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Test Bank, Intermediate Accounting , 14th ed.
CHAPTER 19
197
Earnings Per Share MULTIPLE CHOICE QUESTIONS Theory/Definitiona Q!e"tion"
1 2 " 4 $ ' ( * + 111 12 1" 14 1$ 1' 1( 1* 1+ 221 22 2" 24 2$ 2' 2(
Companies required to supply EPS disclosures Treatment o noncumulati!e preerred di!idends not declared The ea earnings pe per sh share co computation re reported on on th the in income statement Treatment o di!idends on cumulati!e, noncon!erti#le preerre rred stock %tems considered &hen computing diluted EPS Treatment o a stock di!idend issued in mid year )iluted EPS is #ased on assumptions a#out uture transactions Treatment o con!erti#le securities under diluted EPS Truealse statements regarding EPS )ilution o options and &arrants under treasury stock method eporting earnings per share inormation /sing the i0con!erted method &ith diluted EPS ssumptions o i0con!erted method o EPS computation /se o the treasury stock method &hen computing diluti!e EPS Computing EPS or a company ha!ing dierent issues o con!erti rti#le securities andor stock options and &arrants eighted0a!erage nu num#er o shares 3m 3midyear e! e!ents EPS igures are reported on the income statement Purpose o reporting diluted earnings per share Treatment o in interest e5 e5pense on on di diluti!e co con!erti#le de de#t Computing diluted EPS or a company &ith a comple5 capital structure Current 6P or companies &ith comple5 capital structures Current and ormer 6P or earnings per share /.S. 6P !s. international standards Basic EPS and PB 7pinion 8o. 1$ Stock options, &arrants and rights and EPS calculation %ncremental EPS or multiple potential diluti!e securities Presentation o o EPS or di discontinued op operations, e5 e5traordinary items, and cumulati!e eect o accounting change
19#
Chapter 1+
Earnings Per Share
Co$%!tationa Q!e"tion"
2* 2+ ""1 "2 "" "4 "$ "' "( "* "+ 441 42 4" 44 4$ 4' 4( 4* 4+ $$1
Computation o &eighted0a!erage num#er o shares Computation o #asic EPS Computation o #asic EPS Computation o #asic EPS Computation o #asic EPS Computation o &eighted0a!erage shares or diluted EPS Computation o diluted EPS Computation o diluted EPS Computation o &eighted0a!erage shares or diluted EPS Computation o diluted loss per share Computation o shares used or #asic and diluti!e EP EPS Computation o &eighted0a!erage num#er o shares or EPS Computation o diluted EPS Computation o diluted EPS Computation o diluted EPS Eect o treasury stock method and &arrants on num#er o shares used Computation o diluted EPS Computation o #asic EPS Computation o o &eighted0a!erage nu num#er o shares o or di diluted EP EPS Computation o diluted EPS Computation o shares to compute diluted EPS Eect o stock rights on EPS calculation Eect o stock rights on EPS calculation Eect o stock rights on EPS calculation
PRO&LEMS 1 2 " 4 $ ' ( * + 111 12 1" 14
Computation o &eighted0a!erage shares and comparati!e EPS Computation o #asic EPS &ith e5traordinary items Computation o diluti!e EPS Computation o #asic, diluti!e EPS Computation o #asic, diluti!e EPS Computation o &eighted0a!erage shares Computation o simple, diluti!e EPS Computation o simple, diluti!e EPS Computation o #asic, diluti!e EPSloss PS Computation o simple, diluti!e EPS EPS or comple5 capital structure E5clusion o o nonpu#lic co companies r rom EPS reporting EPS and stock price ma5imi9ation %nterpreting the priceearnings ratio
MULTIPLE CHOICE QUESTIONS
Test Bank, Intermediate Accounting , 14th ed.
199
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1. Earn Earnin ings gs per per sha share re disc disclo losu sure res s are are requ requir ired ed only only or a. companies &i &ith co comple5 capital st structures. #. comp compan anie ies s that that change change their their capit capital al struc structu tures res during during the the report reporting ing period. c. pu#l pu#lic ic com compa pani nies es.. d. pri!a pri!ate te comp compan anie ies. s.
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2. %n comp comput utin ing g the the ear earni ning ngs s per per shar share e o com common mon sto stock ck,, non noncu cumu mula lati ti!e !e preerred di di!idends not declared declared should #e a. deducte deducted d rom the the net incom income e or the the year. year. #. added added to the the net income income or or the year. year. c. ignored. d. deducted deducted rom the net income or the year, year, net o ta5. ta5.
a :7*
". hic hich h earn earnin ings gs per per sha share re co comput mputat atiion sho shoul uld d #e rep repor orte ted d on the the ac ace e o the income statement; Basi Basic c EPS EPS )ilu )ilute ted d EPS EPS a. or companies &ith a comple5 capital structure, a con!erti#le security is 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 :7*
2(. n entity that reports a discontinued operation, an e5traordinary item, or a 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.
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d :7"
'(+
2*. 7n )ecem#er "1, 2--2, Superior, %nc. had '--,--- shares o common stock 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. ''-,---
2+. t )ecem#er "1, 2--2, the urdock Company had 1$-,--- shares o common 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 :7"
"-. t )ecem#er "1, 2--" and 2--", :apham Corp. had 2--,--- shares o 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.--.
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"1. The Thomas Companys net income or the year ended )ecem#er "1 &as 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
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d :74
"2. Bay rea Supplies had '-,--- shares o common stock outstanding at Aanuary 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(. "". :andro!er, %nc. had 1$-,--- shares o common stock issued and outstanding 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
# :74
"4. 6lendale Enterprises had 2--,--- shares o common stock issued and outstanding at )ecem#er "1, 2--2. 7n Auly 1, 2--", 6lendale issued a 1percent 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$.-$
# :7$
"$. 7n Aanuary 2, 2--2, orley Co. issued at par D$-,--- o 4 percent #onds 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'.
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d :7$
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c :7$
Chapter 1+
Earnings Per Share
"'. t )ecem#er "1, 2--2, )ayplanner %nc. had 2$-,--- shares o common stock 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 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-.'-.
"*. Facor %ncorporated has 2,$--,--- shares o common stock outstanding on )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.
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d. ",---,--- and ",2--,--# :7"
"+. Shoemaker Company had 1,--- common shares issued and outstanding at 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,**#. *,'4c. *,*2d. +,(2-
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4-. )uring its iscal year, ichards )istri#uting had net income o D1--,--- 3no 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 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
:74
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.*'.
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4". arrants e5ercisa#le at D2- each to o#tain 2-,--- shares o common stock &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.
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44. The ollo&ing inormation relates to the capital structure o etcal Corp.G 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,---,--- 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+.
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4$. t )ecem#er "1, 2--2, :eton, %nc. had '--,--- shares o common stock 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
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4'. t )ecem#er "1, 2--2, :eton, %nc. had '--,--- shares o common stock 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 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-.
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4*. 7n )ecem#er "1, 2--1, >eterik Company had (,--- shares o common stock 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 :7(
4+. Io& should these stock rights #e treated in earnings per share calculations 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 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.
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a :7(
$1. Io& should these stock rights #e treated in the earnings per share calculation 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.
PRO&LEMS Problem 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
2--"G
4$-,--- 5 1212 5 1.1$ J $1(,$-1"$,--- 5 '12 5 1.1$ J ((,'2$ $+$,12$ shares $*$,--- 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 EPS00e5traordinary items EPS
D".22 K 3."1KK D2.+1 3rounded
KD1,-"-,4--"2-,--- J D".22 KKD31--,---"2-,--- J D3."1
32 EPS00continuing operations EPS00e5traordinary items EPS
D".+(K 3.42KK 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,$--. 31 Compute #asic and diluted earnings per share or 2--" assuming no di!idends &ere declared or paid. 32 Compute #asic and diluted earnings per share or 2--" assuming di!idends &ere declared and paid on the preerred stock.
Solution 4
:7" 31 BEPS )EPS
32 BEPS )EPS
J 3D2"1,$-- 12$,--- J D1.*$ 3rounded J D2"1,$-- L12$,--- N 3* 5 (,$--M J D2"1,$-- 1*$,--J D1.2$ 3rounded J 3D2"1,$-- 0 "-,--- 12$,--- J D1.'1 3rounded 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--"...................................................................... )ecem#er "1, 2--".......................................................... !erage market................................................................ 31 Compute the #asic earnings per common share in 2--". 32 Compute the diluted earnings per common share in 2--".
D1* per share D"2 per share D2$ per share
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$-,--- shares o common stock outstanding at the end o 2--1. )uring 2--2 and 2--", the ollo&ing transactions took place. 2--2
arch 1 Auly 24 7cto#er 1 )ecem#er 1
Sold 24,--- shares %ssued a 2- percent stock di!idend Sold 1',--- shares Purchased 1$,--- shares to #e held in treasury
2--"
Aune 1 Septem#er 1
"0or01 stock split 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
2--"
Aanuary 1 arch 1 7cto#er 1 )ecem#er 1
2$-,--- 5 1212 5 1.2- 5 " J 24,--- 5 1-12 5 1.2- 5 " J 1',--- 5 "12 5 " J 31$,--- 5 112 5 " J
Aanuary 1 Septem#er 1
"2+,*--K 5 1212 5 " J '-,--- 5 412 J
+--,--(2,--12,--3",($- +*-,2$+*+,4-2-,--1,--+,4--
K2--2
Aanuary 1 arch 1 Auly 24 7cto#er 1 )ecem#er 1
%ssuance 2-H stock di!idend %ssuance Treasury stock
2$-,--24,--$4,*-1',--31$,--- "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 D '--,--- 5 +H 5 *12 J
Equi!alent Shares 1,2-- #onds 5 1212 5 *- J '-- #onds 5 *- 5 *12 J
D1-*,--"',--D144,---
+',--"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....... %ssued at par
D1--,---
'H D1-- par con!erti#le cumulati!e preerred stock............. %ssued at D1-$ Con!erti#le into 2-,--- shares
D2--,---
Stock options.......................................................................... 7ption price...................................................................... !erage market................................................................ 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 than the 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. 22'
CHAPTER 19 -- QUI. & . B. C. ). E. >. 6.
8ame VVVVVVVVVVVVVVVVVVVVVVVVV Section VVVVVVVVVVVVVVVVVVVVVVVV
%ncremental shares )iluti!e securities Treasury stock method Basic earnings per share Simple capital structure %0con!erted method ntidiluti!e security
I. %. A. @.
Primary earning per share Con!erti#le securities Comple5 capital structure )iluted earnings
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.
22(
CHAPTER 19 -- QUI. SOLUTIONS Wui9 1. 2. ". 4. $. '. (. *. +. 1-.
T T > T > > T T T >
Wui9 B 1. 2. ". 4. $. '. (. *. +. 1-.
B % > E A 6 I C )
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