CALCULATIONS (18 marks)

Lalia Incorporated reported after tax profits of $6,500,000 in 2017. Selected information on Lalias capital structure is as follows at December 31, 2017, the end of its fiscal year:

Long Term Debt:

Bonds Payable, 9%, $10,000,000 par value, due 2027, convertible into common shares at a rate of two common shares for each $100 bond; interest expense on the bonds for the entire year was $900,000

Shareholders Equity:

Preferred Shares, $4.48, cumulative, convertible into common shares at a rate of two common shares for each preferred share, 150,000 outstanding

Preferred Shares, $2.50, cumulative, convertible into common shares at a rate of one common share for each preferred share, 400,000 outstanding

Common Shares oustanding, 1,500,000

100,000 options to purchase common shares (options have been oustanding all year); exercise price, $20; options expire 2023; each option allows the purchase of one common share

TRANSACTIONS DURING 2017:

1. On July 1, 2017, 400,000 common shares were issued on the conversion of 200,000 of the $4.48 preferred shares.
2. On December 1, 2017, 100,000 common shares were issued for cash.

OTHER INFORMATION:

1. Average common share market price during the year $40 per share
2. Tax rate: 25%
3. Quarterly dividends were declared on March 31, June 30, September 30, and December 31
4. Common shares outstanding at January 1, 2017 were 1,000,000.

Required: ROUND ALL DOLLAR AMOUNTS TO 2 DECIMAL PLACES

1. Calculate basic EPS for the 2017 year. (6 marks)
2. Test each security for dilution and identify each as dilutive or anti-dilutive. If options are dilutive, show the calculation of new shares issued. SHOW ALL CALCULATIONS. (8 marks)
3. Prepare a cascade worksheet to show the calculation of diluted EPS, beginning with basic EPS. (4 marks)

Question 2: Convertible Debt SHOW ALL CALCULATIONS (13 marks)

Nexus Ltd. issued convertible bonds on July 1, 2004. The $5,000,000 bonds pay annual interest of 8% each July 1 and mature on July 1, 2020. Each $1,000 bond is convertible into 50 common shares at the investors option. Nexus received proceeds of $5,350,000 for the bond at issue date. The market (yield) rate is 9.5%.

Required:

1. Prepare the journal entry on Nexus books at issuance using the incremental method. (4 marks)

2. Assume Nexus decided to repay (retire) the bonds early on July 1, 2008, after interest is recorded. Record the early repayment assuming Nexus pays investors $5,095,000 of which $925,225 is allocated to the conversion rights. (5 marks)

3. Instead of part b) assume investors decided to convert 30% of their bonds at July 1, 2008, after interest is recorded. Record the conversion on Nexus books. (4 marks)

Question 3: Employee Share Based Compensation: Options SHOW ALL CALCULATIONS

On January 1, 2018, 30 employees are granted stock options for 250 common shares each, a total of 7,500 shares, at an option price of $25 per share. The options vest 4 years after the grant date. The options are valued using an option pricing model at $60,000 total.

Forfeiture estimates are updated at the end of each year:

End of Year 2018 2019 2020 2021

Management Estimates

- Employees expected

to remain 26 (87%) 24 (80%) 23 (77%) n.a.

- Expected forfeitures 4 (13%) 6 (20%) 7 (23%) n.a.

Factual History

- Actual forfeitures 6 1 2 0

- Employees receiving options 21 (30 9)

REQUIRED: Prepare a schedule to calculate compensation expense each year and make entries for each year to record it. (9 marks)