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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’s 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

The 2017 income statement of Wasmeier Corporation showed net income of \(480,000 and a loss from discontinued operations of \)120,000. Wasmeier had 100,000 shares of common stock outstanding all year. Prepare Wasmeier’s income statement presentation of earnings per share.

Pechstein Corporation issued 2,000 shares of \(10 par value common stock upon conversion of 1,000 shares of \)50 par value preferred stock. The preferred stock was originally issued at \(60 per share. The common stock is trading at \)26 per share at the time of conversion. Record the conversion of the preferred stock

E16-30 (L06) (Stock-Appreciation Rights) Capulet Company establishes a stock-appreciation rights program that entitles its new president Ben Davis to receive cash for the difference between the market price of the stock and a pre-established price of \(30 (also market price) on December 31, 2013, on 30,000 SARs. The date of grant is December 31, 2013, and the required employment (service) period is 4 years. President Davis exercises all of the SARs in 2019. The fair value of the SARs is estimated to be \)6 per SAR on December 31, 2014; \(9 on December 31, 2015; \)15 on December 31, 2016; \(6 on December 31, 2017; and \)18 on December 31, 2018.

Instructions

(a) Prepare a 5-year (2014–2018) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis.

(b) Prepare the journal entry for compensation expense in 2014, 2017, and 2018 relative to the 30,000 SARs.

Question: Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for dilutive securities, stock-based compensation, and earnings per share.

(EPS with Options, Various Situations) Venzuela Company’s 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’s 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.
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