Test Bank,
Test Bank, Intermediate Accounting Intermediate Accounting , 14, 14thth ed. ed. 197197
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HAPTER
HAPTER
19
19
Earnings Per Share
Earnings Per Share
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M
ULTIPLEULTIPLEC
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HOICEHOICEQ
Q
UESTIONSUESTIONSTheory/Definitiona Q!e"tion" Theory/Definitiona Q!e"tion"
1
1 CCoommppaanniiees s rreeqquuiirreed d tto o ssuupppplly y EEPPS S ddiisscclloossuurreess 2
2 TTrreeaattmmeennt t oo nnoonnccuummuullaattii!!e e pprreeeerrrreed d ddii!!iiddeenndds s nnoot t ddeeccllaarreedd "
" TThhe ee eaarrnniinnggs ps peer sr shhaarre ce coommppuuttaattiioon rn reeppoorrtteed od on tn thhe ie innccoomme e ssttaatteemmeenntt 4
4 TTrreeaattmmeennt t oo ddii!!iiddeenndds s oon n ccuummuullaattii!!ee, , nnoonnccoonn!!eerrttii##lle e pprreeeerrrreed d ssttoocckk $
$ %%tteemms s ccoonnssiiddeerreed d &&hheen n ccoommppuuttiinng g ddiilluutteed d EEPPSS '
' TTrreeaattmmeennt t oo a a ssttoocck k ddii!!iiddeennd d iissssuueed d iin n mmiid d yyeeaar r (
( ))iilluutteed d EEPPS S iis s ##aasseed d oon n aassssuummppttiioonns s aa##oouut t uuttuurre e ttrraannssaaccttiioonnss *
* TTrreeaattmmeennt t oo ccoonn!!eerrttii##lle e sseeccuurriittiiees s uunnddeer r ddiilluutteed d EEPPSS +
+ TTrruueeaallsse e ssttaatteemmeenntts s rreeggaarrddiinng g EEPPSS 1
1-- ))iilluuttiioon n oo ooppttiioonns s aannd d &&aarrrraanntts s uunnddeer r ttrreeaassuurry y ssttoocck k mmeetthhoodd 1
111 eeppoorrttiinng g eeaarrnniinnggs s ppeer r sshhaarre e iinnoorrmmaattiioonn 1
122 //ssiinng g tthhe e ii00ccoonn!!eerrtteed d mmeetthhood d &&iitth h ddiilluutteed d EEPPSS 1
1"" ssssuummppttiioonns s oo ii00ccoonn!!eerrtteed d mmeetthhood d oo EEPPS S ccoommppuuttaattiioonn 1
144 //sse e oo tthhe e ttrreeaassuurry y ssttoocck k mmeetthhood d &&hheen n ccoommppuuttiinng g ddiilluuttii!!e e EEPPSS 1
1$$ CCoommppuuttiinng g EEPPS S oor r a a ccoommppaany ny hhaa!!iinng g ddiieerreennt t iissssuuees s oo ccoonn!!eertrtii##llee securities andor stock options and &arrants
securities andor stock options and &arrants 1
1'' eeiigghhtteedd00aa!!eerraagge ne nuumm##eer r oo sshhaarrees 3s 3mmiiddyyeeaar er e!!eennttss 1
1(( EEPPS S iigguurrees s aarre e rreeppoorrtteed d oon n tthhe e iinnccoomme e ssttaatteemmeenntt 1
1** PPuurrppoosse e oo rreeppoorrttiinng g ddiilluutteed d eeaarrnniinnggs s ppeer r sshhaarree 1
1++ TTrreeaattmmeennt t oo i inntteerreesst et e55ppeennsse oe on dn diilluuttii!!e ce coonn!!eerrttii##lle de dee##tt 2
2-- CCoommppuuttiinng g ddiilluutteed d EEPPS S oor r a a ccoommppaanny y &&iitth h a a ccoommppllee5 5 ccaappiittaal l ssttrruuccttuurere 2
211 CCuurrrreennt t 66P P oor r ccoommppaanniiees s &&iitth h ccoommppllee5 5 ccaappiittaal l ssttrruuccttuurreess 2
222 CCuurrrreennt t aannd d oorrmmeer r 66P P oor r eeaarrnniinnggs s ppeer r sshhaarree 2
2"" //..SS. . 66P P !!ss. . iinntteerrnnaattiioonnaal l ssttaannddaarrddss 2
244 BBaassiic c EEPPS S aannd d PPB B 77ppiinniioon n 88oo. . 11$$ 2
2$$ SSttoocck k ooppttiioonnss, , &&aarrrraanntts s aannd d rriigghhtts s aannd d EEPPS S ccaallccuullaattiioonn 2
2'' %%nnccrreemmeennttaal l EEPPS S oor r mmuullttiipplle e ppootteennttiiaal l ddiilluuttii!!e e sseeccuurriittiieess 2
2(( PPrreesseennttaattiioon on o EEPPS S oor dr diissccoonnttiinnuueed od oppeerraattiioonnss, e, e55ttrraaoorrddiinnaary ry iitteemmss,, and cumulati!e eect o accounting change
19#
19# Chapter 1+Chapter 1+ Earnings Per Earnings Per ShareShare Co$%!tationa Q!e"tion"
Co$%!tationa Q!e"tion"
2
2** CCoommppuuttaattiioon n oo &&eeiigghhtteedd00aa!!eerraagge e nnuumm##eer r oo sshhaarreess 2
2++ CCoommppuuttaattiioon n oo ##aassiic c EEPPSS "
"-- CCoommppuuttaattiioon n oo ##aassiic c EEPPSS "
"11 CCoommppuuttaattiioon n oo ##aassiic c EEPPSS "
"22 CCoommppuuttaattiioon n oo ##aassiic c EEPPSS "
""" CCoommppuuttaattiioon n oo &&eeiigghhtteedd00aa!!eerraagge e sshhaarrees s oor r ddiilluutteed d EEPPSS "
"44 CCoommppuuttaattiioon n oo ddiilluutteed d EEPPSS "
"$$ CCoommppuuttaattiioon n oo ddiilluutteed d EEPPSS "
"'' CCoommppuuttaattiioon n oo &&eeiigghhtteedd00aa!!eerraagge e sshhaarrees s oor r ddiilluutteed d EEPPSS "
"(( CCoommppuuttaattiioon n oo ddiilluutteed d lloosss s ppeer r sshhaarree "
"** CCoommppuuttaattiioon n oo sshhaarrees s uusseed d oor r ##aassiic c aannd d ddiilluuttii!!e Ee EPPSS "
"++ CCoommppuuttaattiioon n oo &&eeiigghhtteedd00aa!!eerraagge e nnuumm##eer r oo sshhaarrees s oor r EEPPSS 4
4-- CCoommppuuttaattiioon n oo ddiilluutteed d EEPPSS 4
411 CCoommppuuttaattiioon n oo ddiilluutteed d EEPPSS 4
422 CCoommppuuttaattiioon n oo ddiilluutteed d EEPPSS 4
4"" EEeecct t oo ttrreeaassuurry y ssttoocck k mmeetthhood d aannd d &&aarrrraanntts s oon n nnuumm##eer r oo sshhaarrees s uusseedd 4
444 CCoommppuuttaattiioon n oo ddiilluutteed d EEPPSS 4
4$$ CCoommppuuttaattiioon n oo ##aassiic c EEPPSS 4
4'' CCoommppuuttaattiioon on o &&eeiigghhtteedd00aa!!eerraagge ne nuumm##eer r oo sshhaarrees s oor dr diilluutteed Ed EPPSS 4
4(( CCoommppuuttaattiioon n oo ddiilluutteed d EEPPSS 4
4** CCoommppuuttaattiioon n oo sshhaarrees s tto o ccoommppuutte e ddiilluutteed d EEPPSS 4
4++ EEeecct t oo ssttoocck k rriigghhtts s oon n EEPPS S ccaallccuullaattiioonn $
$-- EEeecct t oo ssttoocck k rriigghhtts s oon n EEPPS S ccaallccuullaattiioonn $
$11 EEeecct t oo ssttoocck k rriigghhtts s oon n EEPPS S ccaallccuullaattiioonn
P
P
RO&LEMSRO&LEMS1
1 CCoommppuuttaattiioon n oo &&eeiigghhtteedd00aa!!eerraagge e sshhaarrees s aannd d ccoommppaarraattii!!e e EEPPSS 2
2 CCoommppuuttaattiioon n oo ##aassiic c EEPPS S &&iitth h ee55ttrraaoorrddiinnaarry y iitteemmss "
" CCoommppuuttaattiioon n oo ddiilluuttii!!e e EEPPSS 4
4 CCoommppuuttaattiioon n oo ##aassiicc, , ddiilluuttii!!e e EEPPSS $
$ CCoommppuuttaattiioon n oo ##aassiicc, , ddiilluuttii!!e e EEPPSS '
' CCoommppuuttaattiioon n oo &&eeiigghhtteedd00aa!!eerraagge e sshhaarreess (
( CCoommppuuttaattiioon n oo ssiimmppllee, , ddiilluuttii!!e e EEPPSS *
* CCoommppuuttaattiioon n oo ssiimmppllee, , ddiilluuttii!!e e EEPPSS +
+ CCoommppuuttaattiioon n oo ##aassiicc, , ddiilluuttii!!e e EEPPSSlloosss s PPSS 1
1-- CCoommppuuttaattiioon n oo ssiimmppllee, , ddiilluuttii!!e e EEPPSS 1
111 EEPPS S oor r ccoommppllee5 5 ccaappiittaal l ssttrruuccttuurree 1
122 EE55cclluussiioon on o nnoonnppuu##lliic cc coommppaanniiees s rroom m EEPPS S rreeppoorrttiinngg 1
1"" EEPPS S aannd d ssttoocck k pprriicce e mmaa55iimmii99aattiioonn 1
144 %%nntteerrpprreettiinng g tthhe e pprriicceeeeaarrnniinnggs s rraattiioo
M
Test Bank,
Test Bank, Intermediate Accounting Intermediate Accounting , 14, 14thth ed. ed. 199199
cc 1.1. EaEarnrninings gs peper sr shahare re didiscsclolosusureres as are re rereququirired ed ononly ly or or :
:7722 aa.. ccoommppaanniiees &s &iitth ch coommppllee5 5 ccaappiittaal sl sttrruuccttuurreess.. #.
#. cocompmpananieies s ththat at chachange theinge their r cacapitpital al ststrucructutures res durduring ing ththe e repreportortinging period.
period. c.
c. pupu#l#lic cic comompapaninieses.. d.
d. pripri!a!ate te cocompmpananieies.s.
cc 2.2. %n %n cocompmpututining thg the ee eararniningngs pes per shr sharare o e o cocommmomon sn stotockck, n, nononcucumumulalatiti!e!e :
:77"" pprreeeerrrreed dd dii!!iiddeennddss not not declared should #e declared should #e a.
a. dedudeductected rom td rom the net inhe net incomcome or te or the yeahe year.r. #.
#. addeadded to td to the net he net incoincome me or the or the yeayear.r. cc.. iiggnnoorreedd..
d.
d. deductdeducted rom ed rom the net the net income income or the yor the year, ear, net o tnet o ta5.a5. a
a ".". hhicich eah earnrninings pgs per ser shahare cre coompmpututatatiion son shohoululd #e rd #e repepororteted on td on the he acace o e o the
the :
:77** iinnccoomme e ssttaatteemmeenntt;; Ba
Basisic Ec EPSPS )i)iluluteted d EPEPSS a
a.. <<eess <<eess # #.. <<eess 88oo cc.. 88oo <<eess d d.. 8o8o 88oo #
# 4.4. hehen cn comompuputiting ng eaearnrninings gs peper sr shahare re on on cocommmmon on ststocock, k, didi!i!idedendnds os onn :
:77"" ccuummuullaattii!!e, e, nononncconon!!ererttii#l#le e prpreeererrered d ssttoock ck shshoouuld ld ##ee a.
a. deductededucted rom d rom net incnet income oome only i tnly i the di!idendhe di!idends &ere s &ere declared or declared or paid inpaid in the current period.
the current period. #.
#. deductdeducted rom net incomed rom net income regardless o &hee regardless o &hether the di!idends ðer the di!idends &ere notre not paid or declared in the period.
paid or declared in the period. c.
c. dededucducteted d rrom net incom net incomome only i e only i nenet t incincomome is e is gregreatater er ththan thean the di!idends.
di!idends.
d. ignored. d. ignored.
cc $.$. %n %n cacalclcululatatining dig diluluteted ead earnrninings gs peper sr shaharere, &, &hihich ch o o ththe e olollolo&i&ing sng shohoululdd not not
#e #e :
:77$$ ccoonnssiiddeerreedd;; a.
a. The &The &eighted aeighted a!erage nu!erage num#er m#er o coo common mmon shares oshares outstandutstandinging #.
#. The aThe amount mount o dio di!idends d!idends declared eclared on cumon cumulati!ulati!e preerred e preerred sharesshares c.
c. The amThe amounount o cast o cash di!ih di!idenddends declars declared on comed on commomon shan sharesres d.
d. The num#The num#er o commer o common shaon shares resulres resulting rom thting rom the assume assumed con!ed con!ersiersionon o de#entures outstanding
'(( Chapter 1+ Earnings Per Share
c '. hat is the correct treatment o a stock di!idend issued in mid year &hen :7" computing the &eighted0a!erage num#er o common shares outstanding or
earnings per share purposes;
a. The stock di!idend should #e &eighted #y the length o time that the additional num#er o shares are outstanding during the period.
#. The stock di!idend should #e included in the &eighted0a!erage num#er o common shares outstanding only i the additional shares result in a decrease o " percent or more in earnings per share.
c. The stock di!idend should #e &eighted as i the additional shares &ere issued at the #eginning o the year.
d. The stock di!idend should #e ignored since no additional capital &as recei!ed.
a (. The EPS computation that is or&ard0looking and #ased on assumptions a#out
:72 uture transactions is a. diluted EPS.
#. #asic EPS.
c. continuing operations EPS. d. e5traordinary EPS.
a *. hen computing diluted earnings per share, stock options are :74 a. recogni9ed only i they are diluti!e.
#. recogni9ed only i they are antidiluti!e. c. recogni9ed only i they &ere e5ercised. d. ignored.
# +. 7 the ollo&ing, select the incorrect statement concerning earnings per share.
:7' a. )uring periods &hen all income is paid out as di!idends, earnings per share and di!idends per share under a simple capital structure &ould #e identical.
#. /nder a simple capital structure, no ad=ustment to shares outstanding is necessary or a stock split on the last day o the iscal period.
c. )uring a period, changes in stock issued or reacquired #y a company may aect earnings per share.
d. )uring a loss period, the amount o loss attri#uted to each share o common stock should #e computed.
Test Bank, Intermediate Accounting , 14th ed. '(1
c 1-. %n applying the treasury stock method o computing diluted earnings per share,
:74 &hen is it appropriate to use the a!erage market price o common stock during the year as the assumed repurchase price;
a. l&ays #. 8e!er
c. hen the a!erage market price is higher than the e5ercise price d. hen the a!erage market price is lo&er than the e5ercise price
d 11. Earnings per share inormation should #e reported or all o the ollo&ing :7* e5cept
a. continuing operations. #. e5traordinary gain. c. net income.
d. cash lo&s rom operating acti!ities.
# 12. hen using the i0con!erted method to compute diluted earnings per share, :7$ con!erti#le securities should #e
a. included only i antidiluti!e. #. included only i diluti!e.
c. included &hether diluti!e or not. d. not included.
a 1". The i0con!erted method o computing EPS data assumes con!ersion o :7$ con!erti#le securities at the
a. #eginning o the earliest period reported 3or at time o issuance, i later. #. #eginning o the earliest period reported 3regardless o time o
issuance.
c. middle o the earliest period reported 3regardless o time o issuance. d. ending o the earliest period reported 3regardless o time o issuance. a 14. hen computing diluti!e EPS, the treasury stock method can #e used or
all
:74 o the ollo&ing e5cept
a. con!erti#le preerred stock. #. stock &arrants.
c. stock options. d. stock rights.
'(' Chapter 1+ Earnings Per Share
a 1$. >or a company ha!ing se!eral dierent issues o con!erti#le securities andor
:7( stock options and &arrants, the >SB requires selection o the com#ination o securities producing
a. the lo&est possi#le earnings per share. #. the highest possi#le earnings per share.
c. the earnings per share igure mid&ay #et&een the lo&est possi#le and the highest possi#le earnings per share.
d. any earnings per share igure #et&een the lo&est possi#le and the highest possi#le earnings per share.
a 1'. >or purposes o computing the &eighted0a!erage num#er o shares
:7" outstanding during the year, a midyear e!ent that must #e treated as occurring at the #eginning o the year is the
a. declaration and issuance o a stock di!idend. #. purchase o treasury stock.
c. sale o additional common stock. d. issuance o stock &arrants.
c 1(. here in the inancial statements should #asic and comple5 EPS igures or
:7* income rom continuing operations #e reported; a. %n the accompanying notes
#. %n management?s discussion and analysis c. 7n the income statement
d. 7n the statement o cash lo&s
d 1*. The main purpose o reporting diluted earnings per share is to :72 a. pro!ide a comparison igure or de#t holders.
#. indicate earnings shareholders &ill recei!e in uture periods.
c. distinguish #et&een companies &ith a comple5 capital structure and companies &ith a simple capital structure.
d. sho& the ma5imum possi#le dilution o earnings.
# 1+. %n determining earnings per share, interest e5pense, net o applica#le income
:7$ ta5es, on con!erti#le de#t &hich is diluti!e should #e a. ignored or diluted earnings per share.
Test Bank, Intermediate Accounting , 14th ed. '()
c. deducted rom net income or diluted earnings per share. d. none o the a#o!e.
d 2-. hen computing diluted EPS or a company &ith a comple5 capital structure,
:72 &hat is the denominator in the computation;
a. 8um#er o common shares outstanding at year0end
#. eighted0a!erage num#er o common shares outstanding
c. eighted0a!erage num#er o common shares outstanding plus all other potentially antidiluti!e securities
d. eighted0a!erage num#er o common shares outstanding plus all other potentially diluti!e securities
# 21. /nder current 6P, a company &ith a comple5 capital structure and potential
:71 earnings per share dilution must present
a. primary and ully diluted earnings per share. #. #asic and diluted earnings per share.
c. #asic and primary earnings per share.
d. #asic earnings per share and cash lo& per share. c 22. /nder current 6P, common stock equi!alents
:71 a. are considered in calculating #asic earnings per share. #. are considered in calculating primary earnings per share. c. are not considered in calculating #asic earnings per share.
d. are not considered in calculating ully diluted earnings per share. c 2". Current /.S. 6P or earnings per share
:71 a. are not consistent &ith the standards or earnings per share promulgated #y the ccounting Standards Board o the /nited @ingdom. #. are not consistent &ith the standards or earnings per share promulgated #y the %nternational ccounting Standards Committee 3%SC.
c. are consistent #oth &ith the /.@. and the %nternational ccounting Standards Committee standards or earnings per share.
d. are unique and are not consistent &ith the standards promulgated #y the /.@. ccounting Standards Board, the %nternational ccounting Standards Committee, or any other standard setting #ody in the &orld.
'(* Chapter 1+ Earnings Per Share
d 24. /nder ccounting Principles Board 7pinion 8o. 1$, the historical or #asic :71 earnings per share igure or companies &ith comple5 capital structures
&as
a. al&ays reported as part o primary earnings per share, #ut not ully diluted earnings per share.
#. al&ays reported as part o ully diluted earnings per share, #ut not primary earnings per share.
c. al&ays disclosed as a separate amount in addition to primary and ully diluted earnings per share.
d. ne!er disclosed either in primary or ully diluted earnings per share. c 2$. %n calculating earning per share, stock options &arrants, and rights are :7( a. al&ays diluti!e.
#. ne!er diluti!e.
c. diluti!e i the e5ercise price is less than the a!erage market price o the common stock.
d. diluti!e i the e5ercise price is more than the a!erage market price o the common stock.
# 2'. >or companies &ith a comple5 capital structure, a con!erti#le security is :7( potentially diluti!e i
a. its incremental EPS is greater than #asic EPS ater considering any stock options, rights, and &arrants.
#. its incremental EPS is less than #asic EPS ater considering any stock options, rights, and &arrants.
c. its incremental EPS is equal to #asic EPS ater considering any stock options, rights, and &arrants.
d. its incremental EPS is less than 1.-- ater considering any stock options, rights, and &arrants.
c 2(. n entity that reports a discontinued operation, an e5traordinary item, or a :7* cumulati!e eect o an accounting change shall present #asic and diluted
earnings per share amounts or those line items a. only on the ace o the income statement. #. only in the notes to the inancial statements.
c. either on the ace o the income statement or in the notes to the inancial statements.
d. only i management chooses to do so as these amounts are note required to #e disclosed either in the inancial statements or the notes thereto.
Test Bank, Intermediate Accounting , 14th ed. '(+
c 2*. 7n )ecem#er "1, 2--2, Superior, %nc. had '--,--- shares o common stock
:7" issued and outstanding. Superior issued a 1- percent stock di!idend on Auly 1, 2--". 7n 7cto#er 1, 2--", Superior reacquired 4*,--- shares o its common stock and recorded the purchase using the cost method o accounting or treasury stock. hat num#er o shares should #e used in computing #asic earnings per share or the year ended )ecem#er "1, 2--";
a. '12,---#. '1*,---c. '4*,---d.
''-,---d 2+. t )ecem#er "1, 2--2, the urdock Company had 1$-,--- shares o common
:7" stock issued and outstanding. 7n pril 1, 2--", an additional "-,---shares o common stock &ere issued. urdocks net income or the year ended )ecem#er "1, 2--", &as D$1(,$--. )uring 2--", urdock declared and paid D"--,--- in cash di!idends on its noncon!erti#le preerred stock. The #asic earnings per common share, rounded to the nearest penny, or the year ended )ecem#er "1, 2--", should #e
a. D".--. #. D2.--. c. D1.4$. d. D1.2'.
d "-. t )ecem#er "1, 2--" and 2--", :apham Corp. had 2--,--- shares o :7" common stock and 2-,--- shares o $ percent, D1-- par !alue cumulati!e
preerred stock outstanding. 8o di!idends &ere declared on either the preerred or common stock in 2--" or 2--2. 8et income or 2--" &as D1,---,---. >or 2--", #asic earnings per common share amounted to
a. D$.--. #. D4.($. c. D4.$-. d. D4.--.
c "1. The Thomas Companys net income or the year ended )ecem#er "1 &as :7" D"-,---. )uring the year, Thomas declared and paid D",--- in cash
di!idends on preerred stock and D$,2$- in cash di!idends on common stock. t )ecem#er "1, "',--- shares o common stock &ere outstanding,
'(, Chapter 1+ Earnings Per Share
"-,--- o &hich had #een issued and outstanding throughout the year and ',--- o &hich &ere issued on Auly 1. There &ere no other common stock transactions during the year, and there is no potential dilution o earnings per share. hat should #e the year?s #asic earnings per common share o Thomas, rounded to the nearest penny;
a. D-.'' #. D-.($ c. D-.*2 d. D-.+1
# "2. Bay rea Supplies had '-,--- shares o common stock outstanding at Aanuary
:7" 1. 7n ay 1, Bay reas Supplies issued "1,$-- shares o common stock. 7utstanding all year &ere "-,--- shares o noncon!erti#le preerred stock on &hich a di!idend o D4 per share &as paid in )ecem#er. 8et income or the year &as D2+-,1--. Bay rea Supplies should report #asic earnings per share or the year o
a. D1.*'. #. D2.1-. c. D2.*4. d. D".1(.
d "". :andro!er, %nc. had 1$-,--- shares o common stock issued and outstanding
:74 at )ecem#er "1, 2--2. 7n Auly 1, 2--", an additional 2$,--- shares o common stock &ere issued or cash. :andro!er also had une5ercised stock options to purchase 2-,--- shares o common stock at D1$ per share outstanding at the #eginning and end o 2--". The market price o :andro!ers common stock &as D2- throughout 2--". hat num#er o shares should #e used in computing diluted earnings per share or the year ended )ecem#er "1, 2--";
a. 1*2,$--#. 1*-,---c. 1((,$--d.
1'(,$--Test Bank, Intermediate Accounting , 14th ed. '(7
# "4. 6lendale Enterprises had 2--,--- shares o common stock issued and :74 outstanding at )ecem#er "1, 2--2. 7n Auly 1, 2--", 6lendale issued a
1-percent stock di!idend. /ne5ercised stock options to purchase 4-,---shares o common stock 3ad=usted or the 2--" stock di!idend at D2- per share &ere outstanding at the #eginning and end o 2--". The market price o 6lendales common stock 3&hich &as not aected #y the stock di!idend &as D2$ per share during 2--". 8et income or the year ended )ecem#er "1, 2--", &as D1,1--,---. hat should #e 6lendales 2--" diluted earnings per common share, rounded to the nearest penny;
a. D4.2" #. D4.*2 c. D$.--d. D$.-$
# "$. 7n Aanuary 2, 2--2, orley Co. issued at par D$-,--- o 4 percent #onds :7$ con!erti#le, in total, into $,--- shares o orleys common stock. 8o
#onds &ere con!erted during 2--2. Throughout 2--2 orley had $,---shares o common stock outstanding. orleys 2--2 net income &as D$,---. orleys income ta5 rate is 4- percent. 8o potentially diluti!e securities other than the con!erti#le #onds &ere outstanding during 2--2. orleys diluted earnings per share or 2--2 &ould #e
a. D-.$*. #. D-.'2. c. D-.(-. d. D1.1'.
'(# Chapter 1+ Earnings Per Share
d "'. t )ecem#er "1, 2--2, )ayplanner %nc. had 2$-,--- shares o common stock
:7$ outstanding. 7n 7cto#er 1, 2--", an additional '-,--- shares o common stock &ere issued or cash. )ayplanner also had 2,---,--- o * percent con!erti#le #onds outstanding at )ecem#er "1, 2--", &hich are con!erti#le into $-,--- shares o common stock. The #onds are diluti!e in the 2--" earnings per share computation. 8o #onds &ere issued or con!erted into common stock during 2--". hat is the num#er o shares that should #e used in computing diluted earnings per share or the year ended )ecem#er "1, 2--";
a. 2'$,---#. "--,---c. "1-,---d.
"1$,---# "(. The AB Corporation had 2--,--- shares o common stock and 1-,---shares
:7' o cumulati!e, D' preerred stock outstanding during 2--". The preerred stock is con!erti#le at the rate o three shares o common per share o preerred. >or 2--", the company had a D'-,--- net loss rom operations and declared no di!idends. AB should report 2--" diluted loss per share o 3rounded to the nearest cent
a. D3-."-. #. D3-.$2. c. D3-.$*. d. D3-.'-.
c "*. Facor %ncorporated has 2,$--,--- shares o common stock outstanding on :7$ )ecem#er "1, 2--2. n additional $--,--- shares o common stock &ere
issued pril 1, 2--", and 2$-,--- more on Auly 1, 2--". 7n 7cto#er 1, 2--", Facor issued $,---, D1,--- ace !alue, ( percent con!erti#le #onds. Each #ond is con!erti#le into 4- shares o common stock. 8o #onds &ere con!erted into common stock in 2--". hat is the num#er o shares to #e used in computing #asic earnings per share and diluted earnings per share, respecti!ely;
a. 2,*($,--- and 2,+2$,---#. 2,*($,--- and ",-($,---c. ",---,--- and
",-$-,---Test Bank, Intermediate Accounting , 14th ed. '(9
d. ",---,--- and
",2--,---# "+. Shoemaker Company had 1,--- common shares issued and outstanding at :7" Aanuary 1. )uring the year, Shoemaker also had the common stock
transactions listed #elo&.
pril 1 %ssued "-- pre!iously unissued shares ay 1 Split the stock 20or01
Aune "- Purchased 1-- shares or the treasury Auly "- )istri#uted a 2- percent stock di!idend )ecem#er "1 Split the stock "0or01
6i!en this inormation, &hat is the &eighted0a!erage num#er o shares that Shoemaker should use or earnings per share purposes;
a. 2,**-#. *,'4-c. *,*2-d.
+,(2-c 4-. )uring its iscal year, ichards )istri#uting had net income o D1--,--- 3no :7$ e5traordinary items and $-,--- shares o common stock and
1-,---shares o preerred stock outstanding. ichards declared and paid di!idends o D.$- per share to common and D'.-- per share to preerred. The preerred stock is con!erti#le into common stock on a share0or0share #asis. >or the year, ichards )istri#uting should report diluted earnings 3loss per share o
a. D3-.*-. #. D1.--. c. D1.'(. d. D2.'(.
c 41. t )ecem#er "1, 2--2, the o#erts Company had (--,--- shares o common
'1( Chapter 1+ Earnings Per Share
:7$ stock outstanding. 7n Septem#er 1, 2--", an additional "--,--- shares o common stock &ere issued. %n addition, o#erts had D2-,---,--- o * percent con!erti#le #onds outstanding at )ecem#er "1, 2--2, &hich are con!erti#le into 4--,--- shares o common stock. 8o #onds &ere con!erted into common stock in 2--". The net income or the year ended )ecem#er "1, 2--", &as D',---,---. ssuming the income ta5 rate &as 4- percent, &hat should #e the diluted earnings per share or the year ended )ecem#er "1, 2--";
a. D$.--#. D$.$" c. D$.*-d.
D*."-c 42. The 2--" net income o t&ater %nc. &as D2--,--- and 1--,--- shares o its
:74 common stock &ere outstanding during the entire year. %n addition, there &ere outstanding options to purchase 1-,--- shares o common stock at D1- per share. These options &ere granted in 2--- and none had #een e5ercised #y )ecem#er "1, 2--". arket prices o t&aters common stock during 2--" &ere
Aanuary 1... D2- per share )ecem#er "1... D4- per share !erage Price... D2$ per share
The amount that should #e sho&n as t&aters diluted earnings per share or 2--" 3rounded to the nearest cent is
a. D2.--. #. D1.+$. c. D1.*+. d. D1.*'.
d 4". arrants e5ercisa#le at D2- each to o#tain 2-,--- shares o common stock :74 &ere outstanding during a period &hen the a!erage and year0end market
price o the common stock &as D2$. pplication o the treasury stock method or the assumed e5ercise o these &arrants in computing diluted earnings per share &ill increase the &eighted0a!erage num#er o outstanding common shares #y
a. 2-,---. #. 1',''(. c. 1',---. d. 4,---.
Test Bank, Intermediate Accounting , 14th ed. '11
# 44. The ollo&ing inormation relates to the capital structure o etcal Corp.G :7' 12"1-2
12"1-" 7utstanding sharesG
Common stock... 1*-,--- 1*-,---Preerred stock, con!erti#le into
'-,---shares o common... '-,--- '-,---1-H con!erti#le #onds, con!erti#le into
4-,--- shares o common... D2,---,---)uring 2--" etcal paid D+-,--- in di!idends on the preerred stock. etcals net income or 2--" &as D1,+'-,--- and the income ta5 rate &as 4- percent. >or the year ended )ecem#er "1, 2--", the diluted earnings per share is
a. D(.2+. #. D(.4". c. D*.1(. d. D*.2+.
a 4$. t )ecem#er "1, 2--2, :eton, %nc. had '--,--- shares o common stock :7$ outstanding. 7n pril 1, 2--", an additional 1*-,--- shares o common
stock &ere issued or cash. :eton also had D$,---,--- o *H con!erti#le #onds outstanding at )ecem#er "1, 2--", &hich are con!erti#le into 1$-,--- shares o common stock. The #onds are diluti!e in the 2--" EPS computation. 8o #onds &ere issued or con!erted into common stock during 2--". hat is the num#er o shares that should #e used in computing #asic earnings per share or 2--";
a. ("$,---#. (*-,---c. **$,---d.
+1-,---'1' Chapter 1+ Earnings Per Share
c 4'. t )ecem#er "1, 2--2, :eton, %nc. had '--,--- shares o common stock :7$ outstanding. 7n pril 1, 2---, an additional 1*-,--- shares o common
stock &ere issued or cash. :eton also had D$,---,--- o *H con!erti#le #onds outstanding at )ecem#er "1, 2--", &hich are con!erti#le into 1$-,--- shares o common stock. The #onds are diluti!e in the 2--- EPS computation. 8o #onds &ere issued or con!erted into common stock during 2--". hat is the num#er o shares that should #e used in computing diluted earnings per share or 2--";
a. ("$,---#. (*-,---c. **$,---d.
+1-,---# 4(. )atatec, %nc., had 4--,--- shares o D2- par common stock and 4-,---shares
:7$ o D1-- par, 'H cumulati!e, con!erti#le preerred stock outstanding or the entire year ended )ecem#er "1, 2--". Each share o the preerred stock is con!erti#le into $ shares o common stock. )atatecs net income or 2--" &as D1,'*-,---. >or the year ended )ecem#er "1, 2--", the diluted earnings per share is
a. D2.4-. #. D2.*-. c. D".'-. d. D4.2-.
# 4*. 7n )ecem#er "1, 2--1, >eterik Company had (,--- shares o common stock
:7$ issued and outstanding. 7n pril 1, 2--2, an additional 1,--- shares o common stock &ere issued and on Auly 1, $-- more shares &ere issued. 7n 7cto#er 1, 2--2, >eterik issued 1-, D1,--- maturity !alue, *H con!erti#le #onds. Each #ond is con!erti#le into 4- shares o common stock. 8o #onds &ere con!erted into common stock in 2--2. ssuming there are no antidiluti!e securities, &hat is the num#er o shares >eterik should use to compute diluted earnings per share or the year ended )ecem#er "1, 2--2;
a. (,+$-#. *,1--c. *,1$-d.
*,4--Test Bank, Intermediate Accounting , 14th ed. '1)
The ollo&ing inormation relates to questions 4+0$1G
Aames Corporation currently has stock rights outstanding or 2,--- common shares. The e5ercise price o these shares is D2-. The options &ere issued in Aanuary o 2---. The a!erage market price o the related common stock during the year 2--- &as D2$. The a!erage market price o the related common stock during 2--1 &as D21 and during 2--2 &as D1+. The company?s iscal year ends on )ecem#er "1 o each year.
d 4+. Io& should these stock rights #e treated in earnings per share calculations :7( or the year ending )ecem#er "1, 2---;
a. The stock options are antidiluti!e and should not #e included either in #asic and diluted earnings per share.
#. The stock options are diluti!e and should #e included #oth in #asic and diluted earnings per share.
c. The stock options are diluti!e and should #e included #oth in #asic and diluted earnings per share in the amount o 4-- shares.
d. The stock options are diluti!e and should #e included only in diluted earnings per share in the amount o 4-- shares.
# $-. Io& should these stock rights #e treated in the earnings per share calculation
:7( or the year ending )ecem#er "1, 2--2;
a. The stock options are antidiluti!e and should not #e included either in #asic or diluted earnings per share.
#. The stock options are diluti!e and should #e included in diluted earnings per share in the amount o +$ shares.
c. The stock options are diluti!e and should #e included in diluted earnings per share in the amount o 2,--- shares.
d. The stock options are diluti!e and should #e included in diluted earnings per share in the amount o 4-- shares.
a $1. Io& should these stock rights #e treated in the earnings per share calculation
:7( or the year ending )ecem#er "1, 2--";
a. The stock options are antidiluti!e and should not #e included &ith in #asic or diluted earnings per share.
#. The stock options are diluti!e and should #e included in diluted earnings per share in the amount o 1-$ shares.
c. The stock options are diluti!e and should #e included in diluted earnings per share in the amount o 2,--- shares.
'1* Chapter 1+ Earnings Per Share
d. The stock options are diluti!e and should #e included in diluted earnings per share in the amount o 4-- shares.
P
RO&LEMSProblem 1
7n )ecem#er "1, 2--1, Aamest Tra!el %nc. had 4$-,--- shares o no0par common stock issued and outstanding. ll shares &ere sold or D(.$-. 7n Aune "-, 2--2, the irm issued an additional 1"$,--- shares or D( per share. The 2--2 income &as D"1+,2--. 7n Septem#er 1, 2--", a 1$ percent stock di!idend &as issued to all common shareholders. 7n 7cto#er 1, 2--", '-,--- shares &ere reacquired as treasury shares. 8et income in 2--" &as D2(*,-'".
31 Compute the &eighted0a!erage num#er o common shares outstanding or 2--2 and 2--" that should #e sho&n on comparati!e statements at the end o 2--".
32 Compute the #asic earnings per share in 2--2 and 2--" to #e reported on comparati!e statements at the end o 2--".
Solution 1 :7" 31 2--2G 4$-,--- 5 1212 5 1.1$ J $1(,$--1"$,--- 5 '12 5 1.1$ J ((,'2$ $+$,12$ shares 2--"G $*$,--- 5 1212 5 1.1$ J '(2,($-3'-,--- 5 "12 J 31$,--- '$(,($-32 2--2G 3D"1+,2-- $+$,12$ J D.$4 3rounded 2--"G 3D2(*,-'" '$(,($- J D.42 3rounded Problem 2
The income statement o icro Computers, %nc. sho&ed the ollo&ing inormation on )ecem#er "1, 2--".
%ncome #eore income ta5... D1,4(2,---%ncome ta5 e5pense... 441,'--%ncome rom continuing operations... D1,-"-,4--E5traordinary loss 3net o ta5 sa!ings... 31--,--- 8et income... D
+"-,4--Compute earnings per share igures or common stock under the assumption that icro Computer %nc. has
31 "2-,--- shares o D24 par !alue common stock outstanding.
32 +,'-- shares o D1--, par *H cumulati!e preerred stock, and 24-,--- shares o no0par common stock. )i!idends are not in arrears.
8oteG ssumption 31 is independent o 32.
Solution 2 :7" 31 EPS00continuing operations D".22 K EPS00e5traordinary items 3."1KK EPS D2.+1 3rounded KD1,-"-,4--"2-,--- J D".22 KKD31--,---"2-,--- J D3."1 32 EPS00continuing operations D".+(K EPS00e5traordinary items 3.42KK EPS D".$$ KLD1,-"-,4-- 0 3D*.-- 5 +,'--M 24-,--- J 3D1,-"-,4-- 0 D(',*-- 24-,--- J D".+( KK31--,--- 24-,--- J D3.42 Problem 3
)uring 2--", the Ellis Corporation had "(-,--- shares o D2- par common stock outstanding. 7n Aanuary 1, 2--", 2,---, * percent #onds &ere issued &ith a maturity !alue o D1,--- each. To enhance the #ond sale, the company oered a con!ersion o $- shares o common stock or each #ond at the option o the purchaser. 8et income or 2--" &as D4'4,---. The income ta5 rate &as "-percent. Compute the diluted earnings per share o common stock.
Solution 3 :7$ )iluted EPS J 3D4'4,--- N D1'-,--- 0 D4*,--- 3"(-,--- N 1--,--- J D$(',--- 4(-,---J D1.2" 3rounded Problem 4
)uring 2--", right Corp. had outstanding 12$,--- shares o common stock and (,$-- shares o noncumulati!e, * percent, D$- par preerred stock. Each preerred share is con!erti#le into * shares o common stock. %n 2--", net income &as D2"1,$--.
31 Compute #asic and diluted earnings per share or 2--" assuming no di!idends &ere declared or paid.
32 Compute #asic and diluted earnings per share or 2--" assuming di!idends &ere declared and paid on the preerred stock.
Solution 4 :7" 31 BEPS J 3D2"1,$-- 12$,--- J D1.*$ 3rounded )EPS J D2"1,$-- L12$,--- N 3* 5 (,$--M J D2"1,$-- 1*$,---J D1.2$ 3rounded 32 BEPS J 3D2"1,$-- 0 "-,--- 12$,--- J D1.'1 3rounded )EPS J D2"1,$-- 312$,--- N '-,--- J D2"1,$-- 1*$,---J D1.2$ 3rounded Problem 5
7n )ecem#er "1, 2--", asters %nc. had outstanding 1*-,--- shares o common stock. 8et income or 2--" &as D2*$,---. 7utstanding options 3granted Auly 1, 2--" to purchase 1$,--- shares o common stock at D2- per share had not #een e5ercised #y )ecem#er "1, 2--". )uring 2--", market prices or the common stock &ereG
Auly 1, 2--"... D1* per share )ecem#er "1, 2--"... D"2 per share !erage market... D2$ per share 31 Compute the #asic earnings per common share in 2--".
Solution 5 :74 31 BEPS J D2*$,--- 1*-,---J D1.$* 3rounded 32 )EPS J D2*$,--- L1*-,--- N O 31$,--- 0 12,---KM J D2*$,--- 1*1,$--J D1.$( 3rounded K D"--,---D2$ J 12,--- shares Problem 6
)ata Controls %nc. had 2$-,--- shares o common stock outstanding at the end o 2--1. )uring 2--2 and 2--", the ollo&ing transactions took place.
2--2 arch 1 Sold 24,--- shares
Auly 24 %ssued a 2- percent stock di!idend 7cto#er 1 Sold 1',--- shares
)ecem#er 1 Purchased 1$,--- shares to #e held in treasury 2--" Aune 1 "0or01 stock split
Septem#er 1 Sold '-,--- shares )ata Controls %nc. has a simple capital structure.
Compute the &eighted a!erage num#er o shares or 2--2 and 2--" to #e used in the earnings per share computation or comparati!e inancial statements at the end o 2--". Solution 6 :7" 2--2 Aanuary 1 2$-,--- 5 1212 5 1.2- 5 " J +--,---arch 1 24,--- 5 1-12 5 1.2- 5 " J (2,---7cto#er 1 1',--- 5 "12 5 " J 12,---)ecem#er 1 31$,--- 5 112 5 " J 3",($- +*-,2$-2--" Aanuary 1 "2+,*--K 5 1212 5 " J +*+,4--Septem#er 1 '-,--- 5 412 J 2-,---
1,--+,4--K2--2 Aanuary 1 2$-,---arch 1 %ssuance 24,---Auly 24 2-H stock di!idend $4,*--7cto#er 1 %ssuance 1',---)ecem#er 1 Treasury stock 31$,---
"2+,*--Problem 7
The ollo&ing is a partial #alance sheet or nderson Corp. or the year ended )ecem#er "1, 2--2.
+ percent Con!erti#le Bonds 3issued at par... D1,*--,---Common Stock, 1*-,--- shares issued and outstanding, D$- par. D+,---,---3a Each D1,--- con!erti#le #ond can #e con!erted into *- shares o
common stock.
3# 7n Septem#er 1, 2--", one0third o the con!erti#le de#t &as con!erted into common stock.
3c nderson reported net income o D1,$$-,--- in 2--". The income ta5 rate &as "- percent.
3d 8o other stock transactions took place during 2--". 31 Compute #asic earnings per share or 2--".
32 Compute diluted earnings per share or 2--".
Solution 7
:7'
31 BEPS J D1,$$-,--- L1*-,--- N 3412 5 4*,---M J D1,$$-,---
1+',---J D(.+1 3rounded
Con!ersion 3'-- #onds 5 *- J 4*,--- shares
32 )EPS J D1,$$-,--- N 3D144,--- 5 -.( 1+',--- N 12*,---J D1,'$-,*-- "24,---J D$.1-%nterest !oided D1,2--,--- 5 +H 5 1212 J D1-*,---D '--,--- 5 +H 5 *12 J "',--- D144,---Equi!alent Shares 1,2-- #onds 5 1212 5 *- J +',---'-- #onds 5 *- 5 *12 J
"2,---
12*,---Problem 8
The Stanley Corp. pro!ides the ollo&ing data or 2--". Transactions in common stockG
Aanuary 1, 2--", #eginning #alance... "--,--- shares pril 1, 2--", issuance... 1--,--- shares *H D1-- par noncon!erti#le cumulati!e preerred stock...
D1--,---%ssued at par
'H D1-- par con!erti#le cumulati!e preerred stock... D2--,---%ssued at D1-$
Con!erti#le into 2-,--- shares
Stock options... '-,--- shares 7ption price... D2$ !erage market... D"$ <ear0end market...
D4-The net income or 2--" is D2,"--,---. D4-The companys ta5 rate is "- percent. 8o con!ersions or options &ere e5ercised during 2--".
31 Compute #asic earnings per share. 32 Compute diluted earnings per share.
Solution 8 :7+ 31 BEPS J 3D2,"--,--- 0 D*,--- 0 D12,--- L"--,--- N +12 31--,---M J D2,2*-,--- "($,---J D'.-* 32 )EPS J 3D2,"--,--- 0 D*,--- 3"($,--- N 2-,--- N '-,--- 0 42,*$( J D2,2+2,--- 412,14" J D$.$' 7ptions J '-,--- 5 D2$ J D1,$--,---D1,$--,---D"$ J 42,*$(
Problem 9
t )ecem#er "1, 2--2, ollins %nc. had 4--,--- shares o common stock outstanding. The company also had 4-,--- shares o D( con!erti#le preerred stock. Each share is con!erti#le into 4 shares o common stock. 3)i!idends &ere declared and paid.
Transactions during 2--"G
Auly 1, 2--" Sold 2--,--- shares
Auly *, 2--" )eclared 1--H stock di!idend Septem#er 1, 2--" Sold 12-,--- shares
7cto#er 1, 2--" Purchased '-,--- shares to #e held in treasury ollins %nc. reported a loss o D'(-,--- or 2--".
31 Compute #asic earnings 3loss per share. 32 Compute diluted earnings 3loss per share.
Solution 9 :7' eighted0a!erage computationG Aanuary 1, 2--" 4--,--- 5 1212 5 2 J *--,---Auly 1, 2--" 5 '12 5 2 J 2--,---Septem#er 1, 2--" 12-,--- 5 412 J 4-,---7cto#er 1, 2--" 3'-,--- 5 "12 J 31$,--- 1,-2$,---31 BEPS J LD3'(-,--- 0 D2*-,---M J 3D+$-,--- 1,-2$,---J D3.+" 32 )EPS J D3'(-,--- 31,-2$,--- N 1'-,--- J D3'(-,--- 1,1*$,---J D3.$( K
KThe con!erti#le preerred stock is antidiluti!e. ollins &ould report a loss per common share o D.+" or 2---.
Problem 10
)uring all o 2--2, )a&son anuacturing Company had +$-,--- shares o common stock outstanding. 7n Aune "-, 2--2, the company issued 1-,--- ( percent con!erti#le #onds at par. The maturity !alue o each #ond is D1,---. Each #ond is con!erti#le into 2- shares o common stock. 8one &ere con!erted during 2--2.
)a&son also had '-,--- stock &arrants outstanding or all o 2--2. The option price is D1- per share. The market price o the common stock &as D4- on )ecem#er "1, 2--2, and the a!erage market price or 2--2 &as D"-.
)a&son reported a net income o D",'$-,--- or 2--2. ssume the company had a 4- percent income ta5 rate.
31 Compute the #asic earnings per share. 32 Compute diluted earnings per share.
Solution 10 :7+ 31 BEPS J D",'$-,--- +$-,---J D".*4 3rounded 32 )EPS J 3D",'$-,--- N "$-,--- 0 14-,--- L+$-,--- N '12 32--,--- N 3'-,--- 0 2-,---M J D",*'-,--- 1,-+-,---J D".$4 3rounded Bonds00diluti!eG 3D1-,---,--- 5 .-( 5 .'- 31-,--- 5 2- J D2.1-D2.1- D".*4 %ncremental shares J 1-,--- 5 2- J 2--,---%nterest a!oided J D1-,---,--- 5 (H 5 '12 J D"$-,---Ta5 sa!ings on interest J D"$-,--- 5 -.4- J D14-,---Stock options00diluti!e
Proceeds D1- 5 '-,--- J D'--,---D'--,--- D"- J 2-,--- shares
4-,---Problem 11
t )ecem#er 21, 2--2, E) Company had $--,--- shares o common stock outstanding. E) sold $-,--- shares on 7cto#er 1, 2--". 8et income or 2--" &as D2,41(,*($Q the income ta5 rate &as "-H. %n addition, E) had the ollo&ing de#t and equity securities on its #ooks on )ecem#er "1, 2--2G
3a 1*,--- shares o D1-- par, 12H cumulati!e preerred stock.
3# 2*,--- shares o D1-- par, 1-H cumulati!e preerred stock, par D1--, sold at 11-. Each share o preerred stock is con!erti#le into 2 shares o common stock.
3c D2,---,--- ace !alue o +H #onds sold at par.
3d D",---,--- ace !alue o (H con!erti#le #onds sold to yield *H. /namorti9ed #ond discount is D1--,--- at )ecem#er "1, 2--2. Each D1,--- #ond is con!erti#le into 2- shares o common stock.
7ptions to purchase 1-,--- shares o common stock &ere issued ay 1, 2--". E5ercise price is D"- per shareQ market !alue at date o option &as D2+Q a!erage market !alue ay 1 to )ecem#er "1, 2--", &as D4-.
Compute the earnings per share amounts or the year ended )ecem#er "1, 2--".
Solution 11
:7+
1. Computation o #asic earnings per shareG
8et income... D2,41(,*($ :essG )i!idends on cumulati!e preerred stockG
1*,--- 5 D1-- 5
.12...D21',---2*,--- 5 D1-- 5 .1-... 2*-,---
4+',---8et income identiied &ith common stock... D1,+21,*($
eighted a!erage num#er o sharesG
Aan. 1 to 7ct. 1 3$--,--- 5 R... "($,---7ct. 1 to )ec. "1 3$$-,--- 5 ... 1"(,$--Total...
$12,$--Basic earnings per share... D".($
2. Computation o diluted earnings per shareG Test or dilution o con!erti#le securitiesG
8et %ncome 8um#er o %ncremental
%mpact Shares EPS (H Con!erti#le #onds... D1'*,---K '-,---
D2.*-1-H Con!erti#le preerred stock... 2*-,--- $',---
$.--KD",---,--- 5 .-* 5 .(- J D1'*,---Q eecti!e interest is amount charged to
interest e5pense, not interest paid.
Since only the con!erti#le #onds are less than the #asic earnings per share o D".($, only the con!erti#le #onds are potentially diluti!e.
8et 8um#er o Part o eighted
)escription %ncome Shares <ear !erage EPS Basic earnings per share D1,+21,*($ $12,$-- D".($ ay 1, 2--", options as
i e5ercised ay 1, 2--"G 8um#er o shares
assumed issuedG 1-,---8um#er o treasury
shares 31-,--- 5 D"- ÷ D4- 3(,$-- 2,$-- *12 1,''( D1,+21,*($ $14,1'( D".(4 (H con!erti#le #onds 1'*,--- '-,---)iluted earnings per share D2,-*+,*($ $(4,1'( D".'4 Problem 12
Statement of Financial Accounting Standards No. 128, Earnings Per Share,U requires that earnings per share igures #e presented only #y companies &ith pu#licly held common stock or potential common stock.
:ist arguments or and against the e5clusion o nonpu#lic companies rom the requirement o reporting earnings per share.
Solution 12
:7*
Perhaps the ma=or argument or not requiring earnings per share or nonpu#lic enterprises relates to the issue o standards o!erload. uthoritati!e accounting pronouncements ha!e increased #oth in quantity and comple5ity. anagers o small companies #elie!e that the cost o complying &ith comple5 standards e5ceeds the !alue o the #eneits deri!ed rom the inormation disclosed under these standards. Small irms ha!ing limited resources cannot aord the enormous cost o complying &ith comple5 and costly standards that require inormation o questiona#le !alue.
ma=or argument or requiring earnings per share inormation e!en or nonpu#lic companies is the act that many enterprises e5empted rom the requirement are neither small nor closely held. any nonpu#lic enterprises are large and comple5 entities &hose inancial reports are &idely distri#uted. Such enterprises may #e in direct competition &ith enterprises &hose securities are traded in pu#lic markets. Suspension o the requirement or reporting earnings per share or some enterprises in an industry, #ut not or others, is not sustaina#le solely on the #asis o dierences in orm o o&nership. rguments regarding the cost and #eneits o pronouncements are pro#lematical #ecause costs o applying a standard may #e identiied, #ut !aluing the #eneits deri!ed is diicult. The increasing comple5ity o #usiness transactions suggests that the statement reader should #e pro!ided &ith as much inormation as possi#le in order to make an inormed decision a#out the inancial condition o the enterprise and the integrity and ste&ardship o management. % the standards relating to earnings per share and other matters are comple5, it is only #ecause the standards are relecting the comple5ity o the transactions.
Problem 13
<ou are an independent CP and ha!e =ust acquired a ne& client, . )unn anuacturing Company. The president o the company recently read an article ad!ising a irm?s management team to seek to ma5imi9e the long0run !alue o the irm?s stock. The article mentioned proit ma5imi9ation, earnings per share, and the role o these t&o actors in stock price ma5imi9ation. The president &ants your ad!ice on ho& the choice o in!entory cost lo& methods 3e.g., >%>7 !s. :%>7 relates to proit ma5imi9ation, earnings per share, and stock price ma5imi9ation.
Solution 13
:7*
The o#=ecti!e o a irm is not to ma5imi9e earnings per share or the accounting deinition o proit. The correct o#=ecti!e is to ma5imi9e shareholder &ealth, &hich is the price per share that is equi!alent to the discounted cash lo&s o the irm. a5imi9ing earnings per share may actually result in a reduction in cash lo&s. >or e5ample, earnings per share during a period o rising prices &ould #e higher or a irm that adopts >%>7 in!entory accounting rather than :%>7. >%>7 matches older, lo&er costs against current re!enues, resulting in a higher net income and higher earnings per share. :%>7 &ould produce lo&er net income and earnings per share #ecause more recent, higher costs are matched against current re!enues. 8e!ertheless, >%>7 is the &rong choice in a period o rising prices #ecause it minimi9es cash lo& #y ma5imi9ing ta5es. :%>7 should #e chosen #ecause it pro!ides higher cash lo&s as a result o reducing income and thus reducing ta5es. Since shareholders are concerned a#out discounted cash lo&, they &ill assign a higher !alue to the shares o a company that uses :%>7 accounting.
Problem 14
The price0earnings ratio requently is used #y analysts and in!estors or e!aluating stock prices #ecause it relates the earnings o the #usiness to the current market price
o the stock. The ratio is computed #y di!iding the market price per share #y the earnings per share #eore e5traordinary items.
E5plain ho& the price0earnings ratio should #e interpreted, including any pro#lems associated &ith the interpretation o the ratio.
Solution 14
:7*
stock selling at a high price0earnings ratio generally is regarded a!ora#ly #y analysts. high ratio sho&s that in!estors #elie!e that the irm has good gro&th opportunities and that the irm?s earnings are relati!ely sae. The lo&er risk o the earnings lo&ers the discount rate used in discounting uture earnings to the present thus raising the present !alue o these discounted uture cash lo&s and raising the stock price as a result. 8onetheless, a irm could ha!e a high price0 earnings ratio, not #ecause stock price is high, #ut #ecause earnings are lo&.
ma=or pro#lem &ith the price0earnings ratios is the use o earnings per share in the denominator. Earnings per share relect the some&hat ar#itrary choices o accounting principles used to determine earnings. irm?s reported earnings could #e changed su#stantially #y the adoption o more conser!ati!e or less conser!ati!e accounting procedures. n additional pro#lem &ith the price0earnings ratio is that only at the end o the iscal year are the numerator and denominator measured as o the same date. The price0earnings ratio oten is computed during the year using the earnings per share amount rom the most recent inancial statements or #y using a mo!ing quarterly a!erage.
CHAPTER 19 -- QUI. A
8ame VVVVVVVVVVVVVVVVVVVVVVVVV Section VVVVVVVVVVVVVVVVVVVVVVVV T > 1. hen the market price o stock options, &arrants, and rights is higher thanthe current option price, e5ercise might occurQ thereore, there is potential dilution rom these securities and they &ould #e included in the computation o diluted earnings per share.
T > 2. %n order to compute diluted earnings per share &hen con!erti#le de#t e5ists, ad=ustments must #e made #oth to net income 3numerator and to the num#er o shares o common stock outstanding 3denominator.
T > ". hen a company has only common stock outstanding, #ut there are con!erti#le securities, stock options, &arrants, or other rights outstanding, it is ne!er classiied as a company &ith a simple capital structure.
T > 4. The term comple5 capital structureU descri#es a company &ith outstanding stock options, &arrants, con!erti#le securities, etc., &hich are materially diluti!e.
T > $. hen earnings per share are diluted as a result o the inclusion o outstanding options and &arrants, the a!erage market price o the common stock at the end o the period is used in computing the num#er o shares assumed to #e reacquired.
T > '. 8oncon!erti#le preerred stock is e5cluded rom consideration in the determination o #asic earnings per share during periods &here di!idends on preerred stock are declared.
T > (. etroacti!e treatment o common stock di!idends and splits is required or all periods earnings per share data presented in the inancial statements.
T > *. % preerred stock di!idends are cumulati!e, the ull amount o the annual di!idends should #e deducted rom net income in the determination o #asic earnings per share, &hether or not the di!idends ha!e #een declared.
T > +. ny security &hose e5ercise or con!ersion &ould increase earnings per share or reduce loss per share are reerred to as antidiluti!e securities.
T > 1-. hen a con!erti#le #ond is included in the determination o diluted earnings per share, net income is ad=usted #y adding #ack the interest e5pense, and the
num#er o shares o common stock outstanding is increased #y the num#er o shares that &ould ha!e #een issued upon con!ersion.
CHAPTER 19 -- QUI. &
8ame VVVVVVVVVVVVVVVVVVVVVVVVV Section VVVVVVVVVVVVVVVVVVVVVVVV . %ncremental sharesB. )iluti!e securities C. Treasury stock method ). Basic earnings per share E. Simple capital structure >. %0con!erted method
I. Primary earning per share %. Con!erti#le securities A. Comple5 capital structure @. )iluted earnings
6. ntidiluti!e security
Select the term that #est its each o the ollo&ing deinitions and descriptions. %ndicate your ans&er #y placing the appropriate letter in the space pro!ided
VVVV 1. Securities &hose assumed e5ercise or con!ersion results in a reduction in earnings per share or an increase in loss per share.
VVVV 2. Securities, such as #onds and preerred stock, &hose terms permit the holder to change the in!estment into the common stock.
VVVV ". /sed to ad=ust the earnings per share computation to consider the impact o the possi#le con!ersion o con!erti#le securities.
VVVV 4. company ha!ing only common or common and preerred stock. VVVV $. company &ith potential earnings per share dilution.
VVVV '. The num#er o shares issued upon e5ercising an option or &arrant less the assumed num#er o shares reacquired ater applying the treasury stock method o stock reacquisition.
VVVV (. Securities &hose assumed con!ersion or e5ercise results in an increase in earnings per share or a decrease in a loss per share.
VVVV *. The amount o earnings attri#uta#le to each share o common stock outstanding, including common stock equi!alents. This amount is no longer reported under >SB Statement 8o. 12*.
VVVV +. method o recogni9ing the use o proceeds that &ould #e o#tained upon e5ercise o options and &arrants in computing earnings per share.
VVVV 1-. 8et income di!ided #y &eighted0a!erage num#er o shares outstanding.
