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Chapter 16: Q27E (page 880)

EPS with Contingent Issuance Agreement) Winsor Inc. recently purchased Holiday Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Holiday’s income for 2017 was \(110,000 or more, 10,000 additional shares would be issued to Holiday’s stockholders in 2018. Holiday’s income for 2016 was \)120,000.

Instructions

(a) Would the contingent shares have to be considered in Winsor’s 2016 earnings per share computations?

(b) Assume the same facts, except that the 10,000 shares are contingent on Holiday’s achieving a net income of $130,000 in 2017. Would the contingent shares have to be considered in Winsor’s earnings per share computations for 2016?

Short Answer

Expert verified
  1. Yes, contingent shares will be considered
  2. No, contingent share will not be reflected.

Step by step solution

01

Consideration of Contingent shares

(a) The contingent shares would need to be reflected in diluted earnings per share because the earnings level is as of now being achieved. Actual income of $120,000, exceeds the limit of $110,000.

02

Consideration of Contingent shares

(b) Since the earnings level isn't by and large right now achieved, contingent shares are excluded from the calculation of diluted earnings per share. Actual income of $110,000 is less than $130,000.

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Most popular questions from this chapter

Refer to the data for Barwood Corporation in BE16-6. Repeat the requirements assuming that instead of options, Barwood granted 2,000 shares of restricted stock.

Kalin Corporation had 2017 net income of \(1,000,000. During 2017, Kalin paid a dividend of \)2 per share on 100,000 shares of preferred stock. During 2017, Kalin had outstanding 250,000 shares of common stock.Compute Kalin’s 2017 earnings per share.

IFRS16-3 Norman Co., a fast-growing golf equipment company, uses GAAP. It is considering the issuance of convertible bonds. The bonds mature in 10 years, have a face value of \(400,000, and pay interest annually at a rate of 4%. The equity component of the bond issue has a fair value of \)35,000. Greg Shark is curious as to the difference in accounting for these bonds if the company were to use IFRS.

(a) Prepare the entry to record issuance of the bonds at par under GAAP.

(b) Repeat the requirement for part (a), assuming application of IFRS to the bond issuance.

(c) Which approach provides the better accounting? Explain.

(L04) (EPS: Simple Capital Structure) Ace Company had 200,000 shares of common stock outstanding on December 31, 2018. During the year 2019, the company issued 8,000 shares on May 1 and retired 14,000 shares on October 31. For the year 2019, Ace Company reported net income of \(249,690 after a loss from discontinued operations of \)40,600 (net of tax).

Instructions

What earnings per share data should be reported at the bottom of its income statement?

(Basic EPS: Two-Year Presentation) Melton Corporation is preparing the comparative financial statements for the annual report to its shareholders for fiscal years ended May 31, 2017, and May 31, 2018. The income from operations for thefiscal year ended May 31, 2017, was \(1,800,000 and income from continuing operations for the fiscal year ended May 31, 2018, was \)2,500,000. In both years, the company incurred a 10% interest expense on \(2,400,000 of debt, an obligation that requires interestonly payments for 5 years. The company experienced a loss from discontinued operations of \)600,000 on February 2018. The company uses a 40% effective tax rate for income taxes.

The capital structure of Melton Corporation on June 1, 2016, consisted of 1 million shares of common stock outstanding and 20,000 shares of \(50 par value, 6%, cumulative preferred stock. There were no preferred dividends in arrears, and the company had not issued any convertible securities, options, or warrants.

On October 1, 2016, Melton sold an additional 500,000 shares of the common stock at \)20 per share. Melton distributed a 20% stock dividend on the common shares outstanding on January 1, 2017. On December 1, 2017, Melton was able to sell an additional 800,000 shares of the common stock at $22 per share. These were the only common stock transactions that occurred during the two fiscal years.

Instructions

(a) Identify whether the capital structure at Melton Corporation is a simple or complex capital structure and explain why.

(b) Determine the weighted-average number of shares that Melton Corporation would use in calculating earnings per share for the fiscal year ended: (1) May 31, 2017. (2) May 31, 2018.

(c) Prepare, in good form, a comparative income statement, beginning with income from operations, for Melton Corportion for the fiscal years ended May 31, 2017, and May 31, 2018. This statement will be included in Melton’s annual report and should display the appropriate earnings per share presentations.
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