Question 1: Diluted EPS - SHOW ALL CALCULATIONS (18 marks)

Chrissy Corporation had the following securities outstanding at its fiscal year end December 31, 20X7:

1. 200,000 Options: $11 exercise price; each option allows for the purchase of one share

2. Common Shares, no par; authorized 5,000,000 shares; issued and outstanding 600,000 shares

3. 7.5% Convertible Bonds, par value $2,500,000. The bonds were issued this year on May 1, 20X7.

4. Preferred Shares, cumulative, convertible, $1.25 dividend per quarter, no-par. Authorization limit 100,000; issued and outstanding 25,000 shares. Issued this year on October 1, 20X7.

Other Information for 20X7:

1. Options were outstanding all year to purchase 200,000 common shares at $11 per share
2. 20X7 net earnings were $790,000.
3. Interest expense was $216,000 on the 6% bonds.
4. The preferred shares are convertible into common shares at a rate of 9 common shares for 1 preferred share.
5. The 7.5% convertible bonds are convertible at a rate of seven shares for each $100 bond.
6. The tax rate is 35%
7. Common shares traded for an average of $32 during the year.
8. No dividends were declared in 20X7.
9. No common shares were issued or retired during the year.

NOTE: round all dollars to two decimal places. Round all share amounts to the nearest whole share

Required:

1. Calculate basic EPS for the 2017 year. (4 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. (9 marks)

3. Prepare a cascade worksheet to show the calculation of diluted EPS, beginning with basic EPS. (5 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%.

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 $728,000 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: Stock Appreciation Rights SHOW ALL CALCULATIONS (9 marks)

Sairah Corporation issues 500,000 stock appreciation rights (SARs) program for eight of its senior level managers. The SARs allow the managers to receive a cash payment after holding the SARs for five years. The value of the SARs is calculated as the difference between the $34 per share market value of 500,000 common shares on the date the SARs were issued and the fair market value on payment date, $50

Sairah estimates that six of eight managers will remain with the company over the five year period and that estimate remained unchanged over the first four years. One manager leaves after year 2, one after year 3, and one in year 5.

The fair value of one SAR unit was estimated using an option pricing model at the end of each year as follows:

End of Year 1 $4

End of Year 2 $1

End of Year 3 $2

End of Year 4 $17

The fair market value of each common share on payment date at the end of year 5 was $50.

Required:

1. Calculate compensation expense for years 1 through to year 5. (4 marks)

2. Make the journal entry to record compensation expense related to the SARs plan for each of years 1 through 5. (3 marks)

3. Make the journal entry to record the payment made to the managers under the SARs program at the end of year 5. (2 mark)

END OF ASSIGNMENT