Dilutive Securities and Earnings Per Share_001

7/25/2019 Dilutive Securities and Earnings Per Share_001

1/44

CHAPTER 16

DILUTIVE SECURITIES AND EARNINGS PER SHARE

TRUE-FALSEDilutive SecuritiesCoce!tu"l

As#er No$ Descri!tioT 1. Accounting for convertible bond issue.F 2. Reporting gain/loss on convertible debt retirement.T 3. Reporting additional payment to encourage conversion.F 4. Eercise of convertible preferred stoc!.F ". #onvertible preferred stoc! eercise.T $. Allocating proceeds bet%een debt and detac&able %arrants.F '. Allocating proceeds from nondetac&able %arrants.T (. )ntrinsic value of a stoc! option.F *. #ompensation epense in fair value met&od.

T 1+. ,ervice period in stoc! option plans.F 11. Accounting for noneercise of stoc! options.F 12. Accounting for stoc! option forfeiture.T 13. #umulative preferred stoc! and E-,.F 14. Restating s&ares for stoc! dividends and stoc! splits.T 1". ,toc! dividend and %eig&tedaverage s&ares outstanding.F 1$. -referred dividends and income before etraordinary items.T. 1'. Reporting E-, in comple capital structure.F. 1(. ilutive stoc! options.T 1*. #ontingent issue s&ares.F 2+. Reporting E-, for income from continuing operations.

%ULTIPLE CH&ICEDilutive Securities' Coce!tu"l

As#er No$ Descri!tiod 21. 0ature of convertible bonds.d 22. Recording conversion of bonds.b 23. #lassification of early etinguis&ment of convertible bonds.c ,24. Reasons for issuing convertible debt.a ,2". Reporting gain/loss on conversion of bonds.d ,2$. Accounting for conversion of preferred stoc!.b 2'. Recording conversion of preferred stoc!.d 2(. onds issued %it& detac&able stoc! %arrants.d 2*. ebt euity features of debt issued %it& stoc! %arrants.

d 3+. #lassification of stoc! %arrants outstanding.d -31. onds issued %it& detac&able stoc! %arrants.c -32. istribution of stoc! rig&ts.b ,33. ifference bet%een convertible debt and stoc! %arrants.c ,34. #&aracteristics of noncompensatory stoc! option plan.a 3". easurement of compensation in stoc! option.c 3$. Recognition of compensation epense in a stoc! option plan.a 3'. #ompensation epense in a stoc! option plan.d 3(. #&aracteristics of noncompensatory stoc! purc&ase plan.a 3*. #ompensation epense in an incentive stoc! option plan.


2/44

Test (") *or Iter+e,i"te Accouti' T#el*t. E,itio

%ULTIPLE CH&ICEDilutive Securities' Coce!tu"l /cot$0

As#er No$ Descri!tiod 4+. ,toc! appreciation rig&ts plan.c 41. #ompensation epense in an incentive stoc! option plan.a 42. asis of performancetype plan.

%ULTIPLE CH&ICEDilutive Securities' Co+!ut"tio"lAs#er No$ Descri!tio

a 43. #onversion of convertible bonds.b 44. #onversion of convertible bonds.a 4". Eercise of stoc! purc&ase rig&ts.c 4$. #onversion of convertible bonds.b 4'. Amorti5ation of bond discount.b 4(. 6namorti5ed bond discount related to converted bonds.b 4*. #onversion of convertible bonds.

d "+. #onversion of convertible preferred stoc!.b "1. onds issued %it& detac&able stoc! %arrants.c "2. onds issued %it& detac&able stoc! %arrants.c "3. onds issued %it& detac&able stoc! %arrants.c "4. onds issued %it& detac&able stoc! %arrants.c "". Recording paidin capital from stoc! %arrants.b "$. onds issued %it& detac&able stoc! %arrants.b "'. Eercise of stoc! purc&ase rig&ts.b "(. onds issued %it& detac&able stoc! %arrants7d "*. etermine paidin capital amount in a stoc! option plan.c $+. etermine compensation epense in a stoc! option plan.c $1. 0et income effect in a stoc! option plan.

c $2. etermine compensation epense in a stoc! option plan.c $3. )mpact of stoc! options on stoc!&olders8 euity.b $4. etermine compensation epense in a stoc! option plan.a $". etermine compensation epense in a stoc! option plan.c $$. )ssuance of treasury stoc! in a stoc! option plan.b $'. #ompensation epense recogni5ed in first year in an ,AR plan.b $(. #ompensation epense recogni5ed in second year in an ,AR plan.a $*. #ompensation epense recogni5ed in t&ird year in an ,AR plan.

-T&ese uestions also appear in t&e -roblem,olving ,urvival 9uide.,T&ese uestions also appear in t&e ,tudy 9uide.T&is topic is dealt %it& in an Appendi to t&e c&apter.

%ULTIPLE CH&ICEDilutive Securities' CPA A,"!te,

As#er No$ Descri!tiod '+. #as& proceeds from issuance of convertible bonds.a '1. ond issue %it& detac&able stoc! %arrants.c '2. #ompensation epense in a stoc! option plan.c '3. #ompensation epense recogni5ed in an ,AR plan.

16 -


3/44

ilutive ,ecurities and Earnings per ,&are

%ULTIPLE CH&ICEE"ris Per S."re' Coce!tu"l

As#er No$ Descri!tioc '4. ,imple capital structure.d '". #omputing E-, for a simple capital structure.d '$. #omputation of %eig&tedaverage s&ares outstanding.c ''. Effect of treasury stoc! on E-,.b ,'(. Reporting E-, by companies.b -'*. iluted E-, and conversion of bonds.d (+. iluted E-,.b (1. ilutive convertible securities.a (2. #umulative convertible preferred stoc! income ad:ustment.d (3. Treasury stoc! met&od.a (4. Treasury stoc! met&od.b (". Treasury stoc! met&od.d ($. Antidilutive securities.d ('. E-, calculation %it& t%o dilutive convertible securities.

%ULTIPLE CH&ICEE"ris Per S."re' Co+!ut"tio"lAs#er No$ Descri!tio

c ((. ;eig&ted average number of common s&ares outstanding.c (*. ;eig&ted average number of common s&ares outstanding.b *+. ;eig&ted average number of common s&ares outstanding.b *1. ;eig&ted average number of s&ares outstanding.c *2. etermination of s&ares used in computing E-,.a *3. #omputation of earnings per s&are.d *4. 0umber of s&ares in computing diluted E-,.c *". iluted E-,.

c *$. E-, and contingent issuances.b *'. iluted E-, %it& convertible bonds.c *(. iluted E-, %it& convertible bonds.b **. iluted E-, %it& convertible bonds.b 1++. iluted E-,.d 1+1. asic E-, %it& convertible bonds and convertible preferred stoc!.c 1+2. iluted E-,.b 1+3. enominator in computing basic E-, and E-, %it& convertible bonds.b 1+4. ,&ares outstanding for basic E-, and E-,.b 1+". asic E-, %it& convertible preferred stoc!.c 1+$. asic E-, %it& convertible preferred stoc!.c 1+'. iluted E-, %it& convertible bonds.

a 1+(. asic E-, and E-, %it& convertible bonds issued during year.c 1+*. asic E-, %it& convertible preferred stoc! and convertible bonds.b 11+. E-, %it& convertible preferred stoc! and convertible bonds.c 111. E-, and t&e treasury stoc! met&od.d 112. E-, using t&e treasury stoc! met&od.

16 - 2


4/44


%ULTIPLE CH&ICEE"ris Per S."re' CPA A,"!te,

As#er No$ Descri!tiob 113. etermine earnings per common s&are.b 114. etermine earnings per common s&are.d 11". etermine diluted E-,.b 11$. 0umber of s&ares to calculate diluted E-,.b 11'. E-, %it& convertible securities.d 11(. Effect of dividends on nonconvertible preferred stoc!.a 11*. .E1$122 #onvertible debt and debt %it& %arrants =essay>.

E1$123 ,toc! options.E1$124 ;eig&ted average s&ares outstanding.E1$12" Earnings per s&are =essay>.E1$12$ Earnings per s&are.E1$12' iluted earnings per s&are.

E1$12( ,toc! appreciation rig&ts.

PR&(LE%S

Ite+ Descri!tio

-1$12* #onvertible bonds and stoc! %arrants.-1$13+ Earnings per s&are.

-1$131 asic and diluted earnings per s&are.-1$132 asic and diluted earnings per s&are.-1$133 asic and diluted earnings per s&are.

CHAPTER LEARNING &(4ECTIVES

1. escribe t&e accounting for t&e issuance7 conversion7 and retirement of convertiblesecurities.

2. Eplain t&e accounting for convertible preferred stoc!.

3. #ontrast t&e accounting for stoc! %arrants and stoc! %arrants issued %it& ot&ersecurities.

4. escribe t&e accounting for stoc! compensation plans under generally acceptedaccounting principles.

". iscuss t&e controversy involving stoc! compensation plans.

$. #ompute earnings per s&are in a simple capital structure.

'. #ompute earnings per s&are in a comple capital structure.

(. Eplain t&e accounting for various s&arebased compensation plans.

*. #ompute earnings per s&are in a comple situation.

16 - 5


5/44


SU%%AR &F LEARNING &(4ECTIVES ( 7UESTI&NSItem Type Item Type Item Type Item Type Item Type Item Type Item Type

Le"ri &89ective 1

1. TF 21. # ,24. # 44. # 4'. # '+. # 12*. -

2. TF 22. #

,

2". # 4". # 4(. # 12+. E3. TF 23. # 43. # 4$. # 4*. # 121. E

Le"ri &89ective

4. TF ". TF ,2$. # 2'. # "+. #

Le"ri &89ective 2

$. TF 2(. # -31. # "1. # "4. # "'. # 122. E'. TF 2*. # -32. # "2. # "". # "(. # 12*. -(. TF 3+. # ,33. # "3. # "$. # '1. #

Le"ri &89ective 5

*. TF 12. TF 3$. # "*. # $2. # $". # 123. E1+. TF ,34. # 3'. # $+. # $3. # $$. #

11. TF 3". # 3(. # $1. # $4. # '2. #Le"ri &89ective 6

13. TF '4. # ,'(. # *1. # 113. # 12". E14. TF '". # ((. # *2. # 114. # 131. -1". TF '$. # (*. # *3. # 11". # 132. -1$. TF ''. # *+. # 1+$. # 124. E

Le"ri &89ective :

1'. TF (1. # *4. # 1++. # 1+'. # 11$. # 12'. E1(. TF (2. # *". # 1+1. # 1+(. # 11'. # 13+. -1*. TF (3. # *$. # 1+2. # 1+*. # 11(. # 131. -2+. TF (4. # *'. # 1+3. # 11+. # 11*. # 132. -

-'*. # (". # *(. # 1+4. # 111. # 12". E 133. -(+. # ($. # **. # 1+". # 112. # 12$. E

Le"ri &89ective ;.c. return on common stoc!&olders euity.d. sales.

%ulti!le C.oice As#ersDilutive Securities' Coce!tu"l

Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$21. d 2". a 2*. d 33. b 3'. a 41. b22. d 2$. d 3+. d 34. c 3(. d 42 b

23. b 2'. b 31. d 3". a 3*. c

24. c 2(. d 32. c 3$. c 4+. b

,olutions to t&ose ultiple #&oice uestions for %&ic& t&e ans%er is none of t&ese.B

3+. additions to contributed capital.

%ULTIPLE CH&ICEDilutive Securities' Co+!ut"tio"l

43. Hen!s #o.&as I27"++7+++ of (J convertible bonds outstanding. Eac& I17+++ bond isconvertible into 3+ s&ares of I3+ par value common stoc!. T&e bonds pay interest onHanuary 31 and Huly 31. Cn Huly 317 2++'7 t&e &olders of I(++7+++ bonds eercised t&econversion privilege. Cn t&at date t&e mar!et price of t&e bonds %as 1+" and t&e mar!etprice of t&e common stoc! %as I3$. T&e total unamorti5ed bond premium at t&e date ofconversion %as I1'"7+++. Hen!s s&ould record7 as a result of t&is conversion7 aa. credit of I13$7+++ to -aidin #apital in Ecess of -ar.b. credit of I12+7+++ to -aidin #apital in Ecess of -ar.c. credit of I"$7+++ to -remium on onds -ayable.d. loss of I(7+++.

16 - 1?


11/44


44. Cn Huly 17 2++'7 an interest payment date7 I$+7+++ of Risen #o. bonds %ere convertedinto 172++ s&ares of Risen #o. common stoc! eac& &aving a par value of I4" and amar!et value of I"4. T&ere is I274++ unamorti5ed discount on t&e bonds. 6sing t&e boo!value met&od7 Risen %ould recorda. no c&ange in paidin capital in ecess of par.b. a I37$++ increase in paidin capital in ecess of par.c. a I'72++ increase in paidin capital in ecess of par.d. a I47(++ increase in paidin capital in ecess of par.

4". Kuayle #orporation &ad t%o issues of securities outstanding? common stoc! and an (Jconvertible bond issue in t&e face amount of I1$7+++7+++. )nterest payment dates of t&ebond issue are Hune 3+t& and ecember 31st. T&e conversion clause in t&e bondindenture entitles t&e bond&olders to receive forty s&ares of I2+ par value common stoc!in ec&ange for eac& I17+++ bond. Cn Hune 3+7 2++'7 t&e &olders of I274++7+++ facevalue bonds eercised t&e conversion privilege. T&e mar!et price of t&e bonds on t&atdate %as I171++ per bond and t&e mar!et price of t&e common stoc! %as I3". T&e totalunamorti5ed bond discount at t&e date of conversion %as I17+++7+++. )n applying t&eboo! value met&od7 %&at amount s&ould Kuayle credit to t&e account


12/44


13/44


a. I+b. I127+++c. I1274(+d. I117("$

"4. Cn April '7 2++'7 eade #orporation sold a I27+++7+++7 t%entyyear7 ( percent bondissue for I2712+7+++. Eac& I17+++ bond &as t%o detac&able %arrants7 eac& of %&ic&permits t&e purc&ase of one s&are of t&e corporations common stoc! for I3+. T&e stoc!&as a par value of I2" per s&are. )mmediately after t&e sale of t&e bonds7 t&e corporations securities &ad t&e follo%ing mar!et values?

(J bond %it&out %arrants I17++(;arrants 21#ommon stoc! 2(

;&at accounts s&ould eade credit to record t&e sale of t&e bondsa. onds -ayable I27+++7+++

-remium on onds -ayable ''7$++-aidin #apitalM,toc! ;arrants 4274++

b. onds -ayable I27+++7+++-remium on onds -ayable 1$7+++-aidin #apitalM,toc! ;arrants (47+++

c. onds -ayable I27+++7+++-remium on onds -ayable 3"72++-aidin #apitalM,toc! ;arrants (47(++

d. onds -ayable I27+++7+++-remiums on onds -ayable 12+7+++

6se t&e follo%ing information for uestions "" and "$.

Cn ay 17 2++'7 Nogan #o. issued I3++7+++ of 'J bonds at 1+37 %&ic& are due on April 3+72+1'. T%enty detac&able stoc! %arrants entitling t&e &older to purc&ase for I4+ one s&are ofNogan8s common stoc!7 I1" par value7 %ere attac&ed to eac& I17+++ bond. T&e bonds %it&outt&e %arrants %ould sell at *$. Cn ay 17 2++'7 t&e fair value of Nogan8s common stoc! %as I3"per s&are and of t&e %arrants %as I2.

"". Cn ay 17 2++'7 Nogan s&ould credit -aidin #apital from ,toc! ;arrants fora. I117"2+.b. I127+++.c. I1273$+.d. I217+++.

"$. Cn ay 17 2++'7 Nogan s&ould record t&e bonds %it& aa. discount of I127+++.b. discount of I373$+.c. discount of I37+++.d. premium of I*7+++.

16 - 12


14/44


"'. Cn Huly 47 2++'7 ia5 #ompany issued for I472++7+++ a total of 4+7+++ s&ares of I1++par value7 'J noncumulative preferred stoc! along %it& one detac&able %arrant for eac&s&are issued. Eac& %arrant contains a rig&t to purc&ase one s&are of ia5 I1+ par valuecommon stoc! for I1" per s&are. T&e stoc! %it&out t&e %arrants %ould normally sell forI471++7+++. T&e mar!et price of t&e rig&ts on Huly 17 2++'7 %as I2."+ per rig&t. CnCctober 317 2++'7 %&en t&e mar!et price of t&e common stoc! %as I1* per s&are and t&emar!et value of t&e rig&ts %as I3.++ per rig&t7 1$7+++ rig&ts %ere eercised. As a result oft&e eercise of t&e 1$7+++ rig&ts and t&e issuance of t&e related common stoc!7 %&at

:ournal entry %ould ia5 ma!ea. #as&.................................................................................... 24+7+++

#ommon ,toc! . ....................................................... 1$+7+++-aidin #apital in Ecess of -ar .............................. (+7+++

b. #as&.................................................................................... 24+7+++-aidin #apitalM,toc! ;arrants ......................................... 4+7+++

#ommon ,toc! . ....................................................... 1$+7+++-aidin #apital in Ecess of -ar .............................. 12+7+++

c. #as&.................................................................................... 24+7+++

-aidin #apitalM,toc! ;arrants ......................................... 1++7+++#ommon ,toc! . ....................................................... 1$+7+++-aidin #apital in Ecess of -ar .............................. 1(+7+++

d. #as&.................................................................................... 24+7+++-aidin #apitalM,toc! ;arrants ......................................... $+7+++

#ommon ,toc! . ....................................................... 1$+7+++-aidin #apital in Ecess of -ar .............................. 14+7+++

"(. ,loane #orporation offered detac&able "year %arrants to buy one s&are of commonstoc! =par value I"> at I2+ =at a time %&en t&e stoc! %as selling for I32>. T&e price paidfor 27+++7 I17+++ bonds %it& t&e %arrants attac&ed %as I2+"7+++. T&e mar!et price of t&e,loane bonds %it&out t&e %arrants %as I1(+7+++7 and t&e mar!et price of t&e %arrants

%it&out t&e bonds %as I2+7+++. ;&at amount s&ould be allocated to t&e %arrantsa. I2+7+++b. I2+7"++c. I247+++d. I2"7+++

"*. Cn Hanuary 17 2++(7 -orter #ompany granted stoc! options to officers and !ey employeesfor t&e purc&ase of 1+7+++ s&ares of t&e companys I1 par common stoc! at I2+ pers&are as additional compensation for services to be rendered over t&e net t&ree years.T&e options are eercisable during a fiveyear period beginning Hanuary 17 2+11 bygrantees still employed by -orter. T&e lac!,c&oles option pricing model determinestotal compensation epense to be I*+7+++. T&e mar!et price of common stoc! %as I2$

per s&are at t&e date of grant. T&e :ournal entry to record t&e compensation epenserelated to t&ese options for 2++( %ould include a credit to t&e -aidin #apitalM,toc!Cptions account fora. I+.b. I1(7+++.c. I2+7+++.d. I3+7+++.

16 - 15


15/44


$+. Cn Hanuary 17 2++(7 o%ns #ompany granted Tim ;rig&t7 an employee7 an option to buy17+++ s&ares of o%ns #o. stoc! for I2" per s&are7 t&e option eercisable for " yearsfrom date of grant. 6sing a fair value option pricing model7 total compensation epense isdetermined to be I'7"++. ;rig&t eercised &is option on ,eptember 17 2++(7 and sold &is17+++ s&ares on ecember 17 2++(. Kuoted mar!et prices of o%ns #o. stoc! during2++( %ere

Hanuary 1 I2" per s&are,eptember 1 I3+ per s&areecember 1 I34 per s&are

T&e service period is for t&ree years beginning Hanuary 17 2++(. As a result of t&e optiongranted to ;rig&t7 using t&e fair value met&od7 o%ns s&ould recogni5e compensationepense for 2++( on its boo!s in t&e amount ofa. I*7+++.b. I'7"++.c. I27"++.d. I17"++.

$1. Cn ecember 317 2++'7 Filmore #ompany granted some of its eecutives options topurc&ase "+7+++ s&ares of t&e companys I1+ par common stoc! at an option price ofI"+ per s&are. T&e options become eercisable on Hanuary 17 2++(7 and representcompensation for eecutives services over a t&reeyear period beginning Hanuary 172++(. T&e lac!,c&oles option pricing model determines total compensation epense tobe I3++7+++. At ecember 317 2++(7 none of t&e eecutives &ad eercised t&eir options.;&at is t&e impact on Filmores net income for t&e year ended ecember 317 2++( as aresult of t&is transaction under t&e fair value met&oda. I1++7+++ increaseb. I+c. I1++7+++ decreased. I3++7+++ decrease

$2. Dunger #orp. on Hanuary 17 2++47 granted stoc! options for 4+7+++ s&ares of its I1+ parvalue common stoc! to its !ey employees. T&e mar!et price of t&e common stoc! on t&atdate %as I23 per s&are and t&e option price %as I2+. T&e lac!,c&oles option pricingmodel determines total compensation epense to be I24+7+++. T&e options are eercisablebeginning Hanuary 17 2++'7 provided t&ose !ey employees are still in Dunger8s employ att&e time t&e options are eercised. T&e options epire on Hanuary 17 2++(.

Cn Hanuary 17 2++'7 %&en t&e mar!et price of t&e stoc! %as I2* per s&are7 all 4+7+++options %ere eercised. T&e amount of compensation epense Dunger s&ould record for2++$ under t&e fair value met&od isa. I+.b. I4+7+++.

c. I(+7+++.d. I12+7+++.

$3. Cn ecember 317 2++'7 Hansen #ompany granted some of its eecutives options topurc&ase 4"7+++ s&ares of t&e companys I"+ par common stoc! at an option price of I$+per s&are. T&e lac!,c&oles option pricing model determines total compensation epenseto be I*++7+++. T&e options become eercisable on Hanuary 17 2++(7 and representcompensation for eecutives past and future services over a t&reeyear period beginningHanuary 17 2++(. ;&at is t&e impact on Hansens total stoc!&olders euity for t&e yearended ecember 317 2++'7 as a result of t&is transaction under t&e fair value met&od

16 - 1>


16/44


a. I*++7+++ decreaseb. I3++7+++ decreasec. I+d. I3++7+++ increase

$4. Cn Hune 3+7 2++47 ,ealey #orporation granted compensatory stoc! options for 3+7+++s&ares of its I2+ par value common stoc! to certain of its !ey employees. T&e mar!etprice of t&e common stoc! on t&at date %as I3$ per s&are and t&e option price %as I3+.T&e lac!,c&oles option pricing model determines total compensation epense to beI3$+7+++. T&e options are eercisable beginning Hanuary 17 2++'7 provided t&ose !eyemployees are still in ,ealey8s employ at t&e time t&e options are eercised. T&e optionsepire on Hune 3+7 2++(.

Cn Hanuary 47 2++'7 %&en t&e mar!et price of t&e stoc! %as I42 per s&are7 all 3+7+++options %ere eercised. ;&at s&ould be t&e amount of compensation epense recordedby ,ealey #orporation for t&e calendar year 2++$ using t&e fair value met&oda. I+.b. I1447+++.

c. I1(+7+++.d. I3$+7+++.

$". )n order to retain certain !ey eecutives7 Tanner #orporation granted t&em incentive stoc!options on ecember 317 2++$. "+7+++ options %ere granted at an option price of I3" pers&are. ar!et prices of t&e stoc! %ere as follo%s?

ecember 317 2++' I4$ per s&areecember 317 2++( "1 per s&are

T&e options %ere granted as compensation for eecutives services to be rendered over at%oyear period beginning Hanuary 17 2++'. T&e lac!,c&oles option pricing modeldetermines total compensation epense to be I"++7+++. ;&at amount of compensation

epense s&ould Tanner recogni5e as a result of t&is plan for t&e year ended ecember 3172++' under t&e fair value met&oda. I2"+7+++.b. I"++7+++.c. I""+7+++.d. I17'"+7+++.

$$. Oiner7 )nc. &ad 4+7+++ s&ares of treasury stoc! =I1+ par value> at ecember 317 2++$7%&ic& it acuired at I11 per s&are. Cn Hune 47 2++'7 Oiner issued 2+7+++ treasury s&aresto employees %&o eercised options under Oiners employee stoc! option plan. T&emar!et value per s&are %as I13 at ecember 317 2++$7 I1" at Hune 47 2++'7 and I1( atecember 317 2++'. T&e stoc! options &ad been granted for I12 per s&are. T&e cost

met&od is used. ;&at is t&e balance of t&e treasury stoc! on Oiners balance s&eet atecember 317 2++'a. I14+7+++.b. I1(+7+++.c. I22+7+++.d. I24+7+++.

16 - 16


17/44


6se t&e follo%ing information for uestions $' t&roug& $*.

Cn Hanuary 17 2++$7 er!en7 )nc. establis&ed a stoc! appreciation rig&ts plan for its eecutives.)t entitled t&em to receive cas& at any time during t&e net four years for t&e difference bet%eent&e mar!et price of its common stoc! and a preestablis&ed price of I2+ on $+7+++ ,ARs. #urrentmar!et prices of t&e stoc! are as follo%s?

Hanuary 17 2++$ I3" per s&areecember 317 2++$ 3( per s&areecember 317 2++' 3+ per s&areecember 317 2++( 33 per s&are

#ompensation epense relating to t&e plan is to be recorded over a fouryear period beginningHanuary 17 2++$.

$'. ;&at amount of compensation epense s&ould er!en recogni5e for t&e year endedecember 317 2++$a. I1(+7+++

b. I2'+7+++c. I22"7+++d. I17+(+7+++

$(. ;&at amount of compensation epense s&ould er!en recogni5e for t&e year endedecember 317 2++'a. I+b. I3+7+++c. I3++7+++d. I1"+7+++

$*. Cn ecember 317 2++(7 1$7+++ ,ARs are eercised by eecutives. ;&at amount of

compensation epense s&ould er!en recogni5e for t&e year ended ecember 317 2++(a. I2("7+++b. I1*"7+++c. I"("7+++d. I'(7+++

%ulti!le C.oice As#ersDilutive Securities' Co+!ut"tio"l

Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$

43. a 4'. b "1. b "". c "*. d $3. c $'. b44. b 4(. b "2. c "$. b $+. c $4. b $(. b

4". a 4*. b "3. c "'. b $1. c $". a $*. a

4$. c "+. d "4. c "(. b $2. c $$. c

16 - 1:


18/44


%ULTIPLE CH&ICEDilutive Securities' CPA A,"!te,

'+. Cn Hanuary 27 2++$7 #arr #o. issued 1+year convertible bonds at 1+". uring 2++(7t&ese bonds %ere converted into common stoc! &aving an aggregate par value eual tot&e total face amount of t&e bonds. At conversion7 t&e mar!et price of #arr8s common

stoc! %as "+ percent above its par value. Cn Hanuary 27 2++$7 cas& proceeds from t&eissuance of t&e convertible bonds s&ould be reported asa. paidin capital for t&e entire proceeds.b. paidin capital for t&e portion of t&e proceeds attributable to t&e conversion feature and

as a liability for t&e balance.c. a liability for t&e face amount of t&e bonds and paidin capital for t&e premium over t&e

face amount.d. a liability for t&e entire proceeds.

'1. Oane #o. issued bonds %it& detac&able common stoc! %arrants. Cnly t&e %arrants &ad a!no%n mar!et value. T&e sum of t&e fair value of t&e %arrants and t&e face amount of t&ebonds eceeds t&e cas& proceeds. T&is ecess is reported as

a. iscount on onds -ayable.b. -remium on onds -ayable.c. #ommon ,toc! ,ubscribed.d. -aidin #apital in Ecess of -arM,toc! ;arrants.

'2. Cn Hanuary 17 2++'7 oane #orp. granted an employee an option to purc&ase $7+++s&ares of oanes I" par value common stoc! at I2+ per s&are. T&e lac!,c&olesoption pricing model determines total compensation epense to be I14+7+++. T&e optionbecame eercisable on ecember 317 2++(7 after t&e employee completed t%o years ofservice. T&e mar!et prices of oanes stoc! %ere as follo%s?

Hanuary 17 2++' I3+ecember 317 2++( "+

For 2++(7 oane s&ould recogni5e compensation epense under t&e fair value met&od ofa. I*+7+++.b. I3+7+++.c. I'+7+++.d. I+.

'3. Cn Hanuary 27 2++'7 for past services7 Titus #orp. granted Oen -ine7 its president7 1$7+++stoc! appreciation rig&ts t&at are eercisable immediately and epire on Hanuary 27 2++(.Cn eercise7 -ine is entitled to receive cas& for t&e ecess of t&e mar!et price of t&e stoc!on t&e eercise date over t&e mar!et price on t&e grant date. -ine did not eercise any oft&e rig&ts during 2++'. T&e mar!et price of Tituss stoc! %as I3+ on Hanuary 27 2++'7 and

I4" on ecember 317 2++'. As a result of t&e stoc! appreciation rig&ts7 Titus s&ouldrecogni5e compensation epense for 2++' ofa. I+.b. I(+7+++.c. I24+7+++.d. I4(+7+++.

16 - 1;


19/44


%ulti!le C.oice As#ersDilutive Securities' CPA A,"!te,

Ite+ As$ Ite+ As$ Ite+ As$ Ite+ As$

'+. d '1. a '2. c '3. c

%ULTIPLE CH&ICEE"ris Per S."reCoce!tu"l

'4. ;it& respect to t&e computation of earnings per s&are7 %&ic& of t&e follo%ing %ould bemost indicative of a simple capital structurea. #ommon stoc!7 preferred stoc!7 and convertible securities outstanding in lots of even

t&ousandsb. Earnings derived from one primary line of businessc. C%ners&ip interest consisting solely of common stoc!d. 0one of t&ese

'". )n computing earnings per s&are for a simple capital structure7 if t&e preferred stoc! iscumulative7 t&e amount t&at s&ould be deducted as an ad:ustment to t&e numerator=earnings> is t&ea. preferred dividends in arrears.b. preferred dividends in arrears times =one minus t&e income ta rate>.c. annual preferred dividend times =one minus t&e income ta rate>.d. none of t&ese.

'$. )n computations of %eig&ted average of s&ares outstanding7 %&en a stoc! dividend orstoc! split occurs7 t&e additional s&ares area. %eig&ted by t&e number of days outstanding.

b. %eig&ted by t&e number of mont&s outstanding.c. considered outstanding at t&e beginning of t&e year.d. considered outstanding at t&e beginning of t&e earliest year reported.

''. ;&at effect %ill t&e acuisition of treasury stoc! &ave on stoc!&olders euity and earningsper s&are7 respectivelya. ecrease and no effectb. )ncrease and no effectc. ecrease and increased. )ncrease and decrease

,'(. ue to t&e importance of earnings per s&are information7 it is reuired to be reported by all-ublic #ompanies 0onpublic #ompanies

a. Des Desb. Des 0oc. 0o 0od. 0o Des

16 - 1=


20/44


-'*. A convertible bond issue s&ould be included in t&e diluted earnings per s&are computationas if t&e bonds &ad been converted into common stoc!7 if t&e effect of its inclusion is

ilutive Antidilutivea. Des Desb. Des 0o

c. 0o Desd. 0o 0o

(+. ;&en computing diluted earnings per s&are7 convertible bonds area. ignored.b. assumed converted %&et&er t&ey are dilutive or antidilutive.c. assumed converted only if t&ey are antidilutive.d. assumed converted only if t&ey are dilutive.

(1. ilutive convertible securities must be used in t&e computation ofa. basic earnings per s&are only.b. diluted earnings per s&are only.

c. diluted and basic earnings per s&are.d. none of t&ese.

(2. )n computing earnings per s&are7 t&e euivalent number of s&ares of convertible preferredstoc! are added as an ad:ustment to t&e denominator =number of s&ares outstanding>. )ft&e preferred stoc! is cumulative7 %&ic& amount s&ould t&en be added as an ad:ustmentto t&e numerator =net earnings>a. Annual preferred dividendb. Annual preferred dividend times =one minus t&e income ta rate>c. Annual preferred dividend times t&e income ta rated. Annual preferred dividend divided by t&e income ta rate

(3. )n t&e diluted earnings per s&are computation7 t&e treasury stoc! met&od is used foroptions and %arrants to reflect assumed reacuisition of common stoc! at t&e averagemar!et price during t&e period. )f t&e eercise price of t&e options or %arrants eceeds t&eaverage mar!et price7 t&e computation %oulda. fairly present diluted earnings per s&are on a prospective basis.b. fairly present t&e maimum potential dilution of diluted earnings per s&are on a

prospective basis.c. reflect t&e ecess of t&e number of s&ares assumed issued over t&e number of s&ares

assumed reacuired as t&e potential dilution of earnings per s&are.d. be antidilutive.

(4. )n applying t&e treasury stoc! met&od to determine t&e dilutive effect of stoc! options and

%arrants7 t&e proceeds assumed to be received upon eercise of t&e options and %arrantsa. are used to calculate t&e number of common s&ares repurc&ased at t&e averagemar!et price7 %&en computing diluted earnings per s&are.

b. are added7 net of ta7 to t&e numerator of t&e calculation for diluted earnings pers&are.

c. are disregarded in t&e computation of earnings per s&are if t&e eercise price of t&eoptions and %arrants is less t&an t&e ending mar!et price of common stoc!.

d. none of t&ese.

16 - ?


21/44


(". ;&en applying t&e treasury stoc! met&od for diluted earnings per s&are7 t&e mar!et priceof t&e common stoc! used for t&e repurc&ase is t&ea. price at t&e end of t&e year.b. average mar!et price.c. price at t&e beginning of t&e year.d. none of t&ese.

($. Antidilutive securitiesa. s&ould be included in t&e computation of diluted earnings per s&are but not basic

earnings per s&are.b. are t&ose %&ose inclusion in earnings per s&are computations %ould cause basic

earnings per s&are to eceed diluted earnings per s&are.c. include stoc! options and %arrants %&ose eercise price is less t&an t&e average

mar!et price of common stoc!.d. s&ould be ignored in all earnings per s&are calculations.

('. Assume t&ere are t%o dilutive convertible securities. T&e one t&at s&ould be used first torecalculate earnings per s&are is t&e security %it& t&ea. greater earnings ad:ustment.b. greater earnings per s&are ad:ustment.c. smaller earnings ad:ustment.d. smaller earnings per s&are ad:ustment.

%ulti!le C.oice As#ersE"ris Per S."reCoce!tu"l


'4. c '$. d '(. b (+. d (2. a (4. a ($. d'". d ''. c '*. b (1. b (3. d (". b ('. d

,olution to ultiple #&oice uestion for %&ic& t&e ans%er is none of t&ese.B'". annual preferred dividend.

%ULTIPLE CH&ICEE"ris Per S."reCo+!ut"tio"l

((. Hett #orp. &ad $++7+++ s&ares of common stoc! outstanding on Hanuary 17 issued*++7+++ s&ares on Huly 17 and &ad income applicable to common stoc! of I17+"+7+++ fort&e year ending ecember 317 2++'. Earnings per s&are of common stoc! for 2++' %ouldbe

a. I1.'".b. I.(3.c. I1.++.d. I1.1'.

(*. At ecember 317 2++'7 0orbett #ompany &ad "++7+++ s&ares of common stoc! issuedand outstanding7 4++7+++ of %&ic& &ad been issued and outstanding t&roug&out t&e yearand 1++7+++ of %&ic& %ere issued on Cctober 17 2++'. 0et income for t&e year endedecember 317 2++'7 %as I17+2+7+++. ;&at s&ould be 0orbetts 2++' earnings percommon s&are7 rounded to t&e nearest penny

16 - 1


22/44


a. I2.+2b. I2.""c. I2.4+d. I2.2'

*+. Noeb #o. &ad $++7+++ s&ares of common stoc! outstanding on Hanuary 17 issued 12$7+++s&ares on ay 17 purc&ased $37+++ s&ares of treasury stoc! on ,eptember 17 and issued"47+++ s&ares on 0ovember 1. T&e %eig&ted average s&ares outstanding for t&e year isa. $"17+++.b. $'27+++.c. $*37+++.d. '147+++.

*1. Cn Hanuary 17 2++(7 ingler #orporation &ad 12"7+++ s&ares of its I2 par value commonstoc! outstanding. Cn arc& 17 ingler sold an additional 2"+7+++ s&ares on t&e openmar!et at I2+ per s&are. ingler issued a 2+J stoc! dividend on ay 1. Cn August 17ingler purc&ased 14+7+++ s&ares and immediately retired t&e stoc!. Cn 0ovember 172++7+++ s&ares %ere sold for I2" per s&are. ;&at is t&e %eig&tedaverage number ofs&ares outstanding for 2++(a. "1+7+++b. 3'"7+++c. 3"(7333d. 2"(7333

*2. T&e follo%ing information is available for Alley #orporation?

Hanuary 17 2++( ,&ares outstanding 172"+7+++April 17 2++( ,&ares issued 2++7+++Huly 17 2++( Treasury s&ares purc&ased '"7+++Cctober 17 2++( ,&ares issued in a 1++J stoc! dividend 173'"7+++

T&e number of s&ares to be used in computing earnings per common s&are for 2++( isa. 27(2"7"++.b. 27'3'7"++.c. 27'2"7+++.d. 17'+$72"+.

*3. At ecember 317 2++' -ol! #ompany &ad 3++7+++ s&ares of common stoc! and 1+7+++s&ares of "J7 I1++ par value cumulative preferred stoc! outstanding. 0o dividends %eredeclared on eit&er t&e preferred or common stoc! in 2++' or 2++(. Cn Hanuary 3+7 2++*7prior to t&e issuance of its financial statements for t&e year ended ecember 317 2++(7-ol! declared a 1++J stoc! dividend on its common stoc!. 0et income for 2++( %asI*"+7+++. )n its 2++( financial statements7 -ol!s 2++( earnings per common s&are

s&ould bea. I1."+.b. I1."(.c. I3.++.d. I3.1'.

16 -


23/44


*4. #aruso #ompany &ad "++7+++ s&ares of common stoc! issued and outstanding atecember 317 2++'. Cn Huly 17 2++( an additional "++7+++ s&ares %ere issued for cas&.#aruso also &ad stoc! options outstanding at t&e beginning and end of 2++( %&ic& allo%t&e &olders to purc&ase 1"+7+++ s&ares of common stoc! at I2+ per s&are. T&e averagemar!et price of #arusos common stoc! %as I2" during 2++(. ;&at is t&e number ofs&ares t&at s&ould be used in computing diluted earnings per s&are for t&e year endedecember 317 2++(a. 17+3+7+++b. ('+7+++c. '('7"++d. '(+7+++

*". Loffman #orporation &ad net income for t&e year of I4(+7+++ and a %eig&ted averagenumber of common s&ares outstanding during t&e period of 2++7+++ s&ares. T&ecompany &as a convertible bond issue outstanding. T&e bonds %ere issued four yearsago at par =I27+++7+++>7 carry a 'J interest rate7 and are convertible into 4+7+++ s&aresof common stoc!. T&e company &as a 4+J ta rate. iluted earnings per s&are area. I1.$"b. I2.23.c. I2.3".d. I2."(.

*$. Oern #orporation purc&ased 9oltra )nc. and agreed to give stoc!&olders of 9oltra )nc."+7+++ additional s&ares in 2++* if 9oltra )nc.8s net income in 2++( is I4++7+++ or morePin 2++' 9oltra )nc.8s net income is I41+7+++. Oern &as net income for 2++' of I(++7+++and &as an average number of common s&ares outstanding for 2++' of "++7+++ s&ares.;&at s&ould Oern report as earnings per s&are for 2++'

asic Earnings iluted Earnings-er ,&are -er ,&are

a. I1.$+ I1.$+b. I1.4" I1.$+c. I1.$+ I1.4"d. I1.4" I1.4"

*'. Cn Hanuary 27 2++'7 Ramos #o. issued at par I1+7+++ of $J bonds convertible in totalinto 17+++ s&ares of Ramoss common stoc!. 0o bonds %ere converted during 2++'.T&roug&out 2++'7 Ramos &ad 17+++ s&ares of common stoc! outstanding. Ramoss 2++'net income %as I37+++7 and its income ta rate is 3+J. 0o potentially dilutive securitiesot&er t&an t&e convertible bonds %ere outstanding during 2++'. Ramoss diluted earningsper s&are for 2++' %ould be =rounded to t&e nearest penny>a. I1."+.

b. I1.'1.c. I1.(+.d. I3.42.

16 - 2


24/44


*(. At ecember 317 2++$7 -ratt #ompany &ad "++7+++ s&ares of common stoc! outstanding.Cn Cctober 17 2++'7 an additional 1++7+++ s&ares of common stoc! %ere issued. )naddition7 -ratt &ad I1+7+++7+++ of $J convertible bonds outstanding at ecember 3172++$7 %&ic& are convertible into 22"7+++ s&ares of common stoc!. 0o bonds %ereconverted into common stoc! in 2++'. T&e net income for t&e year ended ecember 3172++'7 %as I37+++7+++. Assuming t&e income ta rate %as 3+J7 t&e diluted earnings pers&are for t&e year ended ecember 317 2++'7 s&ould be =rounded to t&e nearest penny>a. I$."2.b. I4.(+.c. I4."$.d. I4.++.

**. Cn Hanuary 27 2++'7 ino #o. issued at par I3++7+++ of *J convertible bonds. Eac&I17+++ bond is convertible into 3+ s&ares. 0o bonds %ere converted during 2++'. ino&ad "+7+++ s&ares of common stoc! outstanding during 2++'. inos 2++' net income%as I1$+7+++ and t&e income ta rate %as 3+J. inos diluted earnings per s&are for2++' %ould be =rounded to t&e nearest penny>a. I2.'1.

b. I3.+3.c. I3.2+.d. I3."(.

1++. At ecember 317 2++$7 Oegan #o. &ad 172++7+++ s&ares of common stoc! outstanding.)n addition7 Oegan &ad 4"+7+++ s&ares of preferred stoc! %&ic& %ere convertible into'"+7+++ s&ares of common stoc!. uring 2++'7 Oegan paid I$++7+++ cas& dividends ont&e common stoc! and I4++7+++ cas& dividends on t&e preferred stoc!. 0et income for2++' %as I374++7+++ and t&e income ta rate %as 4+J. T&e diluted earnings per s&arefor 2++' is =rounded to t&e nearest penny>a. I1.24.b. I1.'4.

c. I2."1.d. I2.(4.

6se t&e follo%ing information for uestions 1+1 and 1+2.

9illey #o. &ad 2++7+++ s&ares of common stoc!7 2+7+++ s&ares of convertible preferred stoc!7and I17+++7+++ of 1+J convertible bonds outstanding during 2++'. T&e preferred stoc! isconvertible into 4+7+++ s&ares of common stoc!. uring 2++'7 9illey paid dividends of I.*+ pers&are on t&e common stoc! and I3.++ per s&are on t&e preferred stoc!. Eac& I17+++ bond isconvertible into 4" s&ares of common stoc!. T&e net income for 2++' %as I$++7+++ and t&eincome ta rate %as 3+J.

1+1. asic earnings per s&are for 2++' is =rounded to t&e nearest penny>

a. I2.21.b. I2.42.c. I2."1.d. I2.'+.

1+2. iluted earnings per s&are for 2++' is =rounded to t&e nearest penny>a. I2.14.b. I2.2".c. I2.3".d. I2.4$.

16 - 5


25/44


1+3. ;ert&7 )ncorporated7 &as 372++7+++ s&ares of common stoc! outstanding on ecember317 2++$. An additional (++7+++ s&ares of common stoc! %ere issued on April 17 2++'7and 4++7+++ more on Huly 17 2++'. Cn Cctober 17 2++'7 ;ert& issued 2+7+++7 I17+++face value7 (J convertible bonds. Eac& bond is convertible into 2+ s&ares of commonstoc!. 0o bonds %ere converted into common stoc! in 2++'. ;&at is t&e number ofs&ares to be used in computing basic earnings per s&are and diluted earnings per s&are7respectivelya. 47+++7+++ and 47+++7+++b. 47+++7+++ and 471++7+++c. 47+++7+++ and 474++7+++d. 474++7+++ and "72++7+++

1+4. Nem!e #o. &as 47+++7+++ s&ares of common stoc! outstanding on ecember 317 2++$.An additional 2++7+++ s&ares are issued on April 17 2++'7 and 4(+7+++ more on,eptember 1. Cn Cctober 17 Nem!e issued I$7+++7+++ of *J convertible bonds. Eac&I17+++ bond is convertible into 4+ s&ares of common stoc!. 0o bonds &ave beenconverted. T&e number of s&ares to be used in computing basic earnings per s&are anddiluted earnings per s&are on ecember 317 2++' isa. 4731+7+++ and 4731+7+++.b. 4731+7+++ and 473'+7+++.c. 4731+7+++ and 47""+7+++.d. "7+(+7+++ and "732+7+++.

1+". At ecember 317 2++$7 Kuir! #ompany &ad 27+++7+++ s&ares of common stoc!outstanding. Cn Hanuary 17 2++'7 Kuir! issued "++7+++ s&ares of preferred stoc! %&ic&%ere convertible into 17+++7+++ s&ares of common stoc!. uring 2++'7 Kuir! declaredand paid I17"++7+++ cas& dividends on t&e common stoc! and I"++7+++ cas& dividendson t&e preferred stoc!. 0et income for t&e year ended ecember 317 2++'7 %asI"7+++7+++. Assuming an income ta rate of 3+J7 %&at s&ould be diluted earnings pers&are for t&e year ended ecember 317 2++' =Round to t&e nearest penny.>

a. I1."+b. I1.$'c. I2."+d. I2.+(

1+$. #ola% #ompany &ad 3++7+++ s&ares of common stoc! issued and outstanding atecember 317 2++$. uring 2++'7 no additional common stoc! %as issued. Cn Hanuary 172++'7 #ola% issued 4++7+++ s&ares of nonconvertible preferred stoc!. uring 2++'7#ola% declared and paid I1(+7+++ cas& dividends on t&e common stoc! and I1"+7+++ ont&e nonconvertible preferred stoc!. 0et income for t&e year ended ecember 317 2++'7%as I*$+7+++. ;&at s&ould be #ola%s 2++' earnings per common s&are7 rounded tot&e nearest penny

a. I1.1$b. I2.1+c. I2.'+d. I3.2+

16 - >


26/44


1+'. At ecember 317 2++$7 Agler #ompany &ad 172++7+++ s&ares of common stoc!outstanding. Cn ,eptember 17 2++'7 an additional 4++7+++ s&ares of common stoc! %ereissued. )n addition7 Agler &ad I127+++7+++ of $J convertible bonds outstanding atecember 317 2++$7 %&ic& are convertible into (++7+++ s&ares of common stoc!. 0obonds %ere converted into common stoc! in 2++'. T&e net income for t&e year endedecember 317 2++'7 %as I47"++7+++. Assuming t&e income ta rate %as 3+J7 %&ats&ould be t&e diluted earnings per s&are for t&e year ended ecember 317 2++'7 roundedto t&e nearest pennya. I2.11b. I3.3(c. I2.3"d. I2.4"

1+(. Foley #ompany &as 17(++7+++ s&ares of common stoc! outstanding on ecember 3172++$. An additional 1"+7+++ s&ares of common stoc! %ere issued on Huly 17 2++'7 and3++7+++ more on Cctober 17 2++'. Cn April 17 2++'7 Foley issued $7+++7 I17+++ facevalue7 (J convertible bonds. Eac& bond is convertible into 4+ s&ares of common stoc!.0o bonds %ere converted into common stoc! in 2++'. ;&at is t&e number of s&ares to be

used in computing basic earnings per s&are and diluted earnings per s&are7 respectively7for t&e year ended ecember 317 2++'a. 17*"+7+++ and 2713+7+++b. 17*"+7+++ and 17*"+7+++c. 17*"+7+++ and 271*+7+++d. 272"+7+++ and 2743+7+++

6se t&e follo%ing information for uestions 1+* and 11+.

)nformation concerning t&e capital structure of ,imot #orporation is as follo%s?

ecember 3172++' 2++$

#ommon stoc! 1"+7+++ s&ares 1"+7+++ s&ares#onvertible preferred stoc! 1"7+++ s&ares 1"7+++ s&ares*J convertible bonds I274++7+++ I274++7+++

uring 2++'7 ,imot paid dividends of I1.2+ per s&are on its common stoc! and I3.++ per s&areon its preferred stoc!. T&e preferred stoc! is convertible into 3+7+++ s&ares of common stoc!.T&e *J convertible bonds are convertible into '"7+++ s&ares of common stoc!. T&e net incomefor t&e year ended ecember 317 2++'7 %as I$++7+++. Assume t&at t&e income ta rate %as3+J.

1+*. ;&at s&ould be t&e basic earnings per s&are for t&e year ended ecember 317 2++'7rounded to t&e nearest pennya. I2.$$

b. I2.*2c. I3.'+d. I4.++

11+. ;&at s&ould be t&e diluted earnings per s&are for t&e year ended ecember 317 2++'7rounded to t&e nearest pennya. I3.2+b. I2.*"c. I2.(3d. I2.3"

16 - 6


27/44


111. ;arrants eercisable at I2+ eac& to obtain 3+7+++ s&ares of common stoc! %ereoutstanding during a period %&en t&e average mar!et price of t&e common stoc! %as I2".

Application of t&e treasury stoc! met&od for t&e assumed eercise of t&ese %arrants incomputing diluted earnings per s&are %ill increase t&e %eig&ted average number ofoutstanding s&ares bya. 3+7+++.b. 247+++.c. $7+++.d. '7"++.

112. Ferry #orporation &ad 3++7+++ s&ares of common stoc! outstanding at ecember 3172++'. )n addition7 it &ad *+7+++ stoc! options outstanding7 %&ic& &ad been granted tocertain eecutives7 and %&ic& gave t&em t&e rig&t to purc&ase s&ares of Ferrys stoc! atan option price of I3' per s&are. T&e average mar!et price of Ferrys common stoc! for2++' %as I"+. ;&at is t&e number of s&ares t&at s&ould be used in computing dilutedearnings per s&are for t&e year ended ecember 317 2++'a. 3++7+++b. 3317$22c. 3$$7$++d. 32374++

%ulti!le C.oice As#ersE"ris Per S."reCo+!ut"tio"l


((. c *2. c *$. c 1++. b 1+4. b 1+(. a 112. d(*. c *3. a *'. b 1+1. d 1+". b 1+*. c

*+. b *4. d *(. c 1+2. c 1+$. c 11+. b

*1. b *". c **. b 1+3. b 1+'. c 111. c

%ULTIPLE CH&ICEE"ris Per S."reCPA A,"!te,

113. -eine #o. &ad 3++7+++ s&ares of common stoc! issued and outstanding at ecember 3172++$. 0o common stoc! %as issued during 2++'. Cn Hanuary 17 2++'7 -eine issued2++7+++ s&ares of nonconvertible preferred stoc!. uring 2++'7 -eine declared and paidI1++7+++ cas& dividends on t&e common stoc! and I(+7+++ on t&e preferred stoc!. 0etincome for t&e year ended ecember 317 2++' %as I$2+7+++. ;&at s&ould be -eines2++' earnings per common s&area. I2.+'b. I1.(+c. I1.'3

d. I1.4'

114. At ecember 317 2++' and 2++$7 9lass #orp. &ad 1(+7+++ s&ares of common stoc! and1+7+++ s&ares of "J7 I1++ par value cumulative preferred stoc! outstanding. 0odividends %ere declared on eit&er t&e preferred or common stoc! in 2++' or 2++$. 0etincome for 2++' %as I4++7+++. For 2++'7 earnings per common s&are amounted toa. I2.22.b. I1.*4.c. I1.$'.d. I1.11.

16 - :


28/44


29/44


DERIVATI&NS Dilutive Securities' Co+!ut"tio"l

No$ As#er Deriv"tio43. a I(++7+++ Q =I1'"7+++ .32> S =(++ 3+ I3+> @ I13$7+++.

44. b I$+7+++ S =172++ I4"> S I274++ @ I37$++.

4". a =I274++7+++ I17+++> 4+ I2+ @ I17*2+7+++ =common stoc!>=I274++7+++ I1$7+++7+++> I17+++7+++ @ I1"+7+++ =unamorti5ed discount>I274++7+++ S I17*2+7+++ S I1"+7+++ @ I33+7+++.

4$. c =I37+++7+++ S I27((37+++> 11' @ I17+++/mont&=I37+++7+++ .+* 3/12> Q =I17+++ 3> @ I'+7"++.

4'. b I11'7+++ 11' @ I17+++/mont& I$++7+++

I11'7+++ S U=I17+++ 3> Q =I17+++ $V MMMMM @ I217$++I37+++7+++

4(. b onds issued at a discount7 mar!et rate W coupon rate.

4*. b I1++7+++ Q I27+++ S =27+++ I4+> @ I227+++.

"+. d I$71(+7+++ S =$+7+++ 3 I2"> @ I17$(+7+++.

"1. b =I2++7+++ .*"> Q =2++ I"+> @ I2++7+++P I2++7+++ 1.+3 @ I2+$7+++

I1*+7+++MMMM I2+$7+++ @ I1*"7'++.I2++7+++

"2. c =I(++7+++ .*"> Q =(++ I2" 2> @ I(++7+++P I(++7+++ 1.+4 @ I(327+++

I4+7+++MMMM I(327+++ @ I417$++.I(++7+++

"3. c =I3++7+++ .*$> Q =3++ I4+> @ I3++7+++P I3++7+++ 1.+4 @ I3127+++

I127+++MMMM I3127+++ @ I1274(+.I3++7+++

"4. c =27+++ I17++(> Q =47+++ I21> @ I271++7+++

I27+1$7+++MMMMM I2712+7+++ @ I27+3"72++7 bonds? I27+++7+++I271++7+++

I(47+++-remium? I3"72++P MMMMM I2712+7+++ @ I(47(++.

I271++7+++

16 - =


30/44


DERIVATI&NS Dilutive Securities' Co+!ut"tio"l /cot$0

No$ As#er Deriv"tio"". c =I3++7+++ .*$> Q =$7+++ I2> @ I3++7+++P

I3++7+++ 1.+3 @ I3+*7+++

I127+++MMMM I3+*7+++ @ I1273$+.I3++7+++

I2((7+++"$. b I3++7+++ S =MMMMM I3+*7+++> @ I373$+.

I3++7+++

"'. b r. #as&? 1$7+++ I1" @ I24+7+++r. -aidin #apitalM,toc! ;arrants? I1++7+++ 1$/4+ @ I4+7+++#r. #ommon ,toc!? 1$7+++ I1+ @ I1$+7+++#r. -aidin #apital in Ecess of -ar? =I" Q I2."+> 1$7+++ @ I12+7+++.

"(. b UI2+7+++ =I2+7+++ Q I1(+7+++>V I2+"7+++ @ I2+7"++.

"*. d I*+7+++ 3 @ I3+7+++.

$+. c I'7"++ 3 @ I27"++.

$1. c I3++7+++ 3 @ I1++7+++.

$2. c I24+7+++ 3 @ I(+7+++/year.

2$3. c I*++7+++ S =I*++7+++ M > @ I3++7+++ increase =from t&e credit to -aidin

3

#apitalM,toc! Cptions>. Cffset by I3++7+++ decrease =from t&e debit to#ompensation Epense>.

12$4. b I3$+7+++ M @ I1447+++.

3+

$". a I"++7+++ 2 @ I2"+7+++.

$$. c 2+7+++ I11 @ I22+7+++.

$'. b =I3( S I2+> $+7+++ .2" @ I2'+7+++.

$(. b =I3+ S I2+> $+7+++ ." @ I3++7+++I3++7+++ S I2'+7+++ @ I3+7+++.

$*. a =I33 S I2+> $+7+++ .'" @ I"("7+++I"("7+++ S I3++7+++ @ I2("7+++.

16 - 2?


31/44


DERIVATI&NS Dilutive Securities' CPA A,"!te,

No$ As#er Deriv"tio

'+. d #onceptual.

'1. a #onceptual.

'2. c =I14+7+++> 2 @ I'+7+++.

'3. c =I4" S I3+> 1$7+++ @ I24+7+++.

DERIVATI&NS E"ris Per S."re' Co+!ut"tio"l

No$ As#er Deriv"tio

I17+"+7+++((. c MMMMMMMMMMMM @ I1.++.

$

$++7+++ Q =*++7+++ M >12

I17+2+7+++(*. c MMMMMMMMMMMM @ I2.4+.

34++7+++ Q =1++7+++ M >

12

*+. b $++7+++ Q =12$7+++ (/12> S =$37+++ 4/12> Q ="47+++ 2/12> @ $'27+++.

*1. b U=12"7+++ 2 1.2+> Q =3'"7+++ 2 1.2+> Q =4"+7+++ 3> Q =31+7+++ 3>Q ="1+7+++ 2>V 12 @ 3'"7+++.

*2. c U=172"+7+++ 3 2> Q =174"+7+++ 3 2> Q =173'"7+++ 3 2>Q =27'"+7+++ 3>V 12 @ 27'2"7+++.

*3. a UI*"+7+++ S =1+7+++ I1++ .+">V =3++7+++ 2> @ I1."+.

*4. d "++7+++ Q ="++7+++ $/12> Q U=2" S 2+>/2" 1"+7+++V @ '(+7+++.

*". c UI4(+7+++ Q =I27+++7+++ .+' .$+>V =2++7+++ Q 4+7+++> @ I2.3".

*$. c asis? I(++7+++ "++7+++ @ I1.$+.iluted? I(++7+++ ="++7+++ Q "+7+++> @ I1.4"

I37+++ Q =I1+7+++ .+$ .'+>*'. b MMMMMMMMMMMMMM @ I1.'1.17+++ Q 17+++

I37+++7+++ Q =I1+7+++7+++ .+$ .'>*(. c MMMMMMMMMMMMMMMMM @ I4."$.

3"++7+++ Q =1++7+++ M > Q 22"7+++

12

I1$+7+++ Q =I3++7+++ .+* .'>**. b MMMMMMMMMMMMMMMMM @ I3.+3.

"+7+++ Q U=I3++7+++ I17+++> 3+>V

16 - 21


32/44


DERIVATI&NS E"ris Per S."re' Co+!ut"tio"l /cot$0

No$ As#er Deriv"tioI374++7+++

1++. b MMMMMMMMMM @ I1.'4.172++7+++ Q '"+7+++

I$++7+++ S =2+7+++ I3>1+1. d MMMMMMMMMMM @ I2.'+.

2++7+++

I$++7+++ Q =I17+++7+++ .1+ .'>1+2. c MMMMMMMMMMMMMMMM @ I2.3".

2++7+++ Q 4"7+++ Q 4+7+++

1+3. b 372++7+++ Q =(++7+++ */12> Q =4++7+++ $/12> @ 47+++7+++ =E-,>47+++7+++ Q =2+7+++ 2+ 3/12> @ 471++7+++ =E-,>.

1+4. b 47+++7+++ Q =2++7+++ */12> Q =4(+7+++ 4/12> @ 4731+7+++.4731+7+++ Q U=I$7+++7+++ I17+++> 4+ 3/12V @ 473'+7+++.

I"7+++7+++1+". b MMMMMMMMMM @ I1.$'.

27+++7+++ Q 17+++7+++

I*$+7+++ S I1"+7+++1+$. c MMMMMMMMMM @ I2.'+.

3++7+++

I47"++7+++ Q =I127+++7+++ .+$ .'>1+'. c MMMMMMMMMMMMMMMMMM @ I2.3".

172++7+++ Q =4++7+++ 4/12> Q (++7+++

1+(. a 17(++7+++ Q =1"+7+++ $/12> Q =3++7+++ 3/12> @ 17*"+7+++

17*"+7+++ Q =$7+++ 4+ */12> @ 2713+7+++.

I$++7+++ S =1"7+++ I3.++>1+*. c MMMMMMMMMMMMM @ I3.'+.

1"+7+++

I$++7+++ Q =I274++7+++ .+* .'>11+. b MMMMMMMMMMMMMMMM @ I2.*".

1"+7+++ Q '"7+++ Q 3+7+++

111. c 3+7+++ I2+ I2" @ 247+++3+7+++ S 247+++ @ $7+++.

112. d *+7+++ S =*+7+++ I3' I"+> @ 2374++3++7+++ Q 2374++ @ 32374++.

16 - 2


33/44


DERIVATI&NS E"ris Per S."re' CPA A,"!te,

No$ As#er Deriv"tio113. b I$2+7+++ S I(+7+++

MMMMMMMMM @ I1.(+.3++7+++

114. b I4++7+++ S =1+7+++ I1++ .+">MMMMMMMMMMMMMMM @ I1.*4.

1(+7+++

11". d I374++7+++ S I2++7+++MMMMMMMMMMS @ I1.2(. 274++7+++ Q 1++7+++

11$. b "$+7+++ Q =4+7+++ $/12> Q U327+++ S =327+++ I1" I2+>V @ "((7+++.

11'. b #onceptual.

11(. d #onceptual.

11*. a #onceptual.

E3ERCISES

E@$ 16-1?M#onvertible onds.

a&l #o. issued I"7+++7+++ of 12J7 "year convertible bonds on ecember 17 2++$ forI"7+2+7(++ plus accrued interest. T&e bonds %ere dated April 17 2++$ %it& interest payable April1 and Cctober 1. ond premium is amorti5ed eac& interest period on a straig&tline basis. a&l

#o. &as a fiscal year end of ,eptember 3+.

Cn Cctober 17 2++'7 I27"++7+++ of t&ese bonds %ere converted into 3"7+++ s&ares of I1" parcommon stoc!. Accrued interest %as paid in cas& at t&e time of conversion.

Istructios=a> -repare t&e entry to record t&e interest epense at April 17 2++'. Assume t&at interest

payable %as credited %&en t&e bonds %ere issued =round to nearest dollar>.

=b> -repare t&e entry to record t&e conversion on Cctober 17 2++'. Assume t&at t&e entry torecord amorti5ation of t&e bond premium and interest payment &as been made.

16 - 22


34/44


Solutio 16-1?

=a> )nterest -ayable........................................................................... 1++7+++)nterest Epense.......................................................................... 1*(74++-remium on onds -ayable......................................................... 17$++

#as&................................................................................. 3++7+++

#alculations?)ssuance price I"7+2+7(++-ar value "7+++7+++Total premium I 2+7(++

ont&s remaining "2-remium per mont& I4++-remium amorti5ed =4 I4++> I17$++

=b> onds -ayable............................................................................. 27"++7+++-remium on onds -ayable......................................................... (74++

#ommon ,toc! =3"7+++ I1">......................................... "2"7+++-aidin #apital in Ecess of -ar........................................ 17*(374++

#alculations?-remium related to 1/2 of t&e bonds I1+74++ =I2+7(++ 2>Ness premium amorti5ed 27+++ U=I1+74++ "2> 1+V-remium remaining I (74++

E@$ 16-11M#onvertible onds.

Ninn #o. sold convertible bonds at a premium. )nterest is paid on ay 31 and 0ovember 3+. Cn

ay 317 after interest %as paid7 1++7 I17+++ bonds are tendered for conversion into 37+++ s&aresof I1+ par value common stoc! t&at &ad a mar!et price of I4+ per s&are. Lo% s&ould Ninn #o.account for t&e conversion of t&e bonds into common stoc! under t&e boo! value met&odiscuss t&e rationale for t&is met&od.

Solutio 16-11

To account for t&e conversion of bonds under t&e boo! value met&od7 onds -ayable s&ould bedebited for t&e face value7 -remium on onds -ayable s&ould be debited7 and #ommon ,toc!s&ould be credited at par for t&e s&ares issued. 6sing t&e boo! value met&od7 no gain =loss> on

conversion is recorded. T&e amount to be recorded for t&e stoc! is eual to t&e boo! =carrying>value =face value plus unamorti5ed premium> of t&e bonds. -aidin #apital in Ecess of -ar %ouldbe credited for t&e difference bet%een t&e boo! value of t&e bonds and t&e par value of t&e stoc!issued. T&e rationale for t&e boo! value met&od is t&at t&e conversion is t&e completion of t&etransaction initiated %&en t&e bonds %ere issued. ,ince t&is is vie%ed as a transaction %it&stoc!&olders7 no gain =loss> s&ould be recogni5ed.

16 - 25


35/44


E@$ 16-1M#onvertible ebt and ebt %it& ;arrants =Essay>.

;&at accounting treatment is reuired for convertible debt ;&y ;&at accounting treatment isreuired for debt issued %it& stoc! %arrants ;&y

Solutio 16-1

#onvertible debt is treated solely as debt. Cne reason is t&at t&e debt and conversion option areinseparable. T&e &older cannot sell one and retain t&e ot&er. T&e t%o c&oices are mutuallyeclusive. Anot&er reason is t&at t&e valuation of t&e conversion option or t&e debt security%it&out t&e conversion option is sub:ective because t&ese values are not establis&ed separatelyin t&e mar!etplace.

;&en debt is issued %it& stoc! %arrants7 t&e %arrants are given separate recognition. After issue7t&e debt and t&e detac&able %arrants trade separately. T&e proceeds may be allocated to t&e t%oelements based on t&e relative fair values of t&e debt security %it&out t&e %arrants and t&e%arrants at t&e time of issuance. T&e proceeds allocated to t&e %arrants s&ould be accounted for

as paidin capital.

E@$ 16-12M,toc! options.

-repare t&e necessary entries from 1/1/+'2/1/+* for t&e follo%ing events using t&e fair valuemet&od. )f no entry is needed7 %rite


36/44


Solutio 16-12 =cont.>

12/31/+(#ompensation Epense............................................................... $"+7+++

-aidin #apitalM,toc! Cptions......................................... $"+7+++

3. 2/1/+*#as& =4 127+++ I4+> .............................................................. 17*2+7+++-aidin #apitalM,toc! Cptions =I173++7+++ 4/"> ..................... 17+4+7+++

#ommon ,toc!................................................................. 4(+7+++-aidin #apital in Ecess of -ar........................................ 274(+7+++

-aidin #apitalM,toc! Cptions.................................................... 2$+7+++-aidin #apital from Epired ,toc! Cptions...................... 2$+7+++

E@$ 16-15M;eig&ted average s&ares outstanding.

Cn Hanuary 17 2++'7 Darro% #orporation &ad 17+++7+++ s&ares of common stoc! outstanding. Cnarc& 17 t&e corporation issued 1"+7+++ ne% s&ares to raise additional capital. Cn Huly 17 t&ecorporation declared and issued a 2for1 stoc! split. Cn Cctober 17 t&e corporation purc&ased ont&e mar!et $++7+++ of its o%n outstanding s&ares and retired t&em.

Istructios#ompute t&e %eig&ted average number of s&ares to be used in computing earnings per s&are for2++'.

Solutio 16-15

)ncrease ont&s=ecrease> Cutstanding Cutstanding ,&are ont&s

Han. 1 M 17+++7+++ 2 2/1 47+++7+++arc& 1 1"+7+++ 171"+7+++ 4 2/1 *72++7+++Huly 1 171"+7+++ 273++7+++ 3 $7*++7+++Cct. 1 =$++7+++> 17'++7+++ 3 "71++7+++

12 2"72++7+++

=2"72++7+++ 12> 271++7+++

E@$ 16-1>MEarnings -er ,&are. =Essay>

efine t&e follo%ing?

=a> T&e computation of earnings per common s&are

=b> #omple capital structure

=c> asic earnings per s&are

=d> iluted earnings per s&are

16 - 26


37/44


Solutio 16-1>

=a> Earnings per common s&are is computed by dividing net income less preferred dividends byt&e %eig&ted average of common s&ares outstanding.

=b> A comple capital structure eists %&en a corporation &as convertible securities7 options7%arrants7 or ot&er rig&ts t&at upon conversion or eercise could dilute earnings per s&are.

=c> asic earnings per s&are is earnings per s&are computed based on t&e common s&aresoutstanding during t&e period.

=d> iluted earnings per s&are is earnings per s&are computed based on common stoc! and allpotentially dilutive common s&ares t&at %ere outstanding during t&e period.

E@$ 16-16MEarnings per s&are.

Ramire5 #orporation &as 4++7+++ s&ares of common stoc! outstanding t&roug&out 2++'. )naddition7 t&e corporation &as "7+++7 2+year7 'J bonds issued at par in 2++". Eac& I17+++ bond

is convertible into 2+ s&ares of common stoc! after */23/+(. uring t&e year 2++'7 t&ecorporation earned I$++7+++ after deducting all epenses. T&e ta rate %as 3+J.

Istructios#ompute t&e proper earnings per s&are for 2++'.

Solutio 16-16

0et income I$++7+++Earnings per s&are? MMMMMMMMM @ MMMM @ I1."+

Cutstanding s&ares 4++7+++

0et income Q )nterest after taesEarnings per s&are assuming bond conversion? MMMMMMMMMMMMMMM

Assumed outstanding s&ares

I$++7+++ Q I24"7+++=I3"+7+++ .' @ I24"7+++>P MMMMMMMMMM @ I1.$*

4++7+++ Q 1++7+++

T&erefore t&e bonds are antidilutive7 and earnings per common s&are outstanding of I1."+s&ould be reported.

0ote t&at t&e convertible security is antidilutive?

ond interest after taes I24"7+++MMMMMMMMMMMMM @ MMMM @ I2.4"Assumed incremental s&ares 1++7+++

16 - 2:


38/44


E@$ 16-1:Miluted earnings per s&are.

re%er #ompany &ad 4++7+++ s&ares of common stoc! outstanding during t&e year 2++'. )naddition7 at ecember 317 2++'7 *+7+++ s&ares %ere issuable upon eercise of eecutive stoc!options %&ic& reuire a I4+ cas& payment upon eercise =options granted in 2++">. T&e averagemar!et price during 2++' %as I"+.

Istructios#ompute t&e number of s&ares to be used in determining diluted earnings per s&are for 2++'.

Solutio 16-1:

,&ares outstanding 4++7+++Add? Assumed issuance *+7+++

4*+7+++educt? -roceeds/Average mar!et price =I37$++7+++ I"+> ='27+++>0umber of s&ares 41(7+++

-repare t&e :ournal entry at 12/31/+* to record t&e eercise of t&e remaining ,ARs.

,c&edule of #ompensation Epense3++7+++ ,ARs

ar!et ,et Xalue -ercent Accrued ate -rice -rice of ,ARs Accrued to ate Epense12/31/+$ I21 I1$ I17"++7+++ 2"J I3'"7+++ I3'"7+++

='"7+++>12/31/+' 1( 1$ $++7+++ "+J 3++7+++ ='"7+++>

3'"7+++12/31/+( 1* 1$ *++7+++ '"J $'"7+++ 3'"7+++

32"7+++12/31/+* 2+ 1$ 17+++7+++ 1++J 17+++7+++ 32"7+++

=I4 2"+7+++>

16 - 2;


39/44


=b> Niability 6nder ,toc! Appreciation -lan........................................ '"7+++#ompensation Epense.................................................... '"7+++

=c> Niability 6nder ,toc! Appreciation -lan........................................ 17+++7+++

#as&................................................................................. 17+++7+++

PR&(LE%S

Pr$ 16-1=M#onvertible bonds and stoc! %arrants.

For eac& of t&e unrelated transactions described belo%7 present t&e entry=ies> reuired to recordt&e bond transactions.

1. Cn August 17 2++'7 Ryan #orporation called its 1+J convertible bonds for conversion. T&e

I(7+++7+++ par bonds %ere converted into 32+7+++ s&ares of I2+ par common stoc!. CnAugust 17 t&ere %as I'++7+++ of unamorti5ed premium applicable to t&e bonds. T&e fairmar!et value of t&e common stoc! %as I2+ per s&are. )gnore all interest payments.

2. 9arnett7 )nc. decides to issue convertible bonds instead of common stoc!. T&e companyissues 1+J convertible bonds7 par I37+++7+++7 at *'. T&e investment ban!er indicates t&at ift&e bonds &ad not been convertible t&ey %ould &ave sold at *4.

3. Nope5 #ompany issues I"7+++7+++ of bonds %it& a coupon rate of (J. To &elp t&e sale7detac&able stoc! %arrants are issued at t&e rate of ten %arrants for eac& I17+++ bond sold. )tis estimated t&at t&e value of t&e bonds %it&out t&e %arrants is I47*3"7+++ and t&e value oft&e %arrants is I31"7+++. T&e bonds %it& t&e %arrants sold at 1+1.

Solutio 16-1=

1. onds -ayable................................................................................ (7+++7+++-remium on onds -ayable............................................................ '++7+++

#ommon ,toc!.................................................................... $74++7+++-aidin #apital in Ecess of -ar........................................... 273++7+++

2. #as&................................................................................................ 27*1+7+++iscount on onds -ayable............................................................ *+7+++

onds -ayable..................................................................... 37+++7+++

3. #as&................................................................................................ "7+"+7+++iscount on onds -ayable............................................................ 2"37+++

onds -ayable..................................................................... "7+++7+++-aidin #apitalM,toc! ;arrants.......................................... 3+37+++

=I31"7+++ I"72"+7+++ I"7+"+7+++ @ I3+37+++>

16 - 2=


40/44


Pr$ 16-12?MEarnings per s&are.

Adcoc! #orp. &ad I"++7+++ net income in 2++'. Cn Hanuary 17 2++' t&ere %ere 2++7+++ s&aresof common stoc! outstanding. Cn April 17 2+7+++ s&ares %ere issued and on ,eptember 17

Adcoc! boug&t 3+7+++ s&ares of treasury stoc!. T&ere are 3+7+++ options to buy common stoc!at I4+ a s&are outstanding. T&e mar!et price of t&e common stoc! averaged I"+ during 2++'.

T&e ta rate is 4+J.

uring 2++'7 t&ere %ere 4+7+++ s&ares of convertible preferred stoc! outstanding. T&e preferredis I1++ par7 pays I3."+ a year dividend7 and is convertible into t&ree s&ares of common stoc!.

Adcoc! issued I27+++7+++ of (J convertible bonds at face value during 2++$. Eac& I17+++ bondis convertible into 3+ s&ares of common stoc!.

Istructios#ompute diluted earnings per s&are for 2++'. #omplete t&e sc&edule and s&o% all computations.

0et Ad:ust Ad:usted Ad:ust Ad:usted

,ecurity )ncome ment 0et )ncome ,&ares ment ,&ares E-,

Solutio 16-12?

0et Ad:ust Ad:usted Ad:ust Ad:usted,ecurity )ncome ment 0et )ncome ,&ares ment ,&ares E-,

#om. ,toc! I"++7+++ I=14+7+++> I3$+7+++ 2++7+++ "7+++a 2+"7+++ I1.'$

Cptions 3$+7+++ 2+"7+++ $7+++b 2117+++ 1.'1

onds 3$+7+++ *$7+++c

4"$7+++ 2117+++ $+7+++ 2'17+++ 1.$(-referred 4"$7+++ 14+7+++ "*$7+++ 2'17+++ 12+7+++ 3*17+++ 1."2

a2+7+++ 3/4 @ 1"7+++3+7+++ 1/3 @ =1+7+++>

"7+++ ,A

b3+7+++

I172++7+++ I"+ @ =247+++> =or> U="+ S 4+> "+V 3+7+++ @ $7+++ ,A $7+++ ,A

I*$7+++ I14+7+++c I27+++7+++ .+( .$ @ I*$7+++ MMMM @ I1.$+ MMMM @ I1.1' $+7+++ 12+7+++

16 - 5?


41/44


Pr$ 16-121Masic and diluted E-,.

Assume t&at t&e follo%ing data relative to Eddy #ompany for 2++' is available?

0et )ncome I271++7+++

Transactions in #ommon ,&ares #&ange #umulativeHan. 17 2++'7 eginning number '++7+++ar. 17 2++'7 -urc&ase of treasury s&ares =$+7+++> $4+7+++Hune 17 2++'7 ,toc! split 21 $4+7+++ 172(+7+++0ov. 17 2++'7 )ssuance of s&ares 12+7+++ 174++7+++

(J #umulative #onvertible -referred ,toc!,old at par7 convertible into 2++7+++ s&ares of common=ad:usted for split>. I17+++7+++

,toc! CptionsEercisable at t&e option price of I2" per s&are. Averagemar!et price in 2++'7 I3+ =mar!et price and option price

ad:usted for split>. $+7+++ s&ares

Istructios=a> #ompute t&e basic earnings per s&are for 2++'. =Round to t&e nearest penny.>=b> #ompute t&e diluted earnings per s&are for 2++'. =Round to t&e nearest penny.>

Solutio 16-121

#omputation of %eig&ted average s&ares outstanding during t&e year?

Hanuary 1 Cutstanding '++7+++

arc& 1 Repurc&ase ="/$ $+7+++> ="+7+++>$"+7+++

Hune 1 2for1 split 173++7+++0ovember 1 )ssued =1/$ 12+7+++> 2+7+++

1732+7+++

Additional s&ares for purposes of diluted earnings per s&are?

-otentially dilutive securities(J convertible preferred stoc! 2++7+++,toc! options

-roceeds from eercise of $+7+++ options =$+7+++ I2"> I17"++7+++

,&ares issued upon eercise of options $+7+++Ness? treasury stoc! purc&asable %it& proceeds

=I17"++7+++ I3+> "+7+++ 1+7+++ilutive securitiesMadditional s&ares 21+7+++

I271++7+++ S I(+7+++=a> asic earnings per s&are? MMMMMMMMMM @ I1."3

1732+7+++

I271++7+++=b> iluted earnings per s&are? MMMSMMMMMM @ I1.3'

1732+7+++ Q 21+7+++

16 - 51


42/44



-resented belo% is information related to erry #ompany.

1. 0et )ncome Uincluding an etraordinary gain =net of ta> of I'+7+++V I23+7+++

2. #apital ,tructurea. #umulative (J preferred stoc!7 I1++ par7

$7+++ s&ares issued and outstanding I$++7+++

b. I1+ par common stoc!7 '47+++ s&ares outstanding on Hanuary 1.Cn April 17 4+7+++ s&ares %ere issued for cas&. Cn Cctober 171$7+++ s&ares %ere purc&ased and retired. I17+++7+++

c. Cn Hanuary 2 of t&e current year7 erry purc&ased Raye #orporation.Cne of t&e terms of t&e purc&ase %as t&at if erry s net income for t&efollo%ing year is I24++7+++ or more7 "+7+++ additional s&ares %ouldbe issued to Raye stoc!&olders net year.

3. Ct&er )nformationa. Average mar!et price per s&are of common stoc! during entire year I3+b. )ncome ta rate 3+J

Istructios#ompute earnings per s&are for t&e current year.

Solutio 16-12

)ncome before etraordinary item I1$+7+++

Ness preferred dividends =4(7+++>Available to common before etraordinary item 1127+++Add etraordinary gain =net of ta> '+7+++)ncome available to common I1(27+++

;eig&ted average s&ares outstanding?Hanuary 1 '47+++3/4 4+7+++ 3+7+++1/4 1$7+++ =47+++>

1++7+++asic earnings per s&are?

)ncome before etraordinary item I1.12 =a>

Etraordinary item =net of ta> .'+ =b>0et income I1.(2 =c>

#alculations?I1127+++ I'+7+++ I1(27+++

=a> MMMM =b> MMMM =c> MMMM1++7+++ 1++7+++ 1++7+++

16 - 5


43/44


Solutio 16-12 =cont.>

iluted earnings per s&are?)ncome before etraordinary item I .'" =a>Etraordinary item =net of ta> .4$ =b>0et )ncome I1.21 =c>

#alculations?I1127+++ I'+7+++ I1(27+++

=a> MMMMMMMM =b> MMMM =c> MMMMMMMM1++7+++ Q "+7+++ 1"+7+++ 1++7+++ Q "+7+++


T&e follo%ing information %as ta!en from t&e boo!s and records of ,imonic7 )nc.?

1. 0et income I 2(+7+++

2. #apital structure?a. #onvertible $J bonds. Eac& of t&e 3++7 I17+++ bonds is convertible

into "+ s&ares of common stoc! at t&e present date and for t&e net1+ years. 3++7+++

b. I1+ par common stoc!7 2++7+++ s&ares issued and outstandingduring t&e entire year. 27+++7+++

c. ,toc! %arrants outstanding to buy 1$7+++ s&ares of common stoc!at I2+ per s&are.

3. Ct&er information?a. onds converted during t&e year 0oneb. )ncome ta rate 3+Jc. #onvertible debt %as outstanding t&e entire yeard. Average mar!et price per s&are of common stoc! during t&e year I32e. ;arrants %ere outstanding t&e entire yearf. ;arrants eercised during t&e year 0one

Istructios#ompute basic and diluted earnings per s&are.

16 - 52


44/44

Dilutive Securities and Earnings Per Share_001

Documents

Transcript of Dilutive Securities and Earnings Per Share_001