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Chapter 16: Question 18 (page 874)

Define the following terms. (a) Basic earnings per share. (b) Potentially dilutive security. (c) Diluted earnings per share. (d) Complex capital structure. (e) Potential common stock.

Short Answer

Expert verified

Basic earnings per share are how much earning of the period is available to each outstanding common stock.

Potentially dilutive security is a security that can be traded for or changed exchange into common stock.

Diluted earnings per share are how much income for the period is available to each share of normal stock extraordinary.

Complex capital structure is the structure of an organization’s capital construction that includes dilutive securities.

Step by step solution

01

Definition of basic earnings per share

Basic earnings per share: The amount of earnings earned during the period is available to each common stock of the company.

02

Definition of potentially dilutive security

Potentially dilutive security: Security that can be traded for or changed into common stock. Transformation into the common stock leads to a fall in earnings per share. Examples of potentially dilutive securities are convertible protections, investment opportunities, stock warrants, and different privileges.

03

Definition of diluted earnings per share

Diluted earnings per share: The amount of earning available for each portion of common stock outstanding and each share that would have been outstanding is diluted earnings per share. It is assumed that all issued securities are converted into the common stock. Dilutive earning per share also reduce the earning per share

04

Definition of complex capital structure

Complex capital structure: At the point when any potential normal offers are exceptional

A firm with an intricate capital design reports two EPS estimations:

1. Basic EPS - overlooks the dilutive impact of such protections.

2. Diluted EPS - fuses the dilutive impact of all possible normal offers.

05

Definition of potential common stock

Potential common stock: Securities that are not common stock could become normal stock through their activity or conversion.

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Most popular questions from this chapter

Four years after issue, debentures with a face value of \(1,000,000 and book value of \)960,000 are tendered for conversion into 80,000 shares of common stock immediately after an interest payment date. At that time, the market price of the debentures is 104, and the common stock is selling at \(14 per share (par value \)10). The company records the conversion as follows. Bonds Payable 1,000,000 Discount on Bonds Payable 40,000 Common Stock 800,000 Paid-in Capital in Excess of Par— Common Stock 160,000 Discuss the propriety of this accounting treatment.

The 2017 income statement of Wasmeier Corporation showed net income of \(480,000 and a loss from discontinued operations of \)120,000. Wasmeier had 100,000 shares of common stock outstanding all year. Prepare Wasmeier’s income statement presentation of earnings per share.

What are stock rights? How does the issuing company account for them?

Accounting, Analysis, and Principles

On January 1, 2016, Garner issued 10-year, \(200,000 face value, 6% bonds at par. Each \)1,000 bond is convertible into 30 shares of Garner \(2 par value common stock. The company has had 10,000 shares of common stock (and no preferred stock) outstanding throughout its life. None of the bonds have been converted as of the end of 2017. (Ignore all tax effects.)

Accounting

(a) Prepare the journal entry Garner would have made on January 1, 2016, to record the issuance of the bonds.

(b) Garner’s net income in 2017 was \)30,000 and was \(27,000 in 2016. Compute basic and diluted earnings per share for Garner for 2017 and 2016.

(c) Assume that 75% of the holders of Garner’s convertible bonds convert their bonds to stock on June 30, 2018, when Garner’s stock is trading at \)32 per share. Garner pays $50 per bond to induce bondholders to convert. Prepare the journal entry to record the conversion.

Analysis

Show how Garner will report income and EPS for 2017 and 2016. Briefly discuss the importance of GAAP for EPS to analysts evaluating companies based on price-earnings ratios. Consider comparisons for a company over time, as well as comparisons between companies at a point in time.

Principles

In order to converge GAAP and IFRS, the FASB is considering whether the equity element of a convertible bond should be reported as equity. Describe how the journal entry you made in part (a) above would differ under IFRS. In terms of the accounting principles discussed in Chapter 2, what does IFRS for convertible debt accomplish that GAAP potentially sacrifices? What does GAAP for convertible debt accomplish that IFRS potentially sacrifices?

Pechstein Corporation issued 2,000 shares of \(10 par value common stock upon conversion of 1,000 shares of \)50 par value preferred stock. The preferred stock was originally issued at \(60 per share. The common stock is trading at \)26 per share at the time of conversion. Record the conversion of the preferred stock
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