QUESTION 1
The following table summarizes the stock-based compensation expenses included on our Consolidated Statements of Income (in millions):
We capitalized stock-based compensation costs to inventory totaling $15 million in 2016, $13 million in 2015 and $12 million in 2014. The capitalized stock-based compensation costs remaining in inventory were $9 million as of December 31, 2016, $8 million as of December 31, 2015 and $6 million as of December 31, 2014.
Stock-based compensation is recognized as expense over the requisite service periods on our Consolidated Statements of Income using the straight-line expense attribution approach, reduced for estimated forfeitures. We estimate forfeitures based on our historical experience.
What is the journal entry for the stock compensation expense in 2016?
a. Debit compensation expense for 360 and credit equity for 360
b. Debit compensation expense for 276 and credit equity for 276
c. Debit compensation expense for 360 and credit due to employees for 360
d. No entry requiredAOu
QUESTION 2
Use the following information to answer questions 2-5
The 2004 Plan provides for option grants designated as either non-qualified or incentive stock options. Prior to January 1, 2006, we granted both non-qualified and incentive stock options, but all stock options granted after January 1, 2006 have been non-qualified stock options. Under the 2004 Plan, employee stock options granted prior to 2011 generally vest over five years and stock options granted starting in 2011 generally vest over four years. All options are exercisable over a period not to exceed the contractual term of ten years from the date the stock options are issued and are granted at prices not less than the fair market value of our common stock on the grant date. Stock option exercises are settled with common stock from the 2004 Plan’s previously authorized and available pool of shares.
The following table summarizes activity and related information under our stock option plans. All option grants presented in the table had exercise prices not less than the fair value of the underlying common stock on the grant date:
Aggregate intrinsic value represents the value of our closing stock price on the last trading day of the year in excess of the weighted-average exercise price multiplied by the number of options outstanding or exercisable. Total intrinsic value of options exercised was $452 million for 2016, $1.1 billion for 2015 and $1.2 billion for 2014. The weighted-average grant date fair value of the stock options granted was $20.04 per share for 2016, $29.73 per share for 2015 and $27.63 per share for 2014.
As of December 31, 2016, there was $72 million of unrecognized compensation cost related to stock options, which is expected to be recognized over an estimated weighted-average period of 2.85 years.
What was the total fair value of the stock options issued in 2016 (in thousands) based on the per share amount reported?
QUESTION 3
During 2016, 42,000 options expired. What is the most likely reason the grantees allowed the options to expire?
a. The employees left the company
b. The options were in the money at the exercise date
c. The options were out of the money at the exercise date
d. The options were cash settled
QUESTION 4
How many options (in thousands) does Gilead not expect to vest due to forfeiture in future periods as of 12/31/2016?
QUESTION 5
Actual forfeitures of stock options in 2018 was 1,943,000 shares. What effect would this have on compensation expense and equity during 2018?
a. Increase compensation expense, increase total APIC
b. Decrease compensation expense, increase total APIC
c. Decrease compensation expense, reclassify within APIC
d. Decrease compensation expense, reclassify from APIC to retained earnings
QUESTION 6
Please use the following information to answer questions 6-7
The following table shows the calculation of basic and diluted net income per share attributable to Gilead common stockholders (in millions except per share amounts):
The denominator for diluted earnings per share was increased by 13 million shares for the effect of options, while Gilead had more than 19 million options exercisable at 12/31/2016. What are factors that could explain the difference?
a. Some of the options are expected to forfeit
b. Some of the options are expected to expire
c. The denominator is increased by stock purchases under the treasury stock method
d. Some of the options are anti-dilutive and do not affect the denominator
e. All of the above
QUESTION 7
What does it mean for options to be anti-dilutive?
a. The strike price is greater than the fair value of the stock
b. Exercise results in a net decrease in shares outstanding
c. More shares could be repurchased with the proceeds that would be issued
d. All of the above
QUESTION 8
Please use the following information to answer questions 8-15
In July 2010, we issued $1.3 billion of Convertible Notes due in May 2016 in a private placement pursuant to Rule 144A of the Securities Act of 1933, as amended. In 2016 and 2015, portions of the Convertible Notes were converted and on May 1, 2016, the remainder matured. We repaid an aggregate principal balance of $285 million and $213 million during 2016 and 2015, respectively. We also paid in cash $956 million and $784 million during 2016 and 2015, respectively, related to the conversion spread of the Convertible Notes, which represents the conversion value in excess of the principal amount. We received $956 million and $784 million in cash during 2016 and 2015, respectively, from our convertible note hedges related to the Convertible Notes. During 2015, a portion of the warrants related to the Convertible Notes was modified and settled, and in August 2016, the remainder expired. We paid $469 million and $3.9 billion during 2016 and 2015, respectively, to settle the warrants as the average market price of our common stock exceeded the warrants’ exercise price.
The Convertible Notes were issued at par and bore an annual interest rate of 1.625%. The initial conversion rate for the Convertible Notes was 44.0428 shares per $1,000 principal amount (which represented an initial conversion price of approximately $22.71 per share). The conversion rates were subject to customary anti-dilution adjustments, including quarterly dividend distributions. Upon conversion or maturity, a holder received an amount in cash equal to the lesser of (i) the principal amount of the note or (ii) the conversion value for such note, as measured under the indenture governing the relevant notes. If the conversion value exceeded the principal amount, we delivered, at our option, cash or common stock or a combination of cash and common stock for the conversion value in excess of the principal amount.
There were 55 million shares of our common stock underlying the warrants associated with our Convertible Notes. The warrants had an original exercise price of $30.05 per share, subject to customary anti-dilution adjustments including quarterly dividend distributions. In 2015, we entered into modified agreements with our warrant counterparties which changed the timing of the expiration for 46 million of the warrants. The modified agreements allowed us to settle the 46 million warrants at our option, in cash or shares. According to the terms of the modified agreements, these warrants expired during a 32 trading-day period which commenced on May 11, 2015 and ended on June 24, 2015. We exercised our option to settle the warrants in cash. In 2016, the remaining 9 million warrants expired during a 40 trading-day period commencing on August 1, 2016 and ending on September 26, 2016. We exercised our option to settle the remaining warrants in cash. Because these warrants could have been settled at our option, in cash or shares of common stock, under both the original and the modified agreements and these contracts met all of the applicable criteria for equity classification, the settlement payments were recorded as a reduction to Stockholders’ equity on our Consolidated Balance Sheets.
In March 2016, we exercised our option to elect cash for the settlement of the conversion spread of the remaining Convertible Notes and for the related convertible note hedges. As a result, the Convertible Notes and the related convertible note hedges were accounted for as derivative instruments with fair values classified as liability or asset on our Consolidated Balance Sheets (see Note 4, Derivative Financial Instruments). Until our cash settlement election, we bifurcated the conversion option of the Convertible Notes from the debt instrument, classified the conversion option in equity and accreted the resulting debt discount as interest expense over the contractual terms of the Convertible Notes. The following table summarizes information about the equity and liability components of the Convertible Notes (in millions):
We recognized interest expense of $3 million in 2016, $16 million in 2015 and $35 million in 2014 related to the contractual coupon rate and amortization of the debt discount and issuance cost for the Convertible Notes. The effective interest rate on the liability components of Convertible Notes was 4.00%.
Fill in the journal entry for payment of interest on the convertible bonds in 2016 (in millions). What is the interest expense?
QUESTION 9
Fill in the journal entry for payment of interest on the convertible bonds in 2016 (in millions). What is the Amortization of discount?
QUESTION 10
Fill in the journal entry for payment of interest on the convertible bonds in 2016 (in millions). What is the cash?
QUESTION 11
How were the warrants classified on issuance?
a. As a component of the convertible debt
b. As a separate liability
c. As a contra-equity
d. As a component of equity
QUESTION 12
What was the cash payment for the settlement of the warrants and conversion spread associated with the convertible notes (in millions)?
QUESTION 13
What is the debit for the cash payments for the settlement of the warrants and conversion expense?
a. Interest expense
b. Loss on settlement of convertible debt
c. Retained earnings
d. Additional paid in capital
e. None of the above
QUESTION 14
How would you expect the warrants to affect the denominator for diluted EPS in 2015?
a. Increase shares issuable
b. Increase shares issuable net of shares repurchased with the proceeds
c. No effect because the warrants are anti-dilutive
d. Warrants are included in basic earnings per share
QUESTION 15
What was the dilutive impact of the warrants per share?
QUESTION 16
Please use the following information to answer questions 16-22
We grant time-based RSUs to certain employees as part of our annual employee equity compensation review program as well as to new hire employees and to non-employee members of our Board. RSUs are share awards that entitle the holder to receive freely tradable shares of our common stock upon vesting. RSUs vest over four years from the date of grant. The fair value of an RSU is equal to the closing price of our common stock on the grant date.
The following table summarizes our RSU activities and related information:
The weighted-average grant date fair value of RSUs granted was $84.51 per share for 2016, $103.19 per share for 2015, $86.75 per share for 2014. The total grant date fair value of our vested RSUs was $284 million for 2016, $249 million for 2015 and $182 million for 2014, and total fair value as of the respective vesting dates was $408 million for 2016, $666 million for 2015 and $535 million for 2014.
As of December31, 2016, there was $577 million of unrecognized compensation cost related to unvested RSUs which is expected to be recognized over a weighted-average period of 2.4 years.How should Gilead account for the Restricted Stock Units (RSU)?
a. As a liability
b. As an equity grant
QUESTION 17
What would the entries be for the 2016 RSU grants assuming that the awards were issued evenly throughout the year (average period outstanding is six months)?
a. There is no entry on issue of the RSU on the grant date other than a memo entry to record the grants.
b. Record ¼ of the fair value of the stock on the issue date
c. Record 1/8 of the fair value of the stock on the issue date
d. Record the fair value of the stock at the balance sheet date
e. A and b
f. A and c
QUESTION 18
What amount would Gilead recognize as compensation expense assuming that the awards were issued evenly throughout the year (average outstanding = issued divided by 2) ?
QUESTION 19
What would the entry be for the RSU forfeitures in 2016 assuming that Gilead accounts for forfeitures as they occur?
a. A debit to compensation expense
b. A credit to compensation expense
c. A debt to paid-in-capital
d. A credit to paid-in-capital
e. A and d
f. B and c
QUESTION 20
What amount would Gilead recognize for forfeitures in 2016 assuming that Gilead accounts for forfeitures as they occur?
QUESTION 21
Based on the information provided, what is the total amount of outstanding RSUs at 12/31/2016?
QUESTION 22
What was the average gain per RSU that grantees realized on the vesting of RSUs in 2016?
QUESTION 23
Use the following information to answer questions 23-27
What was the total of originating gain or (loss) recognized in other comprehensive income, net of tax, in 2018? Indicate losses with a negative number.
QUESTION 24
What is the total amount of gain or loss recognized in OCI due to reclassification of amounts in AOCI that were previously recognized in comprehensive income? Indicate a gain with a positive number and a loss with a negative number.
QUESTION 25
What is the total amount of gain or (loss) that recognized in earnings due to reclassification of amounts in AOCI that were previously recognized in comprehensive income? Indicate a gain with a positive number and a loss with a negative number.
QUESTION 26
Research: ASU 2018-02. How would you explain to a reader of the financial statements the loss of $717 million in OCI attributed to ASU 2018-02? Be specific as to why there is a loss.
QUESTION 27
What is the other side of the journal entry for the $717 million loss recognized in OCI due to the impact of ASU 2018-02?
a. A gain in earnings
b. Deferred tax assets – OCI
c. Deferred tax liabilities – OCI
d. A reduction of tax expense in earnings