Ch.20

Alvarado Company had the following common stock balances and transactions during the current​ year: What was the number of​ Alvarado's current-year​ weighted-average shares outstanding for basic​ EPS?

72,500

If convertible debt is issued during the​ year, the total interest expense for the entire year must be added to the numerator of the diluted EPS calculation.

FAlse

A company may show EPS information either on the Income Statement or in the Notes to Financial​ Statements, whichever it prefers.

False

A security is antidilutive if decreases the diluted EPS below basic EPS.

False

Footnote disclosures for EPS are concerned only with current and prior​ years, such that subsequent events after the close of the year are ignored.

False

A simple capital structure contains no potentially dilutive securities.

True

Stock options and warrants differ from convertible debt and convertible preferred stock in that they generally provide cash to the issuing entity.

True

When computing diluted​ EPS, only the denominator is affected by​

warrants and options

Interurban Company began operations on the first day of the year. On that day they issued 60,000 shares. On March 1 they issued 100,000 shares and on July​ 1, another 50,000 shares. On December​ 1, Interurban repurchased 2,000 shares of outstanding shares. Compute basic EPS for the first year of operation if net income was $80,000.

0.48

Charlotte Engineering reported net income of $400,000 for the year. It declared $40,000 in preferred dividends on December 23. It began the year with 200,000 common shares outstanding. On July​ 1, Charlotte declared a 10​%common stock dividend. Compute the basic EPS for the year.​

1.64

Ace Corporation has​ 10,000 shares of​ $100, 5%, convertible preferred shares outstanding for the whole year. Each preferred share is convertible into 2 shares of common stock. What is the incremental income per common share from the preferred​ stock?

2.50

Hudson Motors reported $635,000 net income for the current year. Beginning common shares outstanding were 180,000. Hudson also had​ 10,000, 6%​ nonconvertible, cumulative,​ $100 par value preferred shares outstanding for the entire year. No cash dividends were declared. Compute basic earnings per share.​

3.19

Hutchins Company had​ 200,000 shares of common​ stock, 50,000 shares of convertible preferred​ stock, and​$2,000,000 of​ 10% convertible bonds outstanding during the entire year. The preferred stock was convertible into​40,000 shares of common stock. During the current​ year, Hutchins paid dividends of​ $1.00 per share on the common stock and​ $2.00 per share on the preferred stock. Each​ $1,000 bond was convertible into 50 shares of common stock. The net income for the year was​ $1,000,000, and the income tax rate was​ 30%. Diluted earnings per share for the current year was​

3.35

George Manufacturing had net income of​ $150,000 and declared preferred dividends of​ $10,000 during the current year. George began the year with​ 11,000 common shares outstanding. It issued​ 60,000 shares on June 30 and repurchased​ 6,000 of the newly issued shares on November 1. Compute​ George's basic EPS for the year.​

3.5

Hornet Motors reported​ $535,000 net income for the current year. Beginning common shares outstanding were​110,000. Hudson also had​ 10,000, 6%​ nonconvertible, cumulative,​ $100 par value preferred shares outstanding for the entire year. No cash dividends were declared but Hornet did declare and distribute a​ 10% stock dividend on common shares on July 1. Compute basic earnings per share.​

3.93

Gray Corporation reported​ $500,000 in interest expense for the current year for bonds that were issued in prior years.​Gray's tax rate is​ 40%. By what amount is the numerator of diluted EPS positively​ adjusted?

300,000

Hutchins Company had​ 200,000 shares of common​ stock, 50,000 shares of convertible preferred​ stock, and​$2,000,000 of​ 10% convertible bonds outstanding during the entire year. The preferred stock was convertible into​40,000 shares of common stock. During the current​ year, Hutchins paid dividends of​ $1.00 per share on the common stock and​ $2.00 per share on the preferred stock. Each​ $1,000 bond was convertible into 50 shares of common stock. The net income for the year was​ $1,000,000, and the income tax rate was​ 30%. Basic earnings per share for the current year was​ (rounded to the nearest​ penny):

4.5

George Manufacturing had net income of​ $275,000 and declared preferred dividends of​ $20,000 during the current year. George began the year with​ 16,000 common shares outstanding. It issued​ 60,000 shares on June 30 and repurchased​ 12,000 of the newly issued shares on November 1. Compute​ George's weightedminus−average common shares outstanding for the year.

44,000

Anson Company had​ 8,000,000 shares of common stock outstanding on December​ 31, Year 11. Anson issued an additional​ 1,200,000 shares of common stock on April​ 1, Year​ 12, and​ 1,000,000 more on July​ 1, Year 12. On October​ 1, Year​ 12, Anson issued​ 50,000 of​ $1,000 face value​ 4% convertible bonds. Each bond is convertible into 20 shares of common stock. No bonds were converted into common stock in Year 12. What is the number of shares to be used in computing basic earnings per share and diluted earnings per​ share, respectively, in Year​ 12?

9,400,000 and​ 9,650,000

In determining earnings per​ share, interest expense net of applicable income taxes on convertible debt that is dilutive should​ be:

Added back to net income for diluted earnings per share and ignored for basic earnings per share.

The order for antidilutive sequencing is ranking the least dilutive security​ first, ascending to the most dilutive security last.

False

When applying the if−converted ​assumption, the company assumes conversion at the beginning of the year when a convertible bond or convertible preferred stock is issued during the year.

False

Basic EPS must be computed before diluted earnings per share can be properly computed.

True

Companies are required to provide basic EPS on the income statement for each period for which they provide financial information.

True

Earnings per share is the most often quoted financial statistic in the business media.

True

Normally dilutive securities will become antidilutive if income from continuing operations is a net loss.

True

Retroactive application of stock splits and stock dividends to the weightedminus−average number of common shares makes EPS comparable for prior and current periods of one entity.

True

The denominator for basic EPS is based on the weighted−average number of common shares outstanding during the year.

True

The numerator for basic EPS is net income less preferred dividend requirements.

True

Edmond Biometrics reported net income of $700,000 for both last year and the current year. The shares outstanding for the prior year were 100,000 shares for the whole year. On December 1 of the current​ year, Edmond declared a two for one stock split. There were no other stock transactions in either year. Compute the EPS that would be shown on a comparative income statement for Years 1 and 2.​

Year 1 $ 3.50 Year 2 $ 3.50

Burken Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year​ 10, 100,000 shares of common stock were outstanding. In Year​ 11, two distributions of additional common shares​ occurred: On April​ 1, 20,000 shares of treasury stock were​ sold, and on July​ 1, a​ 2-for-1 stock split was issued. Net income was​ $410,000 in Year 11 and​ $350,000 in Year 10. What amounts should Burken report as earnings per share in its Year 11 and Year 10 comparative income​ statements?

Year 11 1.78 year 10 1.75

Robertson Corporation reported net income for Year 1 of $230,000 and Year 2 of $350,000.The weighted−average common shares outstanding 230,000 in Year 1 and 140,000 in Year 2. Robertson also has​ 10,000 shares of​ $100 par​value, cumulative,​ 5% preferred stock outstanding in both years. Dividends were not declared in Year​ 1, but both​ years' dividends were declared and paid in Year 2. Compute EPS for both years.​

Year​ 1, $ 0.78 Year​ 2, $ 2.14

Austin Products reported $320,000 net income for the year with​ 100,000 common shares outstanding all year. Austin also had 10,000 shares of​ $100, 8% convertible preferred shares outstanding all year. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

basic EPS $320,000 − ​(10,000 times × ​$100 times × ​8%); diluted EPS $320,000

Austin Products reported​ $330,000 net income for the year with​ 100,000 common shares outstanding all year. Austin also had​ 24,000 shares of​ $100, 8% convertible preferred shares outstanding all year. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

basic EPS​ $138,000; diluted EPS​ $330,000

Austin Products reported​ $340,000 net income for the year with​ 100,000 common shares outstanding all year. Austin issued​ 26,000 shares of​ $100, 8% convertible preferred shares on March 1. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.​

basic EPS​ $166,667; diluted EPS​ $340,000

Harvey Inc. reported net earnings of​ $700,000 for the year. Harvey has​ 200,000 shares of common stock outstanding all year. Two years ago the company granted​ 20,000 stock options that allow employees to purchase​ 20,000 shares for​$15 each. The company stock has averaged​ $20 in the market during the year. Compute the basic and diluted EPS.

basic EPS​ $3.50; diluted EPS​ $3.41

Austin Products reported​ $330,000 net income for the year with​ 100,000 common shares outstanding all year. Austin issued​ 20,000 shares of​ $100, 8% convertible preferred shares on March 1. Each preferred share is convertible into 10 shares of common stock. Determine the numerator for both basic and diluted EPS.

basic EPS​ $330,000− ​[(20,000 times ×$100 times × ​8%) (10/12)]; diluted EPS​ $330,000

Terrell Foods reported​ $870,000 in net income and its weighted average shares outstanding for the year is​ 200,000 shares. In prior years it sold​ $1,500,000 of​ 8% longminus−term convertible bonds at par which are still outstanding. The bonds are convertible into​ 10,000 shares of common stock. The tax rate for all years is​ 40%. If Terrell has no other potentially dilutive securities and no preferred​ stock, and no conversions occur during the​ year, what are basic and diluted​ EPS?

basic EPS​ $4.35; diluted EPS​ $4.49

Terrell Foods reported​ $910,000 in net income​ (not considering interest​ expense) and its weighted−average shares outstanding for the year is​ 100,000 shares. In prior years it sold​ $1,500,000 of​ 8% long−term convertible bonds at par which are still outstanding at the start of the year. The bonds are convertible into​ 50,000 shares of common stock. The tax rate for all years is​ 40%. Bondholders convert the bonds on July 1 of the current year. If Terrell has no other potentially dilutive securities and no preferred​ stock, what are basic and diluted​ EPS?

basic EPS​ $6.99 diluted EPS​ $6.07

Baker Instruments reported​ $7,000,000 in net income for the current year. The company had​ $500,000 of​ 10% cumulative, non−convertible preferred stock outstanding all​ year, and issued​ $1,000,000 of​ 6% convertible bonds on June 1. Determine the numerator for both basic and diluted EPS when the tax rate is​ 40%.

basic EPS​ $7,000,000 − ​$50,000; diluted EPS​ $7,000,000 − ​$50,000 +​ ($60,000 times × 7/12)(1− ​.40)

Terrell Foods reported​ $680,000 in net income​ (not considering interest​ expense) and its weighted−average shares outstanding for the year is​ 100,000 shares. In prior years it sold​ $1,500,000 of​ 8% long−term convertible bonds at par which are still outstanding at the start of the year. The bonds are convertible into​ 40,000 shares of common stock. The tax rate for all years is​ 40%. Bondholders convert the bonds on July 1 of the current year. If Terrell has no other potentially dilutive securities and no preferred​ stock, what is the denominator for basic and diluted​ EPS?

basic​ 120,000; diluted​ 140,000

When applying the if−converted assumption for potentially dilutive​ securities, conversions are assumed to occur at the​

beginning of the current year or on the issue date of the dilutive security if issued during the current year

A company with convertible bonds outstanding will need to adjust the denominator of the diluted EPS equation. If the bonds are outstanding all​ year, the adjustment will consist of the

conversion ratio times the number of bonds outstanding

When computing basic​ EPS, the numerator includes net income minus the

current year preferred dividends paid and current year preferred dividends in arrears

Stock options and warrants affect the diluted EPS calculation by changing the​

denominator only

When there are multiple dilutive securities in a​ firm, the antidilution test for the sequence should be from​

most dilutive to least dilutive

Which one of the following items is not a way for management to influence EPS computations to meet target​ goals

recording the sale of merchandise on account

The treasury stock method is used when the organizational structure includes

stock options or warrants

Edwards Corporation has three potentially dilutive securities. Computation of the antidilution sequencing recorded the​following: What is the correct order of entry into the EPS​ computation?

stock​ warrants, convertible preferred​ stock, convertible bonds

Carrolton, Inc. has four potentially dilutive securities. Computation of the antidilution sequencing recorded the​ following: What is the correct order of entry into the EPS​ computation?

stock​ warrants, convertible​ bonds, convertible preferred stock

The retroactive assumption for stock splits and stock dividends assumes that all splits and stock dividends occur at the beginning of the​ year, if the stock is outstanding at the beginning of the year. The retroactive assumption is also retroactive to

the date of issue of the common shares