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Chapter 16: Q26E (page 880)

(EPS with Options, Various Situations) Venzuela Company鈥檚 net income for 2017 is \(50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016, each exercisable for one share at \)6. None has been exercised, and 10,000 shares of common were outstanding during 2017. The average market price of Venzuela鈥檚 stock during 2017 was \(20.

Instructions

(a) Compute diluted earnings per share. (Round to nearest cent.)

(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was \)20.

Short Answer

Expert verified
  1. Diluted Earnings per share $4.67
  2. Diluted Earnings per share $4.91

Step by step solution

01

(a) Computation of Diluted Earnings per share-

a)

Options issued

1,000

Multiple: Exercise price per share

$6

Amount paid towards shares

$6,000

Amount paid towards shares (A)

$6,000

Amount paid towards shares (B)

$20

Value of options (A/ B)

300

Options issued

1,000

Less: Value of options

(300)

Diluted shares

700

Net Income

$50,000

Average share outstanding (10,000+700)

10,700

Diluted Earnings Per share

$ 4.67

02

(b) Computation of Diluted Earnings per share-

b)

Diluted shares

700

Months

3/12

Weighted average for the period holding

175

Net Income (A)

$50,000

Average share outstanding (10,000+175) (B)

10,175

Diluted Earnings Per share (A/B)

$ 4.91

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Most popular questions from this chapter

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

Issuance and Exercise of Stock Options) On November 1, 2017, Columbo Company adopted a stock-option plan that granted options to key executives to purchase 30,000 shares of the company鈥檚 \(10 par value common stock. The options were granted on January 2, 2018, were exercisable 2 years after the date of grant if the grantee was still an employee of the company. The options expired 6 years from date of grant. The option price was set at \)40, and the fair value option-pricing model determines the total compensation expense to be \(450,000.All of the options were exercised during the year 2020: 20,000 on January 3 when the market price was \)67, and 10,000 on May 1 when the market price was $77 a share.

Instructions

Prepare journal entries relating to the stock option plan for the years 2018, 2019, and 2020. Assume that the employee performsservices equally in 2018 and 2019.

(EPS: Simple Capital Structure) On January 1, 2017, Lennon Industries had stock outstanding as follows.

6% Cumulative preferred stock, \(100 par value,

issued and outstanding 10,000 shares \)1,000,000

Common stock, \(10 par value, issued and

outstanding 200,000 shares 2,000,000

To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 160,000 common shares. The acquisitions took place as shown below.

Date of Acquisition Shares Issued

Company A April 1, 2017 50,000

Company B July 1, 2017 80,000

Company C October 1, 2017 30,000

On May 14, 2017, Lennon realized a \)90,000 (before taxes) gain on discontinued operations.On December 31, 2017, Lennon recorded income of $300,000 from continuing operations.

Instructions

Assuming a 50% tax rate, compute the earnings per share data that should appear on the financial statements of Lennon Industries as of December 31, 2017.

Archer Inc. issued $4,000,000 par value, 7% convertible bonds at 99 for cash. If the bonds had not included the conversion feature, they would have sold for 95. Prepare the journal entry to record the issuance of the bonds.

(EPS with Convertible Bonds and Preferred Stock) On January 1, 2017, Crocker Company issued 10-year, \(2,000,000 face value, 6% bonds, at par. Each \)1,000 bond is convertible into 15 shares of Crocker common stock. Crocker鈥檚 net income in 2017 was \(300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.

Instructions

(a) Compute diluted earnings per share for 2017.

(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that \)1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.
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