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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

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.

Where can authoritative IFRS be found related to dilutive securities, stock-based compensation, and earnings per share?

On January 1, 2017, Barwood Corporation granted 5,000 options to executives. Each option entitles the holder to purchase one share ofBarwood’s \(5 par value common stock at \)50 per share at any time during the next 5 years. The market price of the stock is \(65 per share on the date of grant. The fair value of the options at the grant date is \)150,000. The period of benefit is 2 years. Prepare Barwood’s journal entries for January 1, 2017, and December 31, 2017 and 2018.

CA16-4 WRITING (Stock Compensation Plans) The following two items appeared on the Internet concerning the GAAP requirement to expense stock options.

WASHINGTON, D.C.—February 17, 2005 Congressman David Dreier (R–CA), Chairman of the House Rules Committee, and Congresswoman Anna Eshoo (D–CA) reintroduced legislation today that will preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.

“Last year, the U.S. House of Representatives overwhelmingly voted for legislation that would have ensured the continued ability of innovative companies to offer stock options to rank-and-file employees,” Dreier stated. “Both the Financial Accounting Standards Board (FASB) and the Securities and Exchange Commission (SEC) continue to ignore our calls to address legitimate concerns about the impact of FASB’s new standard on workers’ ability to have an ownership stake in the New Economy, and its failure to address the real need of shareholders: accurate and meaningful information about a company’s use of stock options.”

In December 2004, FASB issued a stock option expensing standard that will render a huge blow to the 21st century economy,” Dreier said. “Their action and the SEC’s apparent lack of concern for protecting shareholders, requires us to once again take a firm stand on the side of investors and economic growth. Giving investors the ability to understand how stock options impact the value of their shares is critical. And equally important is preserving the ability of companies to use this innovative tool to attract talented employees.”

“Here We Go Again!” by Jack Ciesielski (2/21/2005, http://www.accountingobserver.com/blog/2005/02/here-we-go-again) On February 17, Congressman David Dreier (R–CA), and Congresswoman Anna Eshoo (D–CA), officially entered Silicon Valley’s bid to gum up the launch of honest reporting of stock option compensation: They co-sponsored a bill to “preserve broad-based employee stock option plans and give investors critical information they need to understand how employee stock options impact the value of their shares.” You know what “critical information” they mean: stuff like the stock compensation for the top five officers in a company, with a rigged value set as close to zero as possible. Investors crave this kind of information. Other ways the good Congresspersons want to “help” investors: The bill “also requires the SEC to study the effectiveness of those disclosures over three years, during which time, no new accounting standard related to the treatment of stock options could be recognized. Finally, the bill requires the Secretary of Commerce to conduct a study and report to Congress on the impact of broad-based employee stock option plans on expanding employee corporate ownership, skilled worker recruitment and retention, research and innovation, economic growth, and international competitiveness.”

It’s the old “four corners” basketball strategy: stall, stall, stall. In the meantime, hope for regime change at your opponent, the FASB.

Instructions

(a) What are the major recommendations of the stock-based compensation pronouncement?

(b) How do the provisions of GAAP in this area differ from the bill introduced by members of Congress (Dreier and Eshoo), which would require expensing for options issued to only the top five officers in a company? Which approach do you think would result in more useful information? (Focus on comparability.)

(c) The bill in Congress urges the FASB to develop a rule that preserves “the ability of companies to use this innovative tool to attract talented employees.” Write a response to these Congress-people explaining the importance of neutrality in financial accounting and reporting.

Petrenko Corporation has outstanding 2,000 \(1,000 bonds, each convertible into 50 shares of \)10 par value common stock. The bonds are converted on December 31, 2017, when the unamortized discount is \(30,000 and the market price of the stock is \)21 per share. Record the conversion using the book value approach.
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