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Chapter 16: Q18E (page 878)

16-18 (L04) (EPS: Simple Capital Structure) Flagstad Inc. presented the following data.

Net income \(2,500,000

Preferred stock: 50,000 shares outstanding,

\)100 par, 8% cumulative, not convertible 5,000,000

Common stock: Shares outstanding 1/1 750,000

Issued for cash, 5/1 300,000

Acquired treasury stock for cash, 8/1 150,000

2-for-1 stock split, 10/1

Instructions

Compute earnings per share.

Short Answer

Expert verified

Earnings per share of Flagstad inc. is $1.18

Step by step solution

01

Computation of weighted average shares outstanding

EVENT

DATE OUTSTANDING

SHARES OUTSTANDING

RESTATEMENT

FRACTION OF YEAR

WEIGHTED SHARES

Beginning balance

Jan 1- May 1

750,000

2

4/12

500,000

Issued shares

May 1- Aug 1

1,050,000

(750,000+300,000)

2

3/12

525,000

Reacquired shares

Aug 1- Dec 31

900,000

(1,050,000-150,000)

2

5/12

750,000

Weighted average number of shares
1,775,000

Net Income

$2,500,000

Preferred dividend (5,000*100*8%)

-$400,000

Net income less preferred dividend

$2,100,000

02

Computation of earnings per share

Earningspershare=NetincomeapplicabletocommonstockWeightedaveragenumberofsharesoutstanding=$2,100,0001,775,000=$1.18

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Most popular questions from this chapter

E16-28 (L05) (EPS with Warrants) Howat Corporation earned \(360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrantexercised.

Instructions

(a) Are the warrants dilutive?

(b) Compute basic earnings per share.

(c) Compute diluted earnings per share.

Issuance and Exercise of Stock Options) On November 1, 2017, Columbo Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company’s \(10 par value common stock. The options were granted on January 2, 2018, were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at \)40, and the fair value option-pricing model determines the total compensation expense to be \(450,000.All of the options were exercised during the year 2020: 20,000 on January 3 when the market price was \)67, and 10,000 on May 1 when the market price was $77 a share.

Instructions

Prepare journal entries relating to the stock option plan for the years 2018, 2019, and 2020. Assume that the employee performsservices equally in 2018 and 2019.

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What are the advantages of using restricted stock to compensate employees?

CA16-5 (EPS: Preferred Dividends, Options, and Convertible Debt) “Earnings per share” (EPS) is the most featured, single financial statistic about modern corporations. Daily published quotations of stock prices have recently been expanded to include for many securities a “times earnings” figure that is based on EPS. Stock analysts often focus their discussions on the EPS of the corporations they study.

Instructions

(a) Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.

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(c) Convertible debentures are considered potentially dilutive common shares. Explain how convertible debentures are handled for purposes of EPS computations.
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