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Chapter 14: Problem 15

FirstLight Lighting Company had earnings for 2008 of $$\$ 150,600$$. The company had 90,000 shares of common stock outstanding during the year. In addition, the company issued 2,000 shares of $$\$ 100$$ par value preferred stock on January 5,2008 . The preferred stock has a dividend of $$\$ 6$$ per share. There were no transactions in either common or preferred stock during \(2008 .\) Determine the basic earnings per share for FirstLight.

Short Answer

Expert verified
The basic earnings per share is $1.54.

Step by step solution

01

Identify Total Earnings and Dividends

First, identify the total earnings for the company, which is given as \\(150,600. Next, calculate the total dividend for the preferred stock. The company has 2,000 shares of preferred stock, with each share having a dividend of \\)6, so the total preferred dividends are \(2,000 \times 6 = \$12,000\).
02

Subtract Preferred Dividends from Total Earnings

Calculate the earnings available to common shareholders by subtracting the total preferred dividends from the total earnings: \(150,600 - 12,000 = \$138,600\).
03

Determine Number of Common Shares

The number of common shares outstanding throughout 2008 is given as 90,000.
04

Calculate Basic Earnings Per Share (EPS)

The formula for basic earnings per share is \(\frac{\text{Earnings available to common shareholders}}{\text{Number of common shares}}\). Substitute the numbers: \(\frac{138,600}{90,000} = 1.54\).

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Earnings Calculation
Calculating earnings, especially in a company setting, involves understanding both the total earnings and how these are distributed among shareholders. Total earnings refer to the company's net profits after all expenses.
To calculate the total earnings, it's simple if given directly, as it is for FirstLight Lighting Company. But in general,
  • Gather information on revenue: this is all money earned from sales and other operations.
  • Subtract total expenses, which include everything from salaries to lease costs.
This result should give you the net income, which can be used in further calculations like Basic Earnings Per Share (EPS). The concept of earnings is crucial as it ultimately reflects the company's profitability, impacting shareholders' perceived value and decision-making.
For FirstLight, total earnings were a solid \(\$150,600\), but you needed to adjust these by accounting for distributions like preferred dividends before proceeding to basic EPS calculations.
Preferred Dividends
Preferred dividends are payouts that go to preferred shareholders before any dividends are distributed to common shareholders. These dividends are usually fixed, providing a consistent income stream for investors holding preferred stock, regardless of the company's earnings fluctuations.
To figure out these dividends for FirstLight Lighting Company, several details must be considered:
  • Number of Preferred Shares: In this case, there are 2,000 preferred shares outstanding.
  • Dividend Per Share: The preferred dividend per share is \(\\(6\).
Using this, the total preferred dividends are the product of the number of shares and the dividend per share, calculated as \(2,000 \times 6 = \\)12,000\).
These dividends reduce the amount of earnings available to common shareholders and must be accounted for before calculating basic earnings per share.
Common Shares Outstanding
Common shares outstanding refer to the total number of shares held by all shareholders, including institutional and retail investors, but excluding any treasury shares owned by the company.
Understanding the number of common shares is vital because it's the denominator in the Basic Earnings Per Share (EPS) formula. EPS is a key indicator of a company's profitability per share.
In FirstLight's case, throughout 2008, there were consistently 90,000 common shares outstanding. This consistency simplifies the EPS calculation, as changes in shares throughout the year can complicate the process.
  • When calculating EPS, divide the earnings available to common shareholders by these outstanding shares.
  • For FirstLight, this calculation was straightforward once preferred dividends were deducted from total earnings, leaving earnings available for common shares.
The result was a Basic EPS of \(\$1.54\), reflecting the earnings attributed to each common share.

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Most popular questions from this chapter

Assume that the amount of each of the following items is material to the financial statements. Classify each item as either normally recurring (NR) or extraordinary (E). a. Restructuring charge related to employee termination benefits. b. Loss on sale of fixed assets. c. Uninsured flood loss. (Flood insurance is unavailable because of periodic flooding in the area.) d. Interest revenue on notes receivable. e. Loss on disposal of equipment considered to be obsolete because of development of technology. f. Uninsured loss on building due to hurricane damage. The firm was organized in 1920 and had not previously incurred hurricane damage. g. Uncollectible accounts expense. h. Gain on sale of land condemned for public use.

ExxonMobil Corporation is one of the largest companies in the world. The company explores, develops, refines, and markets petroleum products. The basic earnings per share for three comparative years were as follows: $$ \begin{array}{lccc} & {\text { Years Ended Dec. 31, }} \\ & \mathbf{2 0 0 5} & \mathbf{2 0 0 4} & \mathbf{2 0 0 3} \\ \hline \text { Basic earnings per share } & \$ 5.76 & \$ 3.91 & \$ 3.24 \end{array} $$ The market prices at the end of each year were \(\$ 56, \$ 51\), and \(\$ 41\) for December 31,2005 , 2004 , and 2003, respectively. a. Determine the price-earnings ratio for 2005, 2004, and 2003, using end-of- year prices. Round to one decimal place. b. Interpret your results over the three years.

At a total cost of $$\$ 1,960,000$$, Turner Corporation acquired 70,000 shares of May Corp. common stock as a long-term investment. Turner Corporation uses the equity method of accounting for this investment. May Corp. has 280,000 shares of common stock outstanding, including the shares acquired by Turner Corporation. Journalize the entries by Turner Corporation to record the following information: a. May Corp. reports net income of $$\$ 3,000,000$$ for the current period. b. A cash dividend of $$\$ 3.80$$ per common share is paid by May Corp. during the current period.

Wind Surfer Inc. produces and distributes equipment for sailboats. On the basis of the following data for the current fiscal year ended June 30,2008 , prepare a multiple-step income statement for Wind Surfer, including an analysis of earnings per share in the form illustrated in this chapter. There were 20,000 shares of $$\$ 150$$ par common stock outstanding throughout the year. Administrative expenses Cost of merchandise sold Gain on condemnation of land (extraordinary item) Income tax applicable to gain on condemnation of land Income tax reduction applicable to loss from discontinued operations Income tax applicable to income from continuing operations Loss on discontinued operations Loss from fixed asset impairment Restructuring charge Sales Selling expenses \(\begin{array}{r} 104,000 \\ 467,500 \\ 58,000 \\ 23,200 \\ 32,000 \\ 93,200 \\ 80,000 \\ 120,000 \\ 50,000 \\ 1,100,000 \\ 125,500 \end{array}\)

Eason Company began operations on January 1, 2007, and reported net income of $$\$ 260,000$$ during the year. Eason had a taxable income of $$\$ 350,000$$ for 2007 . The difference between the reported net income and taxable income will reverse in 2008 . The reported net income for 2008 was $$\$ 405,000$$. There were no other temporary differences. The tax rate is \(35 \%\) for both years. Prepare the journal entries to record the tax expense, deferred taxes, and taxes payable for 2007 and 2008 , respectively.
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