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Chapter 16: Q23E (page 880)

(EPS with Convertible Bonds) On June 1, 2015, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.On April 1, 2017, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2017.Lancaster Inc. also issued \(600,000 of 20-year, 8% convertible bonds at par on July 1, 2017. Each \)1,000 bond converts to 40shares of common at any interest date. None of the bonds have been converted to date.Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.)

Instructions

Determine the following for 2017.

(a) The number of shares to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share.

(b) The earnings figures to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share

Short Answer

Expert verified

a.

(1) Basic earnings per share= 1,100,000

(2) Diluted earnings per share= 1,112,000

b.

(1) Basic earnings per share= $1,540,000

(2) Diluted earnings per share= $1,554,400

Step by step solution

01

a. Computation of no shares to be used for calculation:

1.

Jan 1 – Apr, 800,000 shares x 3/12

200,000

Apr 1- Dec,1200,000 shares x 9/12

900,000

1,100,000

2.

Jan 1 - Apr 80,000 share x 3/12

200,000

Apr 1-Jul,1200,000 x 3/12

300,000

Jul 1-Dec,1224,000 x 6/12

612,000

1,112,000

02

 Computation of earnings figure to be used:

Income for basic earnings per share equals $1,540,000, and for diluted per share equals$1,554,400.

After tax Net Income

$1,540,000

Add: Interest savings ($600,000 x 0.08 x½)

$24,000

Less: Lost tax benefit ($24,000 x 0.40)

($9,600)

Adjusted net income

$1,554,400

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Most popular questions from this chapter

Which of the following statements is correct?

a) IFRS separates the proceeds of a convertible bond between debt and equity by determining the fair value of the debt component before the equity component.

b) Both IFRS and GAAP assume that when there is a choice of settlement of an option for cash or shares, share settlement is assumed.

c) IFRS separates the proceeds of a convertible bond between debt and equity, based on relative fair values.

d) Both GAAP and IFRS separate the proceeds of convertible bonds between debt and equity.

CA16-3 WRITING (Stock Warrants—Various Types) For various reasons a corporation may issue warrants to purchase shares of its common stock at specified prices that, depending on the circumstances, may be less than, equal to, or greater than the current market price. For example, warrants may be issued:

1. To existing stockholders on a pro rata basis.

2. To certain key employees under an incentive stock-option plan.

3. To purchasers of the corporation’s bonds.

Instructions

For each of the three examples of how stock warrants are used:

(a) Explain why they are used.

(b) Discuss the significance of the price (or prices) at which the warrants are issued (or granted) in relation to (1) the current market price of the company’s stock, and (2) the length of time over which they can be exercised.

(c) Describe the information that should be disclosed in financial statements, or notes thereto, that are prepared when stock warrants are outstanding in the hands of the three groups listed above

(EPS with Stock Dividend and Discontinued Operations) Christina Corporation is preparing the comparative financial statements to be included in the annual report to stockholders. Christina employs a fiscal year ending May 31.

Income from operations before income taxes for Christina was \(1,400,000 and \)660,000, respectively, for fiscal years ended May 31, 2018 and 2017. Christina experienced a loss from discontinued operations of \(400,000 on March 3, 2018. A 40% combined income tax rate pertains to any and all of Christina Corporation’s profits, gains, and losses.

Christina’s capital structure consists of preferred stock and common stock. The company has not issued any convertible securities or warrants and there are no outstanding stock options.

Christina issued 40,000 shares of \)100 par value, 6% cumulative preferred stock in 2014. All of this stock is outstanding, and no preferred dividends are in arrears.

There were 1,000,000 shares of \(1 par common stock outstanding on June 1, 2016. On September 1, 2016, Christina sold an additional 400,000 shares of the common stock at \)17 per share. Christina distributed a 20% stock dividend on the common shares outstanding on December 1, 2017. These were the only common stock transactions during the past 2 fiscal years.

Instructions

(a) Determine the weighted-average number of common shares that would be used in computing earnings per share on the current comparative income statement for:

(1) The year ended May 31, 2017.

(2) The year ended May 31, 2018.

(b) Starting with income from operations before income taxes, prepare a comparative income statement for the years ended May 31, 2018 and 2017. The statement will be part of Christina Corporation’s annual report to stockholders and should include appropriate earnings per share presentation.

(c) The capital structure of a corporation is the result of its past financing decisions. Furthermore, the earnings per share data presented on a corporation’s financial statements is dependent upon the capital structure.

(1) Explain why Christina Corporation is considered to have a simple capital structure.

(2) Describe how earnings per share data would be presented for a corporation that has a complex capital structure.

Accounting for Restricted Stock) Derrick Company issues 4,000 shares of restricted stock to its CFO, Dane Yaping, on January 1, 2017. The stock has a fair value of \(120,000 on this date. The service period related to this restricted stock is 4 years. Vesting occurs if Yaping stays with the company for 4 years. The par value of the stock is \)5. At December 31, 2018, the fair value of the stock is $145,000.

Instructions

(a) Prepare the journal entries to record the restricted stock on January 1, 2017 (the date of grant), and December 31, 2018.

(b) On March 4, 2019, Yaping leaves the company. Prepare the journal entry (if any) to account for this forfeiture.

Anazazi Co. offers all its 10,000 employees the opportunity to participate in an employee share-purchase plan. Under the terms of the plan, the employees are entitled to purchase 100 ordinary shares (par value \(1 per share) at a 20% discount. The purchase price must be paid immediately upon acceptance of the offer. In total, 8,500 employees accept the offer, and each employee purchases on average 80 shares at \)22 per share (market price \(27.50). Under IFRS, Anazazi Co. will record:

(a) no compensation since the plan is used to raise capital, not compensate employees.

(b) compensation expense of \)5,500,000.

(c) compensation expense of \(18,700,000.

(d) compensation expense of \)3,740,000.
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