Chapter19ShareBasedCompensation

andEarningsperShare

Exercise191Requirement1

$25.50
fairvaluepershare
x
12
million sharesgranted
=$306million fairvalueofaward

Requirement2
noentry
Requirement3
($inmillions)

Compensationexpense($306million3years).. 102
Paidincapitalrestrictedstock..................
102
Requirement4

$25.50
x 12million
x
80%
= $244.8million

fairvaluepershare
sharesgranted
100%20%forfeiturerate
fairvalueofaward

Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2013

19-1

Exercise192

Requirement1

AtJanuary1,2013,theestimatedvalueoftheawardis:

$7
estimatedfairvalueperoption
x75,000
optionsgranted
=$525,000
totalcompensation
Requirement2
Compensationexpense($525,0005years)................................105,000
Paidincapitalstockoptions.............................................
105,000
Requirement3
The company should adjust the cumulative amount of compensation expense
recorded to date in the year the estimate changes.
2014
Compensationexpense([$525x90%x2/5]$105)...............
Paidincapitalstockoptions..............................................

84

84

The expense in each of the remaining three years, 2015-2014201719-2, would be

94.5 million ([$525 x 90%] $105$84=$283.53) Note that this approach is
contrary to the usual way companies account for changes in estimates. For
instance, assume a company acquires a 5-year depreciable asset having no
estimated residual value. The $525 million depreciable cost would be depreciated
straight-line at $105 million over the five-year useful life. If the estimated residual
value changes after one year to 10% of cost, the new estimated depreciable cost
of $472.5 million would be reduced by the $105 million depreciation recorded the
first year, and the remaining $367.5 million would be depreciated equally, $91.875
million per year, over the remaining four years.

The McGraw-Hill Companies, Inc., 2013

19-2

Intermediate Accounting, 7e

Exercise 19-3

1. EPSin2013

(amountsinmillions,exceptpershareamount)
Earnings
PerShare

net
income

$1,200
$1,200
= =$2.00
606
18(10/12)
+18(2/12) +72(1/12)
600
shares
atJan.1

treasury
shares

treasuryshares
sold

new
shares

2. EPSin2014
(amountsinthousands,exceptpershareamount)
Earnings
PerShare

net
income

$1,200
$1,200
= =$.88
(606 18 +18 +72)
x(2.00)
1,356
shares
atJan.1

stockdividend
adjustment

3. 2013EPSinthe2014comparativefinancialstatements
(amountsinthousands,exceptpershareamount)
Earnings
PerShare

net
income

$1,200
$1,200
= =$1.00
600
x(2.00)
1,200
weightedaverageshares
aspreviouslycalculated

stockdividend
adjustment

PROBLEMS
Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2013

19-3

Problem

1. Net loss per share for the year ended December 31,
19-1 2013:

(amountsinmillions,exceptpershareamount)
net
loss

NetLoss
PerShare

preferred
dividends
$2801

$280
$560
= =($.46)
1,200(1.05) 60(8/12) (1.05)
+24(4/12)
1,226
shares
atJan.1

treasury
shares

new
shares

___stockdividend___
adjustment

2.Pershareamountofincomeorlossfromcontinuingoperationsfortheyearended
December31,2013:
(amountsinmillions,exceptpershareamount)

operating
income
$5202

Incomefrom
Continuing
Operations
PerShare

preferred
dividends
$2801

$240
==$.19
1,200(1.05) 60(8/12) (1.05)
+24(4/12)
1,226
shares
atJan.1

treasury
shares

new
shares

___stockdividend___
adjustment
140,000sharesx$100x7%=$280,000
2$800,000$280,000=$520,000

Problem191(concluded)

3. 2013and2012comparativeincomestatements:

(amountsinmillions,exceptpershareamount)

2013
The McGraw-Hill Companies, Inc., 2013
19-4

2012

Intermediate Accounting, 7e

Earnings(Loss)PerCommonShare:

Income(loss)fromoperations
beforeextraordinaryitems

$.19

Extraordinarylossfrom
litigationsettlement

(.65)

Netincome(loss)

($.46)

$.71

$.71

Note:Theweightedaveragenumberofcommonsharesin2012shouldbeadjustedfor

the stock dividend in 2013 for the purpose of reporting 2012 EPS in
subsequentyearsforcomparativepurposes:

net
income

$900
$900
=
1,200
(1.05)
1,260
shares
atJan.1

Earnings
PerShare

=$.71

stockdividend
adjustment

Problem 19-2(amountsinmillions,exceptpershareamount)
net
income

preferred
dividends

$1,050
$39
$1,011
= =$3.00
300(1.04) +30(10/12) (1.04) 2(6/12)
337
shares
atJan.1

new
shares

shares
retired

___stockdividend___
adjustment

Problem 19-3

Alternate Exercises and Problems

The options issued in 2012 are not considered when

calculating2013EPSbecausetheexerciseprice($34)isnot
lessthanthe2013averagemarketpriceof$32(althoughthey
The McGraw-Hill Companies, Inc., 2013
19-5

wouldhavebeenconsideredwhencalculating2011or2012EPSiftheaverageprice
thoseyearshadbeenmorethan$34).
Theoptionsissuedin2013donotaffectthecalculationof2013EPSfor two reasons
related to their being issued at December 31. First, the exercise price ($32) is equal to
the 2013 average market price of $32. While they are not antidilutive, neither are they
dilutive. Second, even if the exercise price had been less than the market price, these
options would be excluded. Options are assumed exercised at the beginning of the year
or when granted, whichever is later when granted, in this case. So, the fraction of
the year the shares are assumed outstanding is 0/12, meaning no increase in the
weighted-average shares.
Theoptionsissuedin2011areconsideredexercisedfor4millionshareswhen
calculating2013EPSbecausetheexerciseprice($24)islessthanthe2013 average
marketpriceof$32.Treasurysharesareassumedrepurchasedattheaverage pricefor
dilutedEPS:
4millionshares
x $24 (exerciseprice)
$96

million

$32 (averagemarketprice)
3millionshares

The McGraw-Hill Companies, Inc., 2013

19-6

Intermediate Accounting, 7e

Problem193(concluded) (amountsinmillions,exceptpershareamounts)
Basic EPS
net
income

preferred
dividends

$1,050
$39
$1,011
= =$3.00
300(1.04) +30(10/12) (1.04) 2(6/12)
337
shares
atJan.1

new
shares

shares
retired

___stockdividend___
adjustment

Diluted EPS
net

preferred

income

dividends

$1,050
$39
+$4040%($40) $1,035
==$2.85
300(1.04)+30(10/12) (1.04) 2(6/12)+(43)
+13*
+12** 363
shares
atJan.1

new
shares

shares
retired

exercise
ofoptions

contingent
shares

conversion
ofbonds

___stockdividend___
adjustment

* Thecontingentlyissuablesharesareconsideredissuedwhencalculatingdiluted
EPSbecausetheconditionforissuance(RWnetincome>$250million)currently
isbeingmet.
** The bonds are considered converted when calculating diluted EPS: 400,000
bondsx30shares=12millionsharesuponconversion.Interest=$400millionx
10%=$40million.

Problem 19-4(amountsinmillions,exceptpershareamounts)

Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2013

19-7

BasicEPS
net
income

$1,300

preferred
dividends
$80*

$1,220

== $1.37
880
+32(3/12)
888
shares
new
atJan.1
shares

DilutedEPS
net
income

$1,300

preferred
dividends
$80*

preferred
dividends
+80*

$1,300

== $1.33
880
+32(3/12)
+(4030**)

978
shares
atJan.1

new
shares

exercise
ofoptions

conversion
ofpreferred
shares

*8millionsharesx$100parx10%=$80million

**Assumedpurchaseoftreasuryshares

40millionshares
x $30 (exerciseprice)
$1,200million

$40
(averagemarketprice)
30millionshares

The McGraw-Hill Companies, Inc., 2013

19-8

Intermediate Accounting, 7e