Question 1 (20 Marks)
Buttler Limited sponsors a defined benefit pension plan, and follows ASPE. The corporation’s actuary provides the following information about the plan (in thousands of dollars):
December 31, 2019
December 31, 2020
Defined benefit obligation, accounting basis
Plan assets (fair value)
Net defined benefit liability/asset
Past service cost, plan amendment, effective
January 2, 2020
Service cost for the year 2020
Contributions (July 1, 2020)
Benefits paid in 2020
a. Prepare a continuity schedule of the defined benefit obligation and plan asset for 2020. (12 marks)
b. Prepare the pension-related entries made by the company during 2020. (5 marks)
c. Prepare SFP extracts showing how the amounts relating to the above pension plan will be presented for December 31, 2019 & December 31, 2020 (3 marks)
Question 2 (13 Marks)
Peanut Butter Limited established a share appreciation rights program that entitled its new president, Amy Chua, to receive cash for the difference between the shares’ fair value and a pre-established price of $32 (also fair value on December 31, 2019), on 45,000 SARs.
The date of grant is December 31, 2019, and the required employment (service) period is four years.
The president exercised all of the SARs on December 31, 2024.
The shares’ fair value fluctuated as follows:
December 31, 2020, $36;
December 31, 2021, $39;
December 31, 2022, $45;
December 31, 2023, $36; and
December 31, 2024, $48.
The company recognizes the SARs in its financial statements. Assume that Peanut Butter follows ASPE.
a. Prepare a schedule of compensation expense pertaining to the 45,000 SARs granted to Amy Chua. (6 Marks)
b. Prepare the journal entry for compensation expense in 2020, 2023, and 2024 relative to the 45,000 SARs. (5 Marks)
c. Prepare the journal entry for SARs exercised in 2024. (2 Marks)
Question 3: (12 Marks)
Susan Summers of the controller’s office of Diamond Corporation was given the assignment of determining the basic earnings per share values for the year ended December 31, 2020. Summers has gathered the following information.
- The company is authorized to issue 8 million common shares. As at December 31, 2019, 2 million shares had been issued and were outstanding.
- The per share market prices of the common shares on selected dates were as follows:
Price per Share
July 1, 2019
Jan. 1, 2020
Apr. 1, 2020
July 1, 2020
Aug. 1, 2020
Nov. 1, 2020
Dec. 31, 2020
- A total of 700,000 shares of an authorized 1.2 million convertible preferred shares had been issued on July 1, 2019. The shares were issued at $25, and have a cumulative dividend of $4 per share. The shares are convertible into common shares at the rate of one convertible preferred share for one common share. Dividends are paid quarterly on September 30, December 31, March 31, and June 30.
- Diamond Corporation is subject to a 30% income tax rate.
- The after-tax net income for the year ended December 31, 2020, was $11,050,000.
The following specific activities took place during 2020:
- April 1: A total of 400,000 shares of the $4 convertible preferred shares were converted into common shares. The company issued new common shares and retired the preferred shares. This was the only conversion of the preferred shares during 2020.
- May 1: A 5% common stock dividend was issued.
- July 1: A 2-for-1 split of the common shares became effective on this date. The board of directors had authorized the split on June 1.
- August 1: A total of 300,000 common shares were issued to acquire a factory building.
- November 1: A total of 24,000 common shares were purchased on the open market at $9 per share and cancelled.
- Cash dividends to common shareholders were declared and paid as follows:
$0.30 per share
$0.20 per share
- Cash dividends to preferred shareholders were declared and paid as scheduled (quarterly).
a. Determine the number of shares to use in calculating basic earnings per share for the year ended December 31, 2020. (6.5 Marks)
b. Calculate the adjusted net income amount to use as the numerator in the basic earnings per share calculation for the year ended December 31, 2020. (5.5 Marks)
Question 4 (10 Marks)
Vera Corporation is preparing earnings per share data for 2020. The net income for the year ended December 31, 2020, was $420,000 and there were 66,000 common shares outstanding during the entire year. Vera has the following two convertible securities outstanding:
10% convertible bonds (each $1,000 bond is convertible into 25 common shares)
5% convertible $100 par value preferred shares (each share is convertible into two common shares)
Stock options (granted in a prior year) to purchase 75,000 common shares at $20 per share
Average market price of common shares
$15 per share
Both convertible securities were issued at face value in 2017. There were no conversions during 2020, and Vera’s income tax rate is 25%. The preferred shares are cumulative.
a. Calculate Vera’s basic earnings per share for 2020. Round to the nearest cent. (2 Marks)b. Calculate Vera’s diluted earnings per share for 2020