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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鈥檚 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

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鈥檚 compensation expense for 2017 and 2018.

(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.

Explain the treasury-stock method as it applies to options and warrants in computing dilutive earnings per share data.

The information below pertains to Barkley Company for 2018.

Net income for the year \(1,200,000

7% convertible bonds issued at par (\)1,000 per bond); each bond is convertible into

30 shares of common stock 2,000,000

6% convertible, cumulative preferred stock, \(100 par value; each share is convertible

into 3 shares of common stock 4,000,000

Common stock, \)10 par value 6,000,000

Tax rate for 2018 40%

Average market price of common stock \(25 per share

There were no changes during 2018 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,000 shares of common stock at \)20 per share.

Instructions

(a) Compute basic earnings per share for 2018.

(b) Compute diluted earnings per share for 2018

(Issuance of Bonds with Detachable Warrants) On September 1, 2017, Sands Company sold at 104 (plus accrued interest) 4,000 of its 9%, 10-year, \(1,000 face value, nonconvertible bonds with detachable stock warrants. Each bond carried two detachable warrants. Each warrant was for one share of common stock at a specified option price of \)15 per share. Shortly after issuance, the warrants were quoted on the market for \(3 each. No fair value can be determined for the Sands Company bonds. Interest is payable on December 1 and June 1. Bond issue costs of \)30,000 were incurred.

Prepare in general journal format the entry to record the issuance of the bonds
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