Chapter 19

Requirement 1

Share-Based Compensation and Earnings per Share Exercise 19-1

$25.50 fair value per share x 12 million shares granted = $306 million fair value of award

Requirement 2 no entry

Requirement 3
($ in millions)

Compensation expense ($306 million 3 years).. 102 Paid-in capital restricted stock.................. 102

Requirement 4 $25.50 x 12 million x 80% = $244.8 million fair value per share shares granted 100% 20% forfeiture rate fair value of award

Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2011 19-1

Requirement 1

Exercise 19-2
At January 1, 2011, the estimated value of the award is: $7 estimated fair value per option x 75,000 options granted = $525,000 total compensation

Requirement 2 Compensation expense ($525,000 5 years)................................ 105,000 Paid-in capital stock options .............................................. 105,000

Requirement 3 The company should adjust the cumulative amount of compensation expense recorded to date in the year the estimate changes. 2012 Compensation expense ([$525 x 90% x 2/5] $105)............... Paid-in capital stock options ...............................................

84 84

The expense in each of the remaining three years, 2013-2012, would be 94.5 million ([$525 x 90%] $105 $84 = $283.5 / 3) 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., 2011 19-2

Intermediate Accounting, 6e

Exercise 19-3
net income

1. EPS in 2011
(amounts in millions, except per share amount) Earnings Per Share

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

shares at Jan. 1 treasury shares treasury shares sold new shares

2. EPS in 2012
(amounts in thousands, except per share amount) net income Earnings Per Share

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

shares at Jan. 1 stock dividend adjustment

3. 2011 EPS in the 2012 comparative financial statements

(amounts in thousands, except per share amount) net income Earnings Per Share

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

weighted average shares as previously calculated stock dividend adjustment

PROBLEMS
Alternate Exercises and Problems The McGraw-Hill Companies, Inc., 2011 19-3

Problem 19-1

1. Net loss per share for the year ended December 31, 2011:

(amounts in millions, except per share amount) net loss preferred dividends Net Loss Per Share

$280 $2801 - $560 = = ($.46) 1,200 (1.05) 60 (8/12) (1.05) + 24 (4/12) 1,226
shares at Jan. 1

___ stock dividend ___

adjustment

treasury shares

new shares

2.Per share amount of income or loss from continuing operations for the year ended December 31, 2011:
(amounts in millions, except per share amount) Income from Continuing operating income preferred dividends Operations Per Share

$5202 $2801 $240 = = $.19 1,200(1.05) 60 (8/12) (1.05) + 24 (4/12) 1,226

shares at Jan. 1

___ stock dividend ___

adjustment

treasury shares

new shares

1 40,000 shares x $100 x 7% = $280,000 2 $800,000 $280,000 = $520,000

Problem 19-1 (concluded)

3. 2011 and 2010 comparative income statements: 2011 2010

Intermediate Accounting, 6e

(amounts in millions, except per share amount)

The McGraw-Hill Companies, Inc., 2011 19-4

Earnings (Loss) Per Common Share: Income (loss) from operations before extraordinary items Extraordinary loss from litigation settlement Net income (loss)
Note:

$ .19

$.71

(.65) ($ .46)

$.71

The weighted average number of common shares in 2010 should be adjusted for the stock dividend in 2011 for the purpose of reporting 2010 EPS in subsequent years for comparative purposes:

Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2011 19-5

net income

Earnings Per Share

$900 $900 = 1,200 (1.05) 1,260

shares at Jan. 1 stock dividend adjustment

= $.71

Problem 19-2(amounts in millions, except per share amount)

net income preferred dividends

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

shares at Jan. 1

= $3.00

___ stock dividend ___

adjustment

new shares

shares retired

Problem 19-3

The options issued in 2010 are not considered when calculating 2011 EPS because the exercise price ($34) is not less than the 2011 average market price of $32 (although they would have been considered when calculating 2009 or 2010 EPS if the average price those years had been more than $34). The options issued in 2011 do not affect the calculation of 2011 EPS for two reasons related to their being issued at December 31. First, the exercise price ($32) is equal to the 2011 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. The options issued in 2009 are considered exercised for 4 million shares when calculating 2011 EPS because the exercise price ($24) is less than the 2011 average
The McGraw-Hill Companies, Inc., 2011 19-6

Intermediate Accounting, 6e

market price of $32. Treasury shares are assumed repurchased at the average price for diluted EPS: 4 million shares x $24 (exercise price) $96 million $32 (average market price) 3 million shares Problem 19-3 (concluded)
(amounts in millions, except per share amounts)

Basic EPS
net income preferred dividends

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

shares at Jan. 1

= $3.00

___ stock dividend ___

adjustment

new shares

shares retired

Diluted EPS
net income preferred dividends after-tax interest savings

$1,050 $39 + $40 40%($40) $1,035 = = $2.85 300 (1.04)+ 30 (10/12) (1.04) 2 (6/12)+ (4 3) + 13* + 12** 363
shares at Jan. 1

___ stock dividend ___

adjustment

new shares

shares retired

exercise of options

contingent shares

conversion of bonds

* The contingently issuable shares are considered issued when calculating diluted EPS because the condition for issuance (RW net income > $250 million) currently is being met.

Alternate Exercises and Problems

The McGraw-Hill Companies, Inc., 2011 19-7

** The bonds are considered converted when calculating diluted EPS: 400,000 bonds x 30 shares = 12 million shares upon conversion. Interest = $400 million x 10% = $40 million.

Problem 19-4 (amounts in millions, except per share amounts)

Basic EPS net income preferred dividends

$1,300 880
shares at Jan. 1

$80* + 32 (3/12)
new shares

$1,220 $1.37 888

= =

Diluted EPS
net income preferred dividends preferred dividends

$1,300 880
shares at Jan. 1

$80* + 32 (3/12)
new shares

+ 80* + (40 30**)

exercise of options

$1,300 $1.33 978

= =

+ 80
conversion of preferred shares

*8

million shares x $100 par x 10% = $80 million

purchase of treasury shares 40 million shares x $30 (exercise price) $1,200 million $40 (average market price) 30 million shares

**Assumed

The McGraw-Hill Companies, Inc., 2011 19-8

Intermediate Accounting, 6e