Logout Open In App
Open In App
Warning: foreach() argument must be of type array|object, bool given in /var/www/html/web/app/themes/studypress-core-theme/template-parts/header/mobile-offcanvas.php on line 20

Chapter 16: Question 21 (page 874)

Explain how convertible securities are determined to be potentially dilutive common shares and how those convertible securities that are not considered to be potentially dilutive common shares enter into the determination of earnings per share data.

Short Answer

Expert verified

Convertible securities are viewed as possibly dilutive protections when their change would diminish profit per share.

Step by step solution

01

Identification of convertible securities are determined to be potentially dilutive common shares

Convertible securities are viewed as possibly dilutive protections when their conversion would decline profit per share. On the off chance that the present circumstance doesn't result, change isn't assumed, and just fundamental EPS is accounted for.

02

Convertible securities other than potentially dilutive common shares enter into the determination of earnings per share data

On the off chance that the present circumstance doesn't result, transformation isn't accepted, and fundamental EPS is reported.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

All of the following are key similarities between GAAP and IFRS with respect to accounting for dilutive securities and EPS except:

(a) the model for recognizing stock-based compensation.

(b) the calculation of basic and diluted EPS.

(c) the accounting for convertible debt.

(d) the accounting for modifications of share options, when the value increases.

(Conversion of Bonds) The December 31, 2017, balance sheet of Kepler Corp. is as follows.10% callable, convertible bonds payable (semiannual interest dates April 30 and October 31; convertible into 6 shares of \(25 par value common stock per \)1,000 of bond principal; maturity date April 30, 2023) \(500,000Discount on bonds payable 10,240 \)489,760On March 5, 2018, Kepler Corp. called all of the bonds as of April 30 for the principal plus interest through April 30. By April 30, all bondholders had exercised their conversion to common stock as of the interest payment date. Consequently, on April 30, Kepler Corp. paid the semiannual interest and issued shares of common stock for the bonds. The discount is amortized on a straight-line basis. Kepler uses book value method.

Prepare the entry(the ies) to record the interest expense and conversion on April 30, 2018. Reversing entries were made on January 1, 2018. (Round to the nearest dollar.)

Bedard Corporation reported net income of \(300,000 in 2017 and had 200,000 shares of common stock outstanding throughout the year. Also outstanding all year were 45,000 options to purchase common stock at \)10 per share. The average market price of the stock during the year was $15. Compute diluted earnings per share.

CA16-5 (EPS: Preferred Dividends, Options, and Convertible Debt) “Earnings per share” (EPS) is the most featured, single financial statistic about modern corporations. Daily published quotations of stock prices have recently been expanded to include for many securities a “times earnings” figure that is based on EPS. Stock analysts often focus their discussions on the EPS of the corporations they study.

Instructions

(a) Explain how dividends or dividend requirements on any class of preferred stock that may be outstanding affect the computation of EPS.

(b) One of the technical procedures applicable in EPS computations is the “treasury-stock method.” Briefly describe the circumstances under which it might be appropriate to apply the treasury stock method.

(c) Convertible debentures are considered potentially dilutive common shares. Explain how convertible debentures are handled for purposes of EPS computations.

CA16-6 WRITING (EPS, Antidilution) Brad Dolan, a stockholder of Rhode Corporation, has asked you, the firm’s accountant, to explain why his stock warrants were not included in diluted EPS. In order to explain this situation, you must briefly explain what dilutive securities are, why they are included in the EPS calculation, and why some securities are antidilutive and thus not included in this calculation.

Rhode Corporation earned \(228,000 during the period, when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of \)25 per share during the period. Also outstanding were 30,000 warrants that could be exercised to purchase one share of common stock at $30 per warrant.

Instructions

Write Mr. Dolan a 1–1.5-page letter explaining why the warrants are not included in the calculation.
See all solutions

Recommended explanations on Business Studies Textbooks

Organizational Behavior

Read Explanation

Managerial Economics

Read Explanation

Financial Performance

Read Explanation

Strategic Analysis

Read Explanation

Managers

Read Explanation

Business Development

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free