Question 1

Baltac Corp. (BC) has been a publicly accountable enterprise for the past five years. On December 16, 2016, for the first time, BC adopted a stock option plan for its three top executives. The company agreed to make 45,000 shares available under this plan and agreed on a strike price of $21 per share. On December 16, 2016, the company’s share price on the TSE closed at $21.

On January 3, 2017, the following options were granted to each of executives Smith, Jones and Chen, and the options granted at this time were estimated to have a total fair value of $405,000:

-            For services to be provided in 2017: 4,000 options each

-            For services to be provided in 2018: 5,000 options each

-            For services to be provided in 2019: 6,000 options each

    15,000 options each

The options are exercisable during the two-year period from January 1, 2020 to December 31, 2021, after which they will expire. The market prices of the BC shares were as follows:

                January 3, 2017                 $20.50

December 31, 2017         $23.00

December 31, 2018         $28.10

December 31, 2019         $30.00

December 31, 2020         $31.50

December 31, 2021         $28.00

The three executives exercised their options as follows: 50% of the options on December 31, 2020 and the other 50% on December 31, 2021.

Required:

a)      Determine the compensation expense recognized by BC in each year from 2016 to 2021.

b)      Identify the accounts and amounts that will be reported on BC’s statement of financial position for each year ending December 31 from 2016 to 2021. Also identify the balance sheet classification of these balance sheet account(s).

Question 2

Further to Question 1 (above), investigate and identify the IFRS standard name and number, and paragraph number that covers how to account for such a compensatory stock option plan. Indicate what the standard requires (taken from the standard itself, not the textbook).

Question 3

Assume that Baltac Corp. (see Question 1 above) is a private company that had provided a share appreciation plan instead of a stock option plan. The terms and conditions and share prices, etc. were the same as provided in Question 1.

a)      Determine the compensation expense recognized by BC in each year from 2016 to 2021.

b)      Identify the accounts and the amounts that will be reported on BC’s statement of financial position for each year ending December 31 from 2016 to 2021. Also identify the balance sheet classification of these balance sheet account(s).

Question 4

Joe Yew, the Vice-president – Finance of Abbass Corporation (AC) provides you with the following information related to the company’s year just ended on December 31, 2016.  Abbass is a large private company that has opted to follow IFRS. Joe tells you that the controller is off on sick leave and had to leave before completing the financial statements that are scheduled to go to AC’s Board of Directors the following day. One of the outstanding items is the determination of earnings per share.

The VP provides you with the following information:

The company ended its 2015 fiscal year with 342,500 common shares, 12,500 shares were purchased and retired on February 28, 2016 from a shareholder who was moving away and 21,000 shares were issued on July 29, 2016 when a subsidiary company was acquired. On September 30, 2016, AC issued a 25% stock dividend.

The VP – Finance also provided you with a copy of the December 31, 2016 draft financial statements which included the following information:

Long-term debt:

                8% convertible debentures                                                                         $  1,500,000

                Lease obligations and other long-term debt                                            5,000,000

Shareholders’ equity:

                $1.00 cumulative, convertible Class A preferred shares,

                    no par value, 200,000 shares authorized,

                    60,000 shares issued and outstanding                                                       600,000

                $2.00 convertible Class B preferred shares, no par

                    value, 25,000 shares authorized, issued, and

    outstanding                                                                                                           475,000

                Common shares, no par value, 1,000,000 shares

                    authorized, 438,750 shares issued and outstanding                          4,400,000

                Contributed surplus                                                                                              ,650,000

                Retained earnings                                                                                              2,400,000

                Accumulated other comprehensive income                                                  23,600

Other draft comments:

• Dividends were paid quarterly on all preferred shares – on March 31, June 30, September 30, and December 31. Dividends of $0.25 per share were paid on the common shares each quarter as well.
• The Class A convertible preferred shares are convertible at the rate of one common share for four preferred shares at the option of the holder.
• The Class B preferred shares are convertible at the rate of one common share for one preferred share any time after September 9, 2020.
• The convertible debentures are convertible at the rate of 10 shares for each $100 debenture until maturity.
• Net income of $930,000 was reported for 2016. This included an after tax gain on discontinued operations of $31,000. Norris Corp. pays taxes at an average rate of 30%.
• Written call options were outstanding for 10,000 common shares, exercisable in 2018, at a price of $10 per share.
• The company’s Finance Department estimated an average market price for the AC shares of $16.50 during 2016.

Required:

(a)          Calculate basic EPS for inclusion with the financial statements.

(b)          For each potentially dilutive factor individually, identify the change in earnings and the

change in shares that would result as you prepare to calculate fully diluted EPS. In each

case, identify whether the factor is dilutive or anti-dilutive.

(c)           Assume your calculations in (a) result in the following answer for basic EPS for net

income: [Note: these are not the correct results, but should be used as the starting point for completing part (c).]

                                Assume: Basic EPS for net income =

                                                  Earnings to common/weighted average number of shares

                                                  = $935,000/400,000 shares

                                                  =  $2.34 per share

Using your results from part (b) and the assumption for basic earnings per share for net income as given in part (c):

(i)                   Indicate which securities are potentially dilutive under this assumption, and

(ii)                Calculate diluted EPS required under GAAP.