Share Appreciation Plan ………………………. (c) Liability Under Share Appreciation Plan …………………………….. Cash (120,000 X $9) …………………………………………………….. 90,000 90,000 1,080,000 1,080,000 *EXERCISE 16-31 (15–25 Minutes) Copyright © 2011 John Wiley & Sons, Inc. Kieso Intermediate: IFRS Edition, Solutions Manual a) Fair Value $ 6 9 15 8 18 Schedule of Compensation Expense Share Appreciation Rights Cumulative Compensation Recognizable $240,000 360,000 600,000 320,000 720,000 Percentage Accrued 25% 50% 75% 100% — Compensation Accrued to Date $ 60,000 120,000 180,000 270,000 450,000 (130,000) 320,000 400,000 $720,000 Expense 2009 $60,000 Expense 2010 $120,000 $270,000 $(130,000) $400,000 Expense 2011 Expense 2012 Expense 2013 Date 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 b) 2009 Compensation Expense …………………………………………………………… Liability Under Share Appreciation Plan ……………………………… 2012 Liability Under Share Appreciation Plan……………………………………. Compensation Expense …………………………………………………….. 2013 Compensation Expense ……………………………………………………………

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