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Chapter 16: Q16E (page 878)

EPS: Simple Capital Structure) On January 1, 2018, Wilke Corp. had 480,000 shares of common stock outstanding. During 2018, it had the following transactions that affected the common stock account.

February 1 Issued 120,000 shares

March 1 Issued a 10% stock dividend

May 1 Acquired 100,000 shares of treasury stock

June 1 Issued a 3-for-1 stock split

October 1 Reissued 60,000 shares of treasury stock

Instructions

(a) Determine the weighted-average number of shares outstanding as of December 31, 2018.

(b) Assume that Wilke Corp. earned net income of \(3,456,000 during 2018. In addition, it had 100,000 shares of 9%, \)100 par nonconvertible, noncumulative preferred stock outstanding for the entire year. Because of liquidity considerations, however, the company did not declare and pay a preferred dividend in 2018. Compute earnings per share for 2018, using the weighted-average number of shares determined in part (a).

(c) Assume the same facts as in part (b), except that the preferred stock was cumulative. Compute earnings per share for 2018.

(d) Assume the same facts as in part (b), except that net income included a loss from discontinued operations of $432,000 (net of tax). Compute earnings per share for 2018.

Short Answer

Expert verified

a. Weighted-average number of shares outstanding is $1,762,000.

b. Earnings per share for 2018 is $1.96

c. Earnings per share excluding preferred stock is $1.45

d. Earnings per share including loss from discounted operations is $2.

Step by step solution

01

(a) Computation of Weighted-average number of shares outstanding

EVENT

DATE OUTSTANDING

SHARES OUTSTANDING

RESTATEMENT

FRACTION OF YEAR

WEIGHTED SHARES

Beginning balance

Jan. 1鈥揊eb. 1

480,000

1.1*3.0

1/12

132,000

Issued shares

Feb. 1鈥揗ar. 1

600,000

(480,000+120,000)

1.1*3.0

1/12

165,000

Stock dividend

Mar. 1鈥揗ay 1

660,000

(600,000 x 110%)

3.0

2/12

330,000

Reacquired shares

May 1鈥揓une 1

560,000

(660,000 鈥� 100,000)

3.0

1/12

140,000

Stock split

June 1鈥揙ct. 1

1,680,000

(560,000 x 3)

4/12

560,000

Reissued shares

Oct. 1鈥揇ec. 31

1,740,000

(1,680,000+60,000)

3/12

435,000

Weighted-average number of shares outstanding
1,762,000
02

(b) Computation of earnings per share

Net Income(A)

$3,456,000

Weighted average number of common shares outstanding (B)

1,762,000

Earnings per share (A/ B)

$1.96

03

(c)  Computation of earnings per share

Net Income (3,456,000-900,000) (A)

$2,556,000

Weighted average number of common shares outstanding (B)

1,762,000

Earnings per share (A/ B)

$1.45

04

(d) Computation of earnings per share

Net Income

$3,456,000

Add: Loss from discontinued operations

$432,000

Income from continuing operations (A)

$3,888,000

Weighted average no of common shares outstanding (B)

1,762,000

Earnings per share (A/ B)

$2.21

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Most popular questions from this chapter

(EPS with Convertible Bonds and Preferred Stock) The Simon Corporation issued 10-year, \(5,000,000 par, 7% callable convertible subordinated debentures on January 2, 2017. The bonds have a par value of \)1,000, with interest payable annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Simon鈥檚 effective tax was 35%. Net income in 2017 was $9,500,000, and the company had 2,000,000 shares outstanding during the entire year.

Instructions

(a) Prepare a schedule to compute both basic and diluted earnings per share.

(b) Discuss how the schedule would differ if the security was convertible preferred stock

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.

All of the following are key similarities between GAAP and IFRS with respect to accounting for dilutive securities and EPS except:

(a) the model for recognizing stock-based compensation.

(b) the calculation of basic and diluted EPS.

(c) the accounting for convertible debt.

(d) the accounting for modifications of share options, when the value increases.

EXCEL (Entries for Conversion, Amortization, and Interest of Bonds) Volker Inc. issued \(2,500,000 of convertible 10-year bonds on July 1, 2017. The bonds provide for 12% interest payable semiannually on January 1 and July 1. The discount in connection with the issue was \)54,000, which is being amortized monthly on a straight-line basis. The bonds are convertible after one year into 8 shares of Volker Inc.鈥檚 \(100 par value common stock for each \)1,000 of bonds. On August 1, 2018, $250,000 of bonds were turned in for conversion into common stock. Interest has been accrued monthly and paid as due. At the time of conversion, any accrued interest on bonds being converted is paid in cash.

Instructions

Prepare the journal entries to record the conversion, amortization, and interest in connection with the bonds as of the following

dates. (Round to the nearest dollar.)

(a) August 1, 2018. (Assume the book value method is used.)

(b) August 31, 2018.

(c) December 31, 2018, including closing entries for end-of-year.

CA16-3 WRITING (Stock Warrants鈥擵arious 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鈥檚 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鈥檚 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
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