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Chapter 16: Q17E (page 878)

(L04) (EPS: Simple Capital Structure) Ace Company had 200,000 shares of common stock outstanding on December 31, 2018. During the year 2019, the company issued 8,000 shares on May 1 and retired 14,000 shares on October 31. For the year 2019, Ace Company reported net income of \(249,690 after a loss from discontinued operations of \)40,600 (net of tax).
Instructions
What earnings per share data should be reported at the bottom of its income statement?

Short Answer

Expert verified

Earnings per share equals $1.23 per share.

Step by step solution

01

Computation of Weighted average number of shares outstanding

EVENT	DATE	OUTSTANDING AMOUNT	FRACTION OF YEAR	WEIGHTED SHARES
Beginning balance	Jan 1- May 1	200,000	4 /12	66,667
Issued Shares	May 1- Oct 31	208,000 (200,000 + 8,000)	6 /12	104,000
Required Shares	Oct 1- Dec 31	194,000 (208,000 – 14,000)	2 /12	32,333
				203,000

02

Computation of earnings per share

Income per share from continuing operations

$290,290 (($249,690+$40,600)/ 203,000)

$1.43

Less: Loss from discontinued operations

($40,600/ 203000)

-$0.2

Net Income per share (249690/ 203000)

$1.23

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Most popular questions from this chapter

EPS with Contingent Issuance Agreement) Winsor Inc. recently purchased Holiday Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Holiday’s income for 2017 was \(110,000 or more, 10,000 additional shares would be issued to Holiday’s stockholders in 2018. Holiday’s income for 2016 was \)120,000.

Instructions

(a) Would the contingent shares have to be considered in Winsor’s 2016 earnings per share computations?

(b) Assume the same facts, except that the 10,000 shares are contingent on Holiday’s achieving a net income of $130,000 in 2017. Would the contingent shares have to be considered in Winsor’s earnings per share computations for 2016?

Assume that Sarazan Company has a share-option plan for top management. Each share option represents the right to purchase a \(1 par value ordinary share in the future at a price equal to the fair value of the shares at the date of the grant. Sarazan has 5,000 share options outstanding, which were granted at the beginning of 2017. The following data relate to the option grant.

Exercise price for options \)40

Market price at grant date (January 1, 2017) \(40

Fair value of options at grant date (January 1, 2017) \)6

Service period 5 years

Instructions

(a) Prepare the journal entry(ies) for the first year of the share-option plan.

(b) Prepare the journal entry(ies) for the first year of the plan assuming that, rather than options, 700 shares of restricted shares were granted at the beginning of 2017.

(c) Now assume that the market price of Sarazan shares on the grant date was $45 per share. Repeat the requirements for (a) and (b).

(d) Sarazan would like to implement an employee share-purchase plan for rank-and-file employees, but it would like to avoid recording expense related to this plan. Explain how employee share-purchase plans are recorded?

(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’s 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.

Petrenko Corporation has outstanding 2,000 \(1,000 bonds, each convertible into 50 shares of \)10 par value common stock. The bonds are converted on December 31, 2017, when the unamortized discount is \(30,000 and the market price of the stock is \)21 per share. Record the conversion using the book value approach.

Briefly explain the accounting requirement for stock compensation plans under GAAP.

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