The following questions are adapted from a variety of sources including questions developed by the AICPA Board of Examiners and those used in the Kaplan CPA Review Course to study accounting for share-based compensation and earnings per share while preparing for the CPA examination. Determine the response that best completes the statements or questions.

1. On January 1, 2013, Pall Corp. granted stock options to key employees for the purchase of 40,000 shares of the company’s common stock at $25 per share. The options are intended to compensate employees for the next two years. The options are exercisable within a four-year period beginning January 1, 2015, by the grantees still in the employ of the company. No options were terminated during 2013, but the company does have an experience of 4% forfeitures over the life of the stock options. The market price of the common stock was $32 per share at the date of the grant. Pall Corp. used the binomial pricing model and estimated the fair value of each of the options at $10. What amount should Pall charge to compensation expense for the year ended December 31, 2013?

a. $153,600

b. $160,000

c. $192,000

d. $200,000

2. On January 1, 2013, Doro Corp. granted an employee an option to purchase 3,000 shares of Doro’s $5 par value common stock at $20 per share. The options became exercisable on December 31, 2014, after the employee completed two years of service. The options were exercised on January 10, 2015. The market prices of Doro’s stock were as follows: January 1, 2013, $30; December 31, 2014, $50; and January 10, 2015, $45. The Black-Scholes-Merton option pricing model estimated the value of the options at $8 each on the grant date. For 2013, Doro should recognize compensation expense of

a. $ 0

b. $12,000

c. $15,000

d. $45,000

3. The following information pertains to Jet Corp.’s outstanding stock for 2013:

What is the number of shares Jet should use to calculate 2013 basic earnings per share?
a. 40,000
b. 45,000
c. 50,000
d. 54,000

4. At December 31, 2013 and 2012, Gow Corp. had 100,000 shares of common stock and 10,000 shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were declared on either the preferred or common stock in 2013 or 2012. Net income for 2013 was $1,000,000. For 2013, basic earnings per common share amounted to
a. $ 5.00
b. $ 9.50
c. $ 9.00
d. $10.00

5. January 1, 2013, Hage Corporation granted options to purchase 9,000 of its common shares at $7 each. The market price of common stock was $9 per share on March 31, 2013, and averaged $9 per share during the quarter then ended. There was no change in the 50,000 shares of outstanding common stock during the quarter ended March 31, 2013. Net income for the quarter was $8,268. The number of shares to be used in computing diluted earnings per share for the quarter is
a. 50,000
b. 52,000
c. 53,000
d. 59,000

6. During 2013, Moore Corp. had the following two classes of stock issued and outstanding for the entire year:
• 100,000 shares of common stock, $1 par.
• 1,000 shares of 4% preferred stock, $100 par, convertible share for share into common stock.
Moore’s 2013 net income was $900,000, and its income tax rate for the year was 30%. In the computation of diluted earnings per share for 2013, the amount to be used in the numerator is
a. $896,000
b. $898,800
c. $900,000
d. $901,200

7. On January 2, 2013, Lang Co. issued at par $10,000 of 4% bonds convertible in total into 1,000 shares of Lang’s common stock. No bonds were converted during 2013.
Throughout 2013, Lang had 1,000 shares of common stock outstanding. Lang’s 2013 net income was $1,000. Lang’s income tax rate is 50%.
No potential common shares other than the convertible bonds were outstanding during 2013.
Lang’s diluted earnings per share for 2013 would be
a. $ .50
b. $ .60
c. $ .70
d. $1.00

Beginning in 2011, International Financial Reporting Standards are tested on the CPA exam along with U.S. GAAP. The following questions deal with the application of IFRS in accounting for share-based compensation. 8. M Company prepares its financial statements using IFRS. M will record a deferred tax asset for stock options
a. for the cumulative amount of the fair value of the options M has recorded for compensation expense.
b. for the portion of the options’ intrinsic value earned to date times the tax rate.
c. for the tax rate times the amount of compensation.
d. unless the award is “in the money;” that is, it has intrinsic value.

9. N Company had issued 80,000 executive stock options as of January 1, 2013, permitting executives to buy 80,000 shares of stock for $60 per share. N’s vesting schedule is 20% the first year, 30% the second year, and 50% the third year (graded-vesting). The fair value of the options is estimated as follows:

Assuming N prepares its financial statements in accordance with International Financial Reporting Standards, what is the compensation expense related to the options to be recorded in 2014?
a. $ 72,000
b. $144,000
c. $192,000
d. $195,000

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Common stock, $5 par value Shares outstanding, 1/1/2013 2-for-1 stock split, 4/1/2013 Shares issued, 7/1/2013 Preferred stock, $10 par value, 5% cumulative 20,000 20,000 10,000 Shares outstanding, 1/1/201:3 4,000 Vesting Date Amount Vesting Fair Value per Option Dec. 31, 2013 Dec. 31, 2014 Dec. 31, 2015 20% 30% 50% $5 $6 $9