ACTP 5008 Fall 2015 Worksheet 3 Stock options and EPS

ACTP 5008Fall 2015Worksheet 3Stock options and EPSProblem 1On January 1, 2014, Lazer Corp. granted stock options to officers and key employeesfor the purchase of 250,000 shares of the company’s $1 par common stock at $86per share. The options were exercisable within a 5-year period beginning January 1,2016, by grantees still in the employ of the company, and expiring December 31,2020. The service period for this award is 2 years. Assume that the fair value optionpricing model determines total compensation expense to be $1,250,000.On July 1, 2014, 20,000 option shares were terminated when the employeesresigned from the company. The market value of the common stock was $88 pershare on this date.On March 31, 2016, 130,000 option shares were exercised when the market value ofthe common stock was $91 per share.InstructionsPrepare journal entries to record issuance of the stock options, termination of thestock options, exercise of the stock options, and charges to compensation expense,for the years ended December 31, 2014, 2015, and 2016.Problem 2:The information below pertains to Riley Company for 2015.Net income for the year$8,670,0006% convertible bonds issued at par ($1,000 per bond);each bond is convertible into 60 shares of common stock5,000,0004% convertible, cumulative preferred stock, $100 parvalue; each share is convertible into 4 shares of common stock2,500,000Common stock, $1 par value9,500,000Income Tax rate for 201540%Average market price of common stock$18 per shareThere were no changes during 2015 in the number of common shares, preferredshares, or convertible bonds outstanding. There is no treasury stock. The companyalso has common stock options (granted in a prior year) to purchase 120,000 sharesof common stock at $12 per share.Instructions(a) Compute basic earnings per share for 2015.(b) Compute diluted earnings per share for 2015.