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Chapter 16: Q7P (page 884)

GROUPWORK (Computation of Basic and Diluted EPS) Charles Austin of the controller’s office of Thompson

Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending

December 31, 2018. Austin has compiled the information listed below.

1. The company is authorized to issue 8,000,000 shares of \(10 par value common stock. As of December 31, 2017, 2,000,000

shares had been issued and were outstanding.

2. The per share market prices of the common stock on selected dates were as follows.

Price per Share

July 1, 2017 \)20.00

January 1, 2018 21.00

April 1, 2018 25.00

July 1, 2018 11.00

August 1, 2018 10.50

November 1, 2018 9.00

December 31, 2018 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2017.

The stock was issued at its par value of \(25, and it has a cumulative dividend of \)3 per share. The stock is convertible into

common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be

automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31,

March 31, and June 30.

4. Thompson Corporation is subject to a 40% income tax rate.

5. The after-tax net income for the year ended December 31, 2018, was \(11,550,000.

The following specific activities took place during 2018.

1. January 1—A 5% common stock dividend was issued. The dividend had been declared on December 1, 2017, to all stockholders

of record on December 29, 2017.

2. April 1—A total of 400,000 shares of the \)3 convertible preferred stock was converted into common stock. The company

issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2018.

3. July 1—A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split

on June 1.

4. August 1—A total of 300,000 shares of common stock were issued to acquire a factory building.

5. November 1—A total of 24,000 shares of common stock were purchased on the open market at \(9 per share. These shares

were to be held as treasury stock and were still in the treasury as of December 31, 2018.

6. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows.

April 15—\)0.30 per share

October 15—$0.20 per share

7. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled.

Instructions

(a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2018.

(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2018.

(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year

ended December 31, 2018.

Short Answer

Expert verified

Number of shares used to compute earning per share and diluted earning per share are 4,951,000 and . The total adjusted income is $10, 350,000.

Step by step solution

01

Basic earnings per share

Particular

Date

Outstanding

Beginning Balance

Including 5% Stock Dividend

Jan 1-Apr 1

$2,100,000

Conversion of Preferred Stock

Apr 1- Jan 1

$2,520,000

Stock Split

July 1- Aug 1

$5,040,000

Issue Share of Building

Aug 1- Nov 1

$5,340,000

Purchase of Treasury Stock

Nov 1- Dec 1

$5,316,000

The total number of common shares to compute basic earnings per share is 4,951,000
02

Diluted earnings per share

Particular

Outstanding

Number of shares used to compute basic earnings per share

4,951,000

Convertible Preferred Stock- Still outstanding

630,000

Convertible Preferred Stock- Converted

$210,000

The total number of common shares to compute diluted earnings per share is $5,719,000
03

Adjusted net income

Particular

Amount

Amount

After Tax Net Income

$11,550,000

Preferred Stock Dividend March 31

$525,000

June 30, Sept 30, and Dec 31

$675,000

$1,200,000

Adjusted Net Income

$10,350,000

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Most popular questions from this chapter

(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.

(Weighted-Average Number of Shares) Newton Inc. uses a calendar year for financial reporting. The company is authorized to issue 9,000,000 shares of $10 par common stock. At no time has Newton issued any potentially dilutive securities. Listed below is a summary of Newton’s common stock activities.

1. Number of common shares issued and outstanding at December 31, 2015 2,000,000

2. Shares issued as a result of a 10% stock dividend on September 30, 2016 200,000

3. Shares issued for cash on March 31, 2017 2,000,000Number of common shares issued and outstanding at December 31, 2017 4,200,000

4. A 2-for-1 stock split of Newton’s common stock took place on March 31, 2018

Instructions

(a) Compute the weighted-average number of common shares used in computing earnings per common share for 2016 on the 2017 comparative income statement.

(b) Compute the weighted-average number of common shares used in computing earnings per common share for 2017 on the 2017 comparative income statement.

(c) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2017 on the 2018 comparative income statement.

(d) Compute the weighted-average number of common shares to be used in computing earnings per common share for 2018 on the 2018 comparative income statement

What effect do stock dividends or stock splits have on the computation of the weighted-average number of shares outstanding?

Question: (Conversion of Bonds) On January 1, 2017, Gottlieb Corporation issued \(4,000,000 of 10-year, 8% convertible debentures at 102. Interest is to be paid semi-annually on June 30 and December 31. Each \)1,000 debenture can be converted into eight shares of Gottlieb Corporation \(100 par value common stock after December 31, 2018. On January 1, 2019, \)400,000 of debentures are converted into common stock, which is then selling at \(110. An additional \)400,000 of debentures are converted on March 31, 2019. The market price of the common stock is then $115. Accrued interest at March 31 will be paid on the next interest date. Bond premium is amortized on a straight-line basis.

Make the necessary journal entries for:

(a) December 31, 2018. (c) March 31, 2019.

(b) January 1, 2019. (d) June 30, 2019.

Record the conversions using the book value method

Ferraro, Inc. established a stock-appreciation rights (SARs) program on January 1, 2017, which entitles executives to receive cash at the date of exercise for the difference between the market price of the stock and the pre-established price of \(20 on 5,000 SARs. The required service period is 2 years. The fair value of the SARs are determined to be \)4 on December 31,2017, and $9 on December 31, 2018. Compute Ferraro’s compensation expense for 2017 and 2018.
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