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Chapter 16: Q16E (page 878)

EPS: Simple Capital Structure) On January 1, 2018, Wilke Corp. had 480,000 shares of common stock outstanding. During 2018, it had the following transactions that affected the common stock account.

February 1 Issued 120,000 shares

March 1 Issued a 10% stock dividend

May 1 Acquired 100,000 shares of treasury stock

June 1 Issued a 3-for-1 stock split

October 1 Reissued 60,000 shares of treasury stock

Instructions

(a) Determine the weighted-average number of shares outstanding as of December 31, 2018.

(b) Assume that Wilke Corp. earned net income of \(3,456,000 during 2018. In addition, it had 100,000 shares of 9%, \)100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare and pay a preferred dividend in 2018. Compute earnings per share for 2018, using the weighted-average number of shares determined in part (a).

(c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2018.

(d) Assume the same facts as in part (b), except that net income included a loss from discontinued operations of $432,000 (net of tax). Compute earnings per share for 2018.

Short Answer

Expert verified

a. Weighted-average number of shares outstanding is $1,762,000.

b. Earnings per share for 2018 is $1.96

c. Earnings per share excluding preferred stock is $1.45

d. Earnings per share including loss from discounted operations is $2.

Step by step solution

01

(a) Computation of Weighted-average number of shares outstanding

EVENT

DATE OUTSTANDING

SHARES OUTSTANDING

RESTATEMENT

FRACTION OF YEAR

WEIGHTED SHARES

Beginning balance

Jan. 1–Feb. 1

480,000

1.1*3.0

1/12

132,000

Issued shares

Feb. 1–Mar. 1

600,000

(480,000+120,000)

1.1*3.0

1/12

165,000

Stock dividend

Mar. 1–May 1

660,000

(600,000 x 110%)

3.0

2/12

330,000

Reacquired shares

May 1–June 1

560,000

(660,000 – 100,000)

3.0

1/12

140,000

Stock split

June 1–Oct. 1

1,680,000

(560,000 x 3)

4/12

560,000

Reissued shares

Oct. 1–Dec. 31

1,740,000

(1,680,000+60,000)

3/12

435,000

Weighted-average number of shares outstanding
1,762,000
02

(b) Computation of earnings per share

Net Income(A)

$3,456,000

Weighted average number of common shares outstanding (B)

1,762,000

Earnings per share (A/ B)

$1.96

03

(c)  Computation of earnings per share

Net Income (3,456,000-900,000) (A)

$2,556,000

Weighted average number of common shares outstanding (B)

1,762,000

Earnings per share (A/ B)

$1.45

04

(d) Computation of earnings per share

Net Income

$3,456,000

Add: Loss from discontinued operations

$432,000

Income from continuing operations (A)

$3,888,000

Weighted average no of common shares outstanding (B)

1,762,000

Earnings per share (A/ B)

$2.21

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Most popular questions from this chapter

DiCenta Corporation reported net income of \(270,000 in 2017 and had 50,000 shares of common stock outstanding throughout the year. Also outstanding all year were 5,000 shares of cumulative preferred stock, each convertible into 2 shares of common. The preferred stock pays an annual dividend of \)5 per share. DiCenta’s tax rate is 40%. Compute DiCenta’s 2017 diluted earnings per share.

Question: . Mae Jong Corp. issues \(1,000,000 of 10% bonds payable which may be converted into 10,000 shares of \)2 par value ordinary shares. The market rate of interest on similar bonds is 12%. Interest is payable annually on December 31, and the bonds were issued for total proceeds of $1,000,000. In accounting for these bonds, Mae Jong Corp. will:

(a) first assign a value to the equity component, then determine the liability component.

(b) assign no value to the equity component since the conversion privilege is not separable from the bond.

(c) first assign a value to the liability component based on the face amount of the bond.

(d) use the “with-and-without” method to value the compound instrument.

(EPS with Options, Various Situations) Venzuela Company’s net income for 2017 is \(50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016, each exercisable for one share at \)6. None has been exercised, and 10,000 shares of common were outstanding during 2017. The average market price of Venzuela’s stock during 2017 was \(20.

Instructions

(a) Compute diluted earnings per share. (Round to nearest cent.)

(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was \)20.

(EPS: Simple Capital Structure) At January 1, 2017, Langley Company’s outstanding shares included the following.

280,000 shares of \(50 par value, 7% cumulative preferred stock

900,000 shares of \)1 par value common stock

Net income for 2017 was \(2,530,000. No cash dividends were declared or paid during 2017. On February 15, 2018, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2017.

On April 1, 2017, 450,000 shares of common stock were sold for \)10 per share, and on October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.

Instructions

Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in March 2018.

Assume that Sarazan Company has a share-option plan for top management. Each share option represents the right to purchase a \(1 par value ordinary share in the future at a price equal to the fair value of the shares at the date of the grant. Sarazan has 5,000 share options outstanding, which were granted at the beginning of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the share-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted shares were granted at the beginning of 2017.

(c) Now assume that the market price of Sarazan shares on the grant date was $45 per share. Repeat the requirements for (a) and (b).

(d) Sarazan would like to implement an employee share-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Explain how employee share-purchase plans are recorded?
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