Test Bank, Intermediate Accounting, 14

th
ed. 197
CHAPTER 19
Earnings Per Share
MULTIPLE CHOICE QUESTIONS
Theory/Definitiona Q!e"tion"
1 Companies required to supply EPS disclosures
2 Treatment o noncumulati!e preerred di!idends not declared
" The earnings per share computation reported on the income statement
4 Treatment o di!idends on cumulati!e, noncon!erti#le preerred stock
$ %tems considered &hen computing diluted EPS
' Treatment o a stock di!idend issued in mid year
( )iluted EPS is #ased on assumptions a#out uture transactions
* Treatment o con!erti#le securities under diluted EPS
+ True,alse statements regarding EPS
1- )ilution o options and &arrants under treasury stock method
11 .eporting earnings per share inormation
12 /sing the i0con!erted method &ith diluted EPS
1" 1ssumptions o i0con!erted method o EPS computation
14 /se o the treasury stock method &hen computing diluti!e EPS
1$ Computing EPS or a company ha!ing dierent issues o con!erti#le
securities and,or stock options and &arrants
1' 2eighted0a!erage num#er o shares 3midyear e!ents4
1( EPS igures are reported on the income statement
1* Purpose o reporting diluted earnings per share
1+ Treatment o interest e5pense on diluti!e con!erti#le de#t
2- Computing diluted EPS or a company &ith a comple5 capital structure
21 Current 611P or companies &ith comple5 capital structures
22 Current and ormer 611P or earnings per share
2" /.S. 611P !s. international standards
24 Basic EPS and 1PB 7pinion 8o. 1$
2$ Stock options, &arrants and rights and EPS calculation
2' %ncremental EPS or multiple potential diluti!e securities
2( Presentation o EPS or discontinued operations, e5traordinary items,
and cumulati!e eect o accounting change
19# Chapter 1+ Earnings Per Share
Co$%!tationa Q!e"tion"
2* Computation o &eighted0a!erage num#er o shares
2+ Computation o #asic EPS
"- Computation o #asic EPS
"1 Computation o #asic EPS
"2 Computation o #asic EPS
"" Computation o &eighted0a!erage shares or diluted EPS
"4 Computation o diluted EPS
"$ Computation o diluted EPS
"' Computation o &eighted0a!erage shares or diluted EPS
"( Computation o diluted loss per share
"* Computation o shares used or #asic and diluti!e EPS
"+ Computation o &eighted0a!erage num#er o shares or EPS
4- Computation o diluted EPS
41 Computation o diluted EPS
42 Computation o diluted EPS
4" Eect o treasury stock method and &arrants on num#er o shares used
44 Computation o diluted EPS
4$ Computation o #asic EPS
4' Computation o &eighted0a!erage num#er o shares or diluted EPS
4( Computation o diluted EPS
4* Computation o shares to compute diluted EPS
4+ Eect o stock rights on EPS calculation
$- Eect o stock rights on EPS calculation
$1 Eect o stock rights on EPS calculation
PRO&LEMS
1 Computation o &eighted0a!erage shares and comparati!e EPS
2 Computation o #asic EPS &ith e5traordinary items
" Computation o diluti!e EPS
4 Computation o #asic, diluti!e EPS
$ Computation o #asic, diluti!e EPS
' Computation o &eighted0a!erage shares
( Computation o simple, diluti!e EPS
* Computation o simple, diluti!e EPS
+ Computation o #asic, diluti!e EPS,loss PS
1- Computation o simple, diluti!e EPS
11 EPS or comple5 capital structure
12 E5clusion o nonpu#lic companies rom EPS reporting
1" EPS and stock price ma5imi9ation
14 %nterpreting the price,earnings ratio
MULTIPLE CHOICE QUESTIONS
Test Bank, Intermediate Accounting, 14
th
ed. 199
c 1. Earnings per share disclosures are required only or
:72 a. companies &ith comple5 capital structures.
#. companies that change their capital structures during the reporting
period.
c. pu#lic companies.
d. pri!ate companies.
c 2. %n computing the earnings per share o common stock, noncumulati!e
:7" preerred di!idends not declared should #e
a. deducted rom the net income or the year.
#. added to the net income or the year.
c. ignored.
d. deducted rom the net income or the year, net o ta5.
a ". 2hich earnings per share computation should #e reported on the ace o
the
:7* income statement;
Basic EPS )iluted EPS
a. <es <es
#. <es 8o
c. 8o <es
d. 8o 8o
# 4. 2hen computing earnings per share on common stock, di!idends on
:7" cumulati!e, noncon!erti#le preerred stock should #e
a. deducted rom net income only i the di!idends &ere declared or paid in
the current period.
#. deducted rom net income regardless o &hether the di!idends &ere not
paid or declared in the period.
c. deducted rom net income only i net income is greater than the
di!idends.
d. ignored.
c $. %n calculating diluted earnings per share, &hich o the ollo&ing should not
#e
:7$ considered;
a. The &eighted a!erage num#er o common shares outstanding
#. The amount o di!idends declared on cumulati!e preerred shares
c. The amount o cash di!idends declared on common shares
d. The num#er o common shares resulting rom the assumed con!ersion
o de#entures outstanding
'(( Chapter 1+ Earnings Per Share
c '. 2hat is the correct treatment o a stock di!idend issued in mid year &hen
:7" computing the &eighted0a!erage num#er o common shares outstanding or
earnings per share purposes;
a. The stock di!idend should #e &eighted #y the length o time that the
additional num#er o shares are outstanding during the period.
#. The stock di!idend should #e included in the &eighted0a!erage
num#er o common shares outstanding only i the additional shares
result in a decrease o " percent or more in earnings per share.
c. The stock di!idend should #e &eighted as i the additional shares &ere
issued at the #eginning o the year.
d. The stock di!idend should #e ignored since no additional capital &as
recei!ed.
a (. The EPS computation that is or&ard0looking and #ased on assumptions
a#out
:72 uture transactions is
a. diluted EPS.
#. #asic EPS.
c. continuing operations EPS.
d. e5traordinary EPS.
a *. 2hen computing diluted earnings per share, stock options are
:74 a. recogni9ed only i they are diluti!e.
#. recogni9ed only i they are antidiluti!e.
c. recogni9ed only i they &ere e5ercised.
d. ignored.
# +. 7 the ollo&ing, select the incorrect statement concerning earnings per
share.
:7' a. )uring periods &hen all income is paid out as di!idends, earnings per
share and di!idends per share under a simple capital structure &ould #e
identical.
#. /nder a simple capital structure, no ad=ustment to shares outstanding is
necessary or a stock split on the last day o the iscal period.
c. )uring a period, changes in stock issued or reacquired #y a company
may aect earnings per share.
d. )uring a loss period, the amount o loss attri#uted to each share o
common stock should #e computed.

Test Bank, Intermediate Accounting, 14
th
ed. '(1
c 1-. %n applying the treasury stock method o computing diluted earnings per
share,
:74 &hen is it appropriate to use the a!erage market price o common stock
during the year as the assumed repurchase price;
a. 1l&ays
#. 8e!er
c. 2hen the a!erage market price is higher than the e5ercise price
d. 2hen the a!erage market price is lo&er than the e5ercise price
d 11. Earnings per share inormation should #e reported or all o the ollo&ing
:7* e5cept
a. continuing operations.
#. e5traordinary gain.
c. net income.
d. cash lo&s rom operating acti!ities.
# 12. 2hen using the i0con!erted method to compute diluted earnings per share,
:7$ con!erti#le securities should #e
a. included only i antidiluti!e.
#. included only i diluti!e.
c. included &hether diluti!e or not.
d. not included.
a 1". The i0con!erted method o computing EPS data assumes con!ersion o
:7$ con!erti#le securities at the
a. #eginning o the earliest period reported 3or at time o issuance, i later4.
#. #eginning o the earliest period reported 3regardless o time o
issuance4.
c. middle o the earliest period reported 3regardless o time o issuance4.
d. ending o the earliest period reported 3regardless o time o issuance4.
a 14. 2hen computing diluti!e EPS, the treasury stock method can #e used or
all
:74 o the ollo&ing e5cept
a. con!erti#le preerred stock.
#. stock &arrants.
c. stock options.
d. stock rights.
'(' Chapter 1+ Earnings Per Share
a 1$. >or a company ha!ing se!eral dierent issues o con!erti#le securities
and,or
:7( stock options and &arrants, the >1SB requires selection o the com#ination
o securities producing
a. the lo&est possi#le earnings per share.
#. the highest possi#le earnings per share.
c. the earnings per share igure mid&ay #et&een the lo&est possi#le and
the highest possi#le earnings per share.
d. any earnings per share igure #et&een the lo&est possi#le and the
highest possi#le earnings per share.
a 1'. >or purposes o computing the &eighted0a!erage num#er o shares
:7" outstanding during the year, a midyear e!ent that must #e treated as
occurring at the #eginning o the year is the
a. declaration and issuance o a stock di!idend.
#. purchase o treasury stock.
c. sale o additional common stock.
d. issuance o stock &arrants.
c 1(. 2here in the inancial statements should #asic and comple5 EPS igures
or
:7* income rom continuing operations #e reported;
a. %n the accompanying notes
#. %n management?s discussion and analysis
c. 7n the income statement
d. 7n the statement o cash lo&s
d 1*. The main purpose o reporting diluted earnings per share is to
:72 a. pro!ide a comparison igure or de#t holders.
#. indicate earnings shareholders &ill recei!e in uture periods.
c. distinguish #et&een companies &ith a comple5 capital structure and
companies &ith a simple capital structure.
d. sho& the ma5imum possi#le dilution o earnings.
# 1+. %n determining earnings per share, interest e5pense, net o applica#le
income
:7$ ta5es, on con!erti#le de#t &hich is diluti!e should #e
a. ignored or diluted earnings per share.
#. added #ack to net income or diluted earnings per share.
Test Bank, Intermediate Accounting, 14
th
ed. '()
c. deducted rom net income or diluted earnings per share.
d. none o the a#o!e.
d 2-. 2hen computing diluted EPS or a company &ith a comple5 capital
structure,
:72 &hat is the denominator in the computation;
a. 8um#er o common shares outstanding at year0end
#. 2eighted0a!erage num#er o common shares outstanding
c. 2eighted0a!erage num#er o common shares outstanding plus all other
potentially antidiluti!e securities
d. 2eighted0a!erage num#er o common shares outstanding plus all other
potentially diluti!e securities
# 21. /nder current 611P, a company &ith a comple5 capital structure and
potential
:71 earnings per share dilution must present
a. primary and ully diluted earnings per share.
#. #asic and diluted earnings per share.
c. #asic and primary earnings per share.
d. #asic earnings per share and cash lo& per share.
c 22. /nder current 611P, common stock equi!alents
:71 a. are considered in calculating #asic earnings per share.
#. are considered in calculating primary earnings per share.
c. are not considered in calculating #asic earnings per share.
d. are not considered in calculating ully diluted earnings per share.
c 2". Current /.S. 611P or earnings per share
:71 a. are not consistent &ith the standards or earnings per share
promulgated #y the 1ccounting Standards Board o the /nited @ingdom.
#. are not consistent &ith the standards or earnings per share
promulgated #y the %nternational 1ccounting Standards Committee
3%1SC4.
c. are consistent #oth &ith the /.@. and the %nternational 1ccounting
Standards Committee standards or earnings per share.
d. are unique and are not consistent &ith the standards promulgated #y
the /.@. 1ccounting Standards Board, the %nternational 1ccounting
Standards Committee, or any other standard setting #ody in the &orld.
'(* Chapter 1+ Earnings Per Share
d 24. /nder 1ccounting Principles Board 7pinion 8o. 1$, the historical or #asic
:71 earnings per share igure or companies &ith comple5 capital structures
&as
a. al&ays reported as part o primary earnings per share, #ut not ully
diluted earnings per share.
#. al&ays reported as part o ully diluted earnings per share, #ut not
primary earnings per share.
c. al&ays disclosed as a separate amount in addition to primary and ully
diluted earnings per share.
d. ne!er disclosed either in primary or ully diluted earnings per share.
c 2$. %n calculating earning per share, stock options &arrants, and rights are
:7( a. al&ays diluti!e.
#. ne!er diluti!e.
c. diluti!e i the e5ercise price is less than the a!erage market price o the
common stock.
d. diluti!e i the e5ercise price is more than the a!erage market price o the
common stock.
# 2'. >or companies &ith a comple5 capital structure, a con!erti#le security is
:7( potentially diluti!e i
a. its incremental EPS is greater than #asic EPS ater considering any
stock options, rights, and &arrants.
#. its incremental EPS is less than #asic EPS ater considering any stock
options, rights, and &arrants.
c. its incremental EPS is equal to #asic EPS ater considering any stock
options, rights, and &arrants.
d. its incremental EPS is less than 1.-- ater considering any stock
options, rights, and &arrants.
c 2(. 1n entity that reports a discontinued operation, an e5traordinary item, or a
:7* cumulati!e eect o an accounting change shall present #asic and diluted
earnings per share amounts or those line items
a. only on the ace o the income statement.
#. only in the notes to the inancial statements.
c. either on the ace o the income statement or in the notes to the
inancial statements.
d. only i management chooses to do so as these amounts are note
required to #e disclosed either in the inancial statements or the notes
thereto.
Test Bank, Intermediate Accounting, 14
th
ed. '(+
c 2*. 7n )ecem#er "1, 2--2, Superior, %nc. had '--,--- shares o common
stock
:7" issued and outstanding. Superior issued a 1- percent stock di!idend on
Auly 1, 2--". 7n 7cto#er 1, 2--", Superior reacquired 4*,--- shares o its
common stock and recorded the purchase using the cost method o
accounting or treasury stock. 2hat num#er o shares should #e used in
computing #asic earnings per share or the year ended )ecem#er "1,
2--";
a. '12,---
#. '1*,---
c. '4*,---
d. ''-,---
d 2+. 1t )ecem#er "1, 2--2, the Burdock Company had 1$-,--- shares o
common
:7" stock issued and outstanding. 7n 1pril 1, 2--", an additional "-,---
shares o common stock &ere issued. BurdockCs net income or the year
ended )ecem#er "1, 2--", &as D$1(,$--. )uring 2--", Burdock declared
and paid D"--,--- in cash di!idends on its noncon!erti#le preerred stock.
The #asic earnings per common share, rounded to the nearest penny, or
the year ended )ecem#er "1, 2--", should #e
a. D".--.
#. D2.--.
c. D1.4$.
d. D1.2'.
d "-. 1t )ecem#er "1, 2--" and 2--", :apham Corp. had 2--,--- shares o
:7" common stock and 2-,--- shares o $ percent, D1-- par !alue cumulati!e
preerred stock outstanding. 8o di!idends &ere declared on either the
preerred or common stock in 2--" or 2--2. 8et income or 2--" &as
D1,---,---. >or 2--", #asic earnings per common share amounted to
a. D$.--.
#. D4.($.
c. D4.$-.
d. D4.--.
c "1. The Thomas CompanyCs net income or the year ended )ecem#er "1 &as
:7" D"-,---. )uring the year, Thomas declared and paid D",--- in cash
di!idends on preerred stock and D$,2$- in cash di!idends on common
stock. 1t )ecem#er "1, "',--- shares o common stock &ere outstanding,
'(, Chapter 1+ Earnings Per Share
"-,--- o &hich had #een issued and outstanding throughout the year and
',--- o &hich &ere issued on Auly 1. There &ere no other common stock
transactions during the year, and there is no potential dilution o earnings
per share. 2hat should #e the year?s #asic earnings per common share o
Thomas, rounded to the nearest penny;
a. D-.''
#. D-.($
c. D-.*2
d. D-.+1
# "2. Bay 1rea Supplies had '-,--- shares o common stock outstanding at
Aanuary
:7" 1. 7n Bay 1, Bay 1reas Supplies issued "1,$-- shares o common stock.
7utstanding all year &ere "-,--- shares o noncon!erti#le preerred stock
on &hich a di!idend o D4 per share &as paid in )ecem#er. 8et income or
the year &as D2+-,1--. Bay 1rea Supplies should report #asic earnings
per share or the year o
a. D1.*'.
#. D2.1-.
c. D2.*4.
d. D".1(.
d "". :andro!er, %nc. had 1$-,--- shares o common stock issued and
outstanding
:74 at )ecem#er "1, 2--2. 7n Auly 1, 2--", an additional 2$,--- shares o
common stock &ere issued or cash. :andro!er also had une5ercised stock
options to purchase 2-,--- shares o common stock at D1$ per share
outstanding at the #eginning and end o 2--". The market price o
:andro!erCs common stock &as D2- throughout 2--". 2hat num#er o
shares should #e used in computing diluted earnings per share or the year
ended )ecem#er "1, 2--";
a. 1*2,$--
#. 1*-,---
c. 1((,$--
d. 1'(,$--
Test Bank, Intermediate Accounting, 14
th
ed. '(7
# "4. 6lendale Enterprises had 2--,--- shares o common stock issued and
:74 outstanding at )ecem#er "1, 2--2. 7n Auly 1, 2--", 6lendale issued a 1-
percent stock di!idend. /ne5ercised stock options to purchase 4-,---
shares o common stock 3ad=usted or the 2--" stock di!idend4 at D2- per
share &ere outstanding at the #eginning and end o 2--". The market
price o 6lendaleCs common stock 3&hich &as not aected #y the stock
di!idend4 &as D2$ per share during 2--". 8et income or the year ended
)ecem#er "1, 2--", &as D1,1--,---. 2hat should #e 6lendaleCs 2--"
diluted earnings per common share, rounded to the nearest penny;
a. D4.2"
#. D4.*2
c. D$.--
d. D$.-$
# "$. 7n Aanuary 2, 2--2, 2orley Co. issued at par D$-,--- o 4 percent #onds
:7$ con!erti#le, in total, into $,--- shares o 2orleyCs common stock. 8o
#onds &ere con!erted during 2--2. Throughout 2--2 2orley had $,---
shares o common stock outstanding. 2orleyCs 2--2 net income &as
D$,---. 2orleyCs income ta5 rate is 4- percent. 8o potentially diluti!e
securities other than the con!erti#le #onds &ere outstanding during 2--2.
2orleyCs diluted earnings per share or 2--2 &ould #e
a. D-.$*.
#. D-.'2.
c. D-.(-.
d. D1.1'.
'(# Chapter 1+ Earnings Per Share
d "'. 1t )ecem#er "1, 2--2, )ayplanner %nc. had 2$-,--- shares o common
stock
:7$ outstanding. 7n 7cto#er 1, 2--", an additional '-,--- shares o common
stock &ere issued or cash. )ayplanner also had 2,---,--- o * percent
con!erti#le #onds outstanding at )ecem#er "1, 2--", &hich are con!erti#le
into $-,--- shares o common stock. The #onds are diluti!e in the 2--"
earnings per share computation. 8o #onds &ere issued or con!erted into
common stock during 2--". 2hat is the num#er o shares that should #e
used in computing diluted earnings per share or the year ended )ecem#er
"1, 2--";
a. 2'$,---
#. "--,---
c. "1-,---
d. "1$,---
# "(. The AEB Corporation had 2--,--- shares o common stock and 1-,---
shares
:7' o cumulati!e, D' preerred stock outstanding during 2--". The preerred
stock is con!erti#le at the rate o three shares o common per share o
preerred. >or 2--", the company had a D'-,--- net loss rom operations
and declared no di!idends. AEB should report 2--" diluted loss per share
o 3rounded to the nearest cent4
a. D3-."-4.
#. D3-.$24.
c. D3-.$*4.
d. D3-.'-4.
c "*. Facor %ncorporated has 2,$--,--- shares o common stock outstanding on
:7$ )ecem#er "1, 2--2. 1n additional $--,--- shares o common stock &ere
issued 1pril 1, 2--", and 2$-,--- more on Auly 1, 2--". 7n 7cto#er 1,
2--", Facor issued $,---, D1,--- ace !alue, ( percent con!erti#le #onds.
Each #ond is con!erti#le into 4- shares o common stock. 8o #onds &ere
con!erted into common stock in 2--". 2hat is the num#er o shares to #e
used in computing #asic earnings per share and diluted earnings per share,
respecti!ely;
a. 2,*($,--- and 2,+2$,---
#. 2,*($,--- and ",-($,---
c. ",---,--- and ",-$-,---
Test Bank, Intermediate Accounting, 14
th
ed. '(9
d. ",---,--- and ",2--,---
# "+. Shoemaker Company had 1,--- common shares issued and outstanding at
:7" Aanuary 1. )uring the year, Shoemaker also had the common stock
transactions listed #elo&.
1pril 1 %ssued "-- pre!iously unissued shares
Bay 1 Split the stock 20or01
Aune "- Purchased 1-- shares or the treasury
Auly "- )istri#uted a 2- percent stock di!idend
)ecem#er "1 Split the stock "0or01
6i!en this inormation, &hat is the &eighted0a!erage num#er o shares that
Shoemaker should use or earnings per share purposes;
a. 2,**-
#. *,'4-
c. *,*2-
d. +,(2-
c 4-. )uring its iscal year, .ichardsC )istri#uting had net income o D1--,--- 3no
:7$ e5traordinary items4 and $-,--- shares o common stock and 1-,---
shares o preerred stock outstanding. .ichards declared and paid
di!idends o D.$- per share to common and D'.-- per share to preerred.
The preerred stock is con!erti#le into common stock on a share0or0share
#asis. >or the year, .ichards )istri#uting should report diluted earnings
3loss4 per share o
a. D3-.*-4.
#. D1.--.
c. D1.'(.
d. D2.'(.
c 41. 1t )ecem#er "1, 2--2, the .o#erts Company had (--,--- shares o
common
'1( Chapter 1+ Earnings Per Share
:7$ stock outstanding. 7n Septem#er 1, 2--", an additional "--,--- shares o
common stock &ere issued. %n addition, .o#erts had D2-,---,--- o *
percent con!erti#le #onds outstanding at )ecem#er "1, 2--2, &hich are
con!erti#le into 4--,--- shares o common stock. 8o #onds &ere
con!erted into common stock in 2--". The net income or the year ended
)ecem#er "1, 2--", &as D',---,---. 1ssuming the income ta5 rate &as
4- percent, &hat should #e the diluted earnings per share or the year
ended )ecem#er "1, 2--";
a. D$.--
#. D$.$"
c. D$.*-
d. D*."-
c 42. The 2--" net income o 1t&ater %nc. &as D2--,--- and 1--,--- shares o
its
:74 common stock &ere outstanding during the entire year. %n addition, there
&ere outstanding options to purchase 1-,--- shares o common stock at
D1- per share. These options &ere granted in 2--- and none had #een
e5ercised #y )ecem#er "1, 2--". Barket prices o 1t&aterCs common stock
during 2--" &ere
Aanuary 1.................................................... D2- per share
)ecem#er "1.............................................. D4- per share
1!erage Price............................................. D2$ per share
The amount that should #e sho&n as 1t&aterCs diluted earnings per share
or 2--" 3rounded to the nearest cent4 is
a. D2.--.
#. D1.+$.
c. D1.*+.
d. D1.*'.
d 4". 2arrants e5ercisa#le at D2- each to o#tain 2-,--- shares o common stock
:74 &ere outstanding during a period &hen the a!erage and year0end market
price o the common stock &as D2$. 1pplication o the treasury stock
method or the assumed e5ercise o these &arrants in computing diluted
earnings per share &ill increase the &eighted0a!erage num#er o
outstanding common shares #y
a. 2-,---.
#. 1',''(.
c. 1',---.
d. 4,---.
Test Bank, Intermediate Accounting, 14
th
ed. '11
# 44. The ollo&ing inormation relates to the capital structure o Betcal Corp.G
:7' 12,"1,-2
12,"1,-"
7utstanding sharesG
Common stock.............................................. 1*-,--- 1*-,---
Preerred stock, con!erti#le into '-,---
shares o common......................................... '-,--- '-,---
1-H con!erti#le #onds, con!erti#le into
4-,--- shares o common............................ D2,---,--- D2,---,---
)uring 2--" Betcal paid D+-,--- in di!idends on the preerred stock.
BetcalCs net income or 2--" &as D1,+'-,--- and the income ta5 rate &as
4- percent. >or the year ended )ecem#er "1, 2--", the diluted earnings
per share is
a. D(.2+.
#. D(.4".
c. D*.1(.
d. D*.2+.
a 4$. 1t )ecem#er "1, 2--2, :eton, %nc. had '--,--- shares o common stock
:7$ outstanding. 7n 1pril 1, 2--", an additional 1*-,--- shares o common
stock &ere issued or cash. :eton also had D$,---,--- o *H con!erti#le
#onds outstanding at )ecem#er "1, 2--", &hich are con!erti#le into
1$-,--- shares o common stock. The #onds are diluti!e in the 2--" EPS
computation. 8o #onds &ere issued or con!erted into common stock
during 2--". 2hat is the num#er o shares that should #e used in
computing #asic earnings per share or 2--";
a. ("$,---
#. (*-,---
c. **$,---
d. +1-,---
'1' Chapter 1+ Earnings Per Share
c 4'. 1t )ecem#er "1, 2--2, :eton, %nc. had '--,--- shares o common stock
:7$ outstanding. 7n 1pril 1, 2---, an additional 1*-,--- shares o common
stock &ere issued or cash. :eton also had D$,---,--- o *H con!erti#le
#onds outstanding at )ecem#er "1, 2--", &hich are con!erti#le into
1$-,--- shares o common stock. The #onds are diluti!e in the 2--- EPS
computation. 8o #onds &ere issued or con!erted into common stock
during 2--". 2hat is the num#er o shares that should #e used in
computing diluted earnings per share or 2--";
a. ("$,---
#. (*-,---
c. **$,---
d. +1-,---
# 4(. )atatec, %nc., had 4--,--- shares o D2- par common stock and 4-,---
shares
:7$ o D1-- par, 'H cumulati!e, con!erti#le preerred stock outstanding or the
entire year ended )ecem#er "1, 2--". Each share o the preerred stock is
con!erti#le into $ shares o common stock. )atatecCs net income or 2--"
&as D1,'*-,---. >or the year ended )ecem#er "1, 2--", the diluted
earnings per share is
a. D2.4-.
#. D2.*-.
c. D".'-.
d. D4.2-.
# 4*. 7n )ecem#er "1, 2--1, >eterik Company had (,--- shares o common
stock
:7$ issued and outstanding. 7n 1pril 1, 2--2, an additional 1,--- shares o
common stock &ere issued and on Auly 1, $-- more shares &ere issued.
7n 7cto#er 1, 2--2, >eterik issued 1-, D1,--- maturity !alue, *H
con!erti#le #onds. Each #ond is con!erti#le into 4- shares o common
stock. 8o #onds &ere con!erted into common stock in 2--2. 1ssuming
there are no antidiluti!e securities, &hat is the num#er o shares >eterik
should use to compute diluted earnings per share or the year ended
)ecem#er "1, 2--2;
a. (,+$-
#. *,1--
c. *,1$-
d. *,4--
Test Bank, Intermediate Accounting, 14
th
ed. '1)
The ollo&ing inormation relates to questions 4+0$1G
Aames Corporation currently has stock rights outstanding or 2,--- common
shares. The e5ercise price o these shares is D2-. The options &ere
issued in Aanuary o 2---. The a!erage market price o the related
common stock during the year 2--- &as D2$. The a!erage market price o
the related common stock during 2--1 &as D21 and during 2--2 &as D1+.
The company?s iscal year ends on )ecem#er "1 o each year.
d 4+. Io& should these stock rights #e treated in earnings per share calculations
:7( or the year ending )ecem#er "1, 2---;
a. The stock options are antidiluti!e and should not #e included either in
#asic and diluted earnings per share.
#. The stock options are diluti!e and should #e included #oth in #asic and
diluted earnings per share.
c. The stock options are diluti!e and should #e included #oth in #asic and
diluted earnings per share in the amount o 4-- shares.
d. The stock options are diluti!e and should #e included only in diluted
earnings per share in the amount o 4-- shares.
# $-. Io& should these stock rights #e treated in the earnings per share
calculation
:7( or the year ending )ecem#er "1, 2--2;
a. The stock options are antidiluti!e and should not #e included either in
#asic or diluted earnings per share.
#. The stock options are diluti!e and should #e included in diluted
earnings per share in the amount o +$ shares.
c. The stock options are diluti!e and should #e included in diluted
earnings per share in the amount o 2,--- shares.
d. The stock options are diluti!e and should #e included in diluted
earnings per share in the amount o 4-- shares.
a $1. Io& should these stock rights #e treated in the earnings per share
calculation
:7( or the year ending )ecem#er "1, 2--";
a. The stock options are antidiluti!e and should not #e included &ith in
#asic or diluted earnings per share.
#. The stock options are diluti!e and should #e included in diluted
earnings per share in the amount o 1-$ shares.
c. The stock options are diluti!e and should #e included in diluted
earnings per share in the amount o 2,--- shares.
'1* Chapter 1+ Earnings Per Share
d. The stock options are diluti!e and should #e included in diluted
earnings per share in the amount o 4-- shares.
PRO&LEMS
Problem 1
7n )ecem#er "1, 2--1, Aamest Tra!el %nc. had 4$-,--- shares o no0par common
stock issued and outstanding. 1ll shares &ere sold or D(.$-. 7n Aune "-, 2--2,
the irm issued an additional 1"$,--- shares or D( per share. The 2--2 income
&as D"1+,2--. 7n Septem#er 1, 2--", a 1$ percent stock di!idend &as issued to
all common shareholders. 7n 7cto#er 1, 2--", '-,--- shares &ere reacquired as
treasury shares. 8et income in 2--" &as D2(*,-'".
314 Compute the &eighted0a!erage num#er o common shares outstanding or
2--2 and 2--" that should #e sho&n on comparati!e statements at the end o
2--".
324 Compute the #asic earnings per share in 2--2 and 2--" to #e reported on
comparati!e statements at the end o 2--".
Solution 1
:7"
314 2--2G 4$-,--- 5 12,12 5 1.1$ J $1(,$--
1"$,--- 5 ',12 5 1.1$ J ((,'2$
$+$,12$ shares

2--"G $*$,--- 5 12,12 5 1.1$ J '(2,($-
3'-,---4 5 ",12 J 31$,---4
'$(,($-
324 2--2G 3D"1+,2-- , $+$,12$4 J D.$4 3rounded4
2--"G 3D2(*,-'" , '$(,($-4 J D.42 3rounded4
Problem 2
The income statement o Bicro Computers, %nc. sho&ed the ollo&ing inormation
on )ecem#er "1, 2--".
%ncome #eore income ta5..................................................... D1,4(2,---
%ncome ta5 e5pense............................................................... 441,'--
%ncome rom continuing operations....................................... D1,-"-,4--
E5traordinary loss 3net o ta5 sa!ings4.................................. 31--,---4
8et income............................................................................. D +"-,4--
Compute earnings per share igures or common stock under the assumption that
Bicro Computer %nc. has
314 "2-,--- shares o D24 par !alue common stock outstanding.
324 +,'-- shares o D1--, par *H cumulati!e preerred stock, and 24-,--- shares
o no0par common stock. )i!idends are not in arrears.
8oteG 1ssumption 314 is independent o 324.
Solution 2
:7"
314 EPS00continuing operations D".22 K
EPS00e5traordinary items 3."14KK
EPS D2.+1 3rounded4
KD1,-"-,4--,"2-,--- J D".22
KKD31--,---4,"2-,--- J D3."14
324 EPS00continuing operations D".+(K
EPS00e5traordinary items 3.424KK
EPS D".$$
KLD1,-"-,4-- 0 3D*.-- 5 +,'--4M , 24-,--- J 3D1,-"-,4-- 0 D(',*--4 , 24-,--- J D".+(
KK31--,---4 , 24-,--- J D3.424
Problem 3
)uring 2--", the Ellis Corporation had "(-,--- shares o D2- par common stock
outstanding. 7n Aanuary 1, 2--", 2,---, * percent #onds &ere issued &ith a
maturity !alue o D1,--- each. To enhance the #ond sale, the company oered a
con!ersion o $- shares o common stock or each #ond at the option o the
purchaser. 8et income or 2--" &as D4'4,---. The income ta5 rate &as "-
percent. Compute the diluted earnings per share o common stock.
Solution 3
:7$
)iluted EPS J 3D4'4,--- N D1'-,--- 0 D4*,---4 , 3"(-,--- N 1--,---4
J D$(',--- , 4(-,---
J D1.2" 3rounded4
Problem 4
)uring 2--", 2right Corp. had outstanding 12$,--- shares o common stock and
(,$-- shares o noncumulati!e, * percent, D$- par preerred stock. Each preerred
share is con!erti#le into * shares o common stock. %n 2--", net income &as
D2"1,$--.
314 Compute #asic and diluted earnings per share or 2--" assuming no di!idends
&ere declared or paid.
324 Compute #asic and diluted earnings per share or 2--" assuming di!idends
&ere declared and paid on the preerred stock.
Solution 4
:7"
314 BEPS J 3D2"1,$-- , 12$,---4 J D1.*$ 3rounded4
)EPS J D2"1,$-- , L12$,--- N 3* 5 (,$--4M
J D2"1,$-- , 1*$,---
J D1.2$ 3rounded4
324 BEPS J 3D2"1,$-- 0 "-,---4 , 12$,--- J D1.'1 3rounded4
)EPS J D2"1,$-- , 312$,--- N '-,---4
J D2"1,$-- , 1*$,---
J D1.2$ 3rounded4
Problem 5
7n )ecem#er "1, 2--", Basters %nc. had outstanding 1*-,--- shares o common
stock. 8et income or 2--" &as D2*$,---. 7utstanding options 3granted Auly 1,
2--"4 to purchase 1$,--- shares o common stock at D2- per share had not #een
e5ercised #y )ecem#er "1, 2--". )uring 2--", market prices or the common
stock &ereG
Auly 1, 2--"...................................................................... D1* per share
)ecem#er "1, 2--".......................................................... D"2 per share
1!erage market................................................................ D2$ per share
314 Compute the #asic earnings per common share in 2--".
324 Compute the diluted earnings per common share in 2--".
Solution 5
:74
314 BEPS J D2*$,--- , 1*-,---
J D1.$* 3rounded4
324 )EPS J D2*$,--- , L1*-,--- N O 31$,--- 0 12,---K4M
J D2*$,--- , 1*1,$--
J D1.$( 3rounded4
K D"--,---,D2$ J 12,--- shares
Problem 6
)ata Controls %nc. had 2$-,--- shares o common stock outstanding at the end o
2--1. )uring 2--2 and 2--", the ollo&ing transactions took place.
2--2 Barch 1 Sold 24,--- shares
Auly 24 %ssued a 2- percent stock di!idend
7cto#er 1 Sold 1',--- shares
)ecem#er 1 Purchased 1$,--- shares to #e held in treasury
2--" Aune 1 "0or01 stock split
Septem#er 1 Sold '-,--- shares
)ata Controls %nc. has a simple capital structure.
Compute the &eighted a!erage num#er o shares or 2--2 and 2--" to #e used in
the earnings per share computation or comparati!e inancial statements at the end
o 2--".
Solution 6
:7"
2--2 Aanuary 1 2$-,--- 5 12,12 5 1.2- 5 " J +--,---
Barch 1 24,--- 5 1-,12 5 1.2- 5 " J (2,---
7cto#er 1 1',--- 5 ",12 5 " J 12,---
)ecem#er 1 31$,---4 5 1,12 5 " J 3",($-4
+*-,2$-
2--" Aanuary 1 "2+,*--K 5 12,12 5 " J +*+,4--
Septem#er 1 '-,--- 5 4,12 J 2-,---
1,--+,4--
K2--2 Aanuary 1 2$-,---
Barch 1 %ssuance 24,---
Auly 24 2-H stock di!idend $4,*--
7cto#er 1 %ssuance 1',---
)ecem#er 1 Treasury stock 31$,---4
"2+,*--
Problem 7
The ollo&ing is a partial #alance sheet or 1nderson Corp. or the year ended
)ecem#er "1, 2--2.
+ percent Con!erti#le Bonds 3issued at par4................................... D1,*--,---
Common Stock, 1*-,--- shares issued and outstanding, D$- par. D+,---,---
3a4 Each D1,--- con!erti#le #ond can #e con!erted into *- shares o
common stock.
3#4 7n Septem#er 1, 2--", one0third o the con!erti#le de#t &as con!erted
into common stock.
3c4 1nderson reported net income o D1,$$-,--- in 2--". The income ta5
rate &as "- percent.
3d4 8o other stock transactions took place during 2--".
314 Compute #asic earnings per share or 2--".
324 Compute diluted earnings per share or 2--".
Solution 7
:7'
314 BEPS J D1,$$-,--- , L1*-,--- N 34,12 5 4*,---4M
J D1,$$-,--- , 1+',---
J D(.+1 3rounded4
Con!ersion 3'-- #onds 5 *-4 J 4*,--- shares
324 )EPS J D1,$$-,--- N 3D144,--- 5 -.(4 , 1+',--- N 12*,---
J D1,'$-,*-- , "24,---
J D$.1-
%nterest 1!oided
D1,2--,--- 5 +H 5 12,12 J D1-*,---
D '--,--- 5 +H 5 *,12 J "',---
D144,---
Equi!alent Shares
1,2-- #onds 5 12,12 5 *- J +',---
'-- #onds 5 *- 5 *,12 J "2,---
12*,---
Problem 8
The Stanley Corp. pro!ides the ollo&ing data or 2--".
Transactions in common stockG
Aanuary 1, 2--", #eginning #alance............................... "--,--- shares
1pril 1, 2--", issuance.................................................... 1--,--- shares
*H D1-- par noncon!erti#le cumulati!e preerred stock....... D1--,---
%ssued at par
'H D1-- par con!erti#le cumulati!e preerred stock............. D2--,---
%ssued at D1-$
Con!erti#le into 2-,--- shares
Stock options.......................................................................... '-,--- shares
7ption price...................................................................... D2$
1!erage market................................................................ D"$
<ear0end market............................................................... D4-
The net income or 2--" is D2,"--,---. The companyCs ta5 rate is "- percent. 8o
con!ersions or options &ere e5ercised during 2--".
314 Compute #asic earnings per share.
324 Compute diluted earnings per share.
Solution 8
:7+
314 BEPS J 3D2,"--,--- 0 D*,--- 0 D12,---4 , L"--,--- N +,12 31--,---4M
J D2,2*-,--- , "($,---
J D'.-*
324 )EPS J 3D2,"--,--- 0 D*,---4 , 3"($,--- N 2-,--- N '-,--- 0 42,*$(4
J D2,2+2,--- , 412,14"
J D$.$'
7ptions J '-,--- 5 D2$ J D1,$--,---
D1,$--,---,D"$ J 42,*$(
Problem 9
1t )ecem#er "1, 2--2, .ollins %nc. had 4--,--- shares o common stock
outstanding. The company also had 4-,--- shares o D( con!erti#le preerred
stock. Each share is con!erti#le into 4 shares o common stock. 3)i!idends &ere
declared and paid.4
Transactions during 2--"G
Auly 1, 2--" Sold 2--,--- shares
Auly *, 2--" )eclared 1--H stock di!idend
Septem#er 1, 2--" Sold 12-,--- shares
7cto#er 1, 2--" Purchased '-,--- shares to #e held in treasury
.ollins %nc. reported a loss o D'(-,--- or 2--".
314 Compute #asic earnings 3loss4 per share.
324 Compute diluted earnings 3loss4 per share.
Solution 9
:7'
2eighted0a!erage computationG
Aanuary 1, 2--" 4--,--- 5 12,12 5 2 J *--,---
Auly 1, 2--" 2--,--- 5 ',12 5 2 J 2--,---
Septem#er 1, 2--" 12-,--- 5 4,12 J 4-,---
7cto#er 1, 2--" 3'-,---4 5 ",12 J 31$,---4
1,-2$,---
314 BEPS J LD3'(-,---4 0 D2*-,---M , 1,-2$,---
J 3D+$-,---4 , 1,-2$,---
J D3.+"4
324 )EPS J D3'(-,---4 , 31,-2$,--- N 1'-,---4
J D3'(-,---4 , 1,1*$,---
J D3.$(4 K
KThe con!erti#le preerred stock is antidiluti!e. .ollins &ould report a loss per
common share o D.+" or 2---.
Problem 10
)uring all o 2--2, )a&son Banuacturing Company had +$-,--- shares o
common stock outstanding. 7n Aune "-, 2--2, the company issued 1-,--- (
percent con!erti#le #onds at par. The maturity !alue o each #ond is D1,---. Each
#ond is con!erti#le into 2- shares o common stock. 8one &ere con!erted during
2--2.
)a&son also had '-,--- stock &arrants outstanding or all o 2--2. The option
price is D1- per share. The market price o the common stock &as D4- on
)ecem#er "1, 2--2, and the a!erage market price or 2--2 &as D"-.
)a&son reported a net income o D",'$-,--- or 2--2. 1ssume the company had
a 4- percent income ta5 rate.
314 Compute the #asic earnings per share.
324 Compute diluted earnings per share.
Solution 10
:7+
314 BEPS J D",'$-,--- , +$-,---
J D".*4 3rounded4
324 )EPS J 3D",'$-,--- N "$-,--- 0 14-,---4 , L+$-,--- N ',12 32--,---4 N
3'-,--- 0 2-,---4M
J D",*'-,--- , 1,-+-,---
J D".$4 3rounded4
Bonds00diluti!eG
3D1-,---,--- 5 .-( 5 .'-4 , 31-,--- 5 2-4 J D2.1-
D2.1- P D".*4
%ncremental shares J 1-,--- 5 2- J 2--,---
%nterest a!oided J D1-,---,--- 5 (H 5 ',12 J D"$-,---
Ta5 sa!ings on interest J D"$-,--- 5 -.4- J D14-,---
Stock options00diluti!e
Proceeds D1- 5 '-,--- J D'--,---
D'--,--- , D"- J 2-,--- shares
%ncremental shares J '-,--- 0 2-,--- J 4-,---
Problem 11
1t )ecem#er 21, 2--2, EB) Company had $--,--- shares o common stock
outstanding. EB) sold $-,--- shares on 7cto#er 1, 2--". 8et income or 2--"
&as D2,41(,*($Q the income ta5 rate &as "-H. %n addition, EB) had the ollo&ing
de#t and equity securities on its #ooks on )ecem#er "1, 2--2G
3a4 1*,--- shares o D1-- par, 12H cumulati!e preerred stock.
3#4 2*,--- shares o D1-- par, 1-H cumulati!e preerred stock, par D1--, sold at
11-. Each share o preerred stock is con!erti#le into 2 shares o common
stock.
3c4 D2,---,--- ace !alue o +H #onds sold at par.
3d4 D",---,--- ace !alue o (H con!erti#le #onds sold to yield *H. /namorti9ed
#ond discount is D1--,--- at )ecem#er "1, 2--2. Each D1,--- #ond is
con!erti#le into 2- shares o common stock.
7ptions to purchase 1-,--- shares o common stock &ere issued Bay 1, 2--".
E5ercise price is D"- per shareQ market !alue at date o option &as D2+Q a!erage
market !alue Bay 1 to )ecem#er "1, 2--", &as D4-.
Compute the earnings per share amounts or the year ended )ecem#er "1, 2--".
Solution 11
:7+
1. Computation o #asic earnings per shareG
8et income.................................................................. D2,41(,*($
:essG )i!idends on cumulati!e preerred stockG
1*,--- 5 D1-- 5 .12............................................D21',---
2*,--- 5 D1-- 5 .1-............................................ 2*-,---
4+',---
8et income identiied &ith common stock..........................
D1,+21,*($
2eighted a!erage num#er o sharesG
Aan. 1 to 7ct. 1 3$--,--- 5 R4....................................
"($,---
7ct. 1 to )ec. "1 3$$-,--- 5 S4.................................
1"(,$--
Total....................................................................
$12,$--
Basic earnings per share....................................................
D".($
2. Computation o diluted earnings per shareG
Test or dilution o con!erti#le securitiesG
8et %ncome 8um#er o
%ncremental
%mpact Shares EPS
(H Con!erti#le #onds.......................... D1'*,---
K
'-,--- D2.*-
1-H Con!erti#le preerred stock.......... 2*-,--- $',--- $.--

K
D",---,--- 5 .-* 5 .(- J D1'*,---Q eecti!e interest is amount charged to
interest e5pense, not interest paid.
Since only the con!erti#le #onds are less than the #asic earnings per share o
D".($, only the con!erti#le #onds are potentially diluti!e.
8et 8um#er o Part o 2eighted
)escription %ncome Shares <ear 1!erage EPS
Basic earnings per share D1,+21,*($ $12,$-- D".($
Bay 1, 2--", options as
i e5ercised Bay 1, 2--"G
8um#er o shares
assumed issuedG 1-,---
8um#er o treasury
shares 31-,--- 5
D"-4 D4- 3(,$--4 2,$-- *,12 1,''(
D1,+21,*($ $14,1'( D".(4
(H con!erti#le
#onds 1'*,--- '-,---
)iluted earnings
per share D2,-*+,*($ $(4,1'( D".'4
Problem 12
Statement of Financial Accounting Standards No. 128, TEarnings Per Share,U
requires that earnings per share igures #e presented only #y companies &ith
pu#licly held common stock or potential common stock.
:ist arguments or and against the e5clusion o nonpu#lic companies rom the
requirement o reporting earnings per share.
Solution 12
:7*
Perhaps the ma=or argument or not requiring earnings per share or nonpu#lic
enterprises relates to the issue o standards o!erload. 1uthoritati!e accounting
pronouncements ha!e increased #oth in quantity and comple5ity. Banagers o
small companies #elie!e that the cost o complying &ith comple5 standards
e5ceeds the !alue o the #eneits deri!ed rom the inormation disclosed under
these standards. Small irms ha!ing limited resources cannot aord the enormous
cost o complying &ith comple5 and costly standards that require inormation o
questiona#le !alue.
1 ma=or argument or requiring earnings per share inormation e!en or nonpu#lic
companies is the act that many enterprises e5empted rom the requirement are
neither small nor closely held. Bany nonpu#lic enterprises are large and comple5
entities &hose inancial reports are &idely distri#uted. Such enterprises may #e in
direct competition &ith enterprises &hose securities are traded in pu#lic markets.
Suspension o the requirement or reporting earnings per share or some
enterprises in an industry, #ut not or others, is not sustaina#le solely on the #asis
o dierences in orm o o&nership. 1rguments regarding the cost and #eneits o
pronouncements are pro#lematical #ecause costs o applying a standard may #e
identiied, #ut !aluing the #eneits deri!ed is diicult. The increasing comple5ity o
#usiness transactions suggests that the statement reader should #e pro!ided &ith
as much inormation as possi#le in order to make an inormed decision a#out the
inancial condition o the enterprise and the integrity and ste&ardship o
management. % the standards relating to earnings per share and other matters are
comple5, it is only #ecause the standards are relecting the comple5ity o the
transactions.
Problem 13
<ou are an independent CP1 and ha!e =ust acquired a ne& client, 1. )unn
Banuacturing Company. The president o the company recently read an article
ad!ising a irm?s management team to seek to ma5imi9e the long0run !alue o the
irm?s stock. The article mentioned proit ma5imi9ation, earnings per share, and the
role o these t&o actors in stock price ma5imi9ation. The president &ants your
ad!ice on ho& the choice o in!entory cost lo& methods 3e.g., >%>7 !s. :%>74
relates to proit ma5imi9ation, earnings per share, and stock price ma5imi9ation.
Solution 13
:7*
The o#=ecti!e o a irm is not to ma5imi9e earnings per share or the accounting
deinition o proit. The correct o#=ecti!e is to ma5imi9e shareholder &ealth, &hich
is the price per share that is equi!alent to the discounted cash lo&s o the irm.
Ba5imi9ing earnings per share may actually result in a reduction in cash lo&s. >or
e5ample, earnings per share during a period o rising prices &ould #e higher or a
irm that adopts >%>7 in!entory accounting rather than :%>7. >%>7 matches older,
lo&er costs against current re!enues, resulting in a higher net income and higher
earnings per share. :%>7 &ould produce lo&er net income and earnings per share
#ecause more recent, higher costs are matched against current re!enues.
8e!ertheless, >%>7 is the &rong choice in a period o rising prices #ecause it
minimi9es cash lo& #y ma5imi9ing ta5es. :%>7 should #e chosen #ecause it
pro!ides higher cash lo&s as a result o reducing income and thus reducing ta5es.
Since shareholders are concerned a#out discounted cash lo&, they &ill assign a
higher !alue to the shares o a company that uses :%>7 accounting.
Problem 14
The price0earnings ratio requently is used #y analysts and in!estors or e!aluating
stock prices #ecause it relates the earnings o the #usiness to the current market
price
o the stock. The ratio is computed #y di!iding the market price per share #y the
earnings per share #eore e5traordinary items.
E5plain ho& the price0earnings ratio should #e interpreted, including any pro#lems
associated &ith the interpretation o the ratio.
Solution 14
:7*
1 stock selling at a high price0earnings ratio generally is regarded a!ora#ly #y
analysts. 1 high ratio sho&s that in!estors #elie!e that the irm has good gro&th
opportunities and that the irm?s earnings are relati!ely sae. The lo&er risk o the
earnings lo&ers the discount rate used in discounting uture earnings to the
present thus raising the present !alue o these discounted uture cash lo&s and
raising the stock price as a result. 8onetheless, a irm could ha!e a high price0
earnings ratio, not #ecause stock price is high, #ut #ecause earnings are lo&.
1 ma=or pro#lem &ith the price0earnings ratios is the use o earnings per share in
the denominator. Earnings per share relect the some&hat ar#itrary choices o
accounting principles used to determine earnings. 1 irm?s reported earnings could
#e changed su#stantially #y the adoption o more conser!ati!e or less conser!ati!e
accounting procedures. 1n additional pro#lem &ith the price0earnings ratio is that
only at the end o the iscal year are the numerator and denominator measured as
o the same date. The price0earnings ratio oten is computed during the year using
the earnings per share amount rom the most recent inancial statements or #y
using a mo!ing quarterly a!erage.
CHAPTER 19 -- QUI. A 8ame VVVVVVVVVVVVVVVVVVVVVVVVV
Section VVVVVVVVVVVVVVVVVVVVVVVV
T > 1. 2hen the market price o stock options, &arrants, and rights is higher than
the current option price, e5ercise might occurQ thereore, there is potential
dilution rom these securities and they &ould #e included in the computation
o diluted earnings per share.
T > 2. %n order to compute diluted earnings per share &hen con!erti#le de#t e5ists,
ad=ustments must #e made #oth to net income 3numerator4 and to the num#er
o shares o common stock outstanding 3denominator4.
T > ". 2hen a company has only common stock outstanding, #ut there are
con!erti#le securities, stock options, &arrants, or other rights outstanding, it
is ne!er classiied as a company &ith a simple capital structure.
T > 4. The term Tcomple5 capital structureU descri#es a company &ith outstanding
stock options, &arrants, con!erti#le securities, etc., &hich are materially
diluti!e.
T > $. 2hen earnings per share are diluted as a result o the inclusion o
outstanding options and &arrants, the a!erage market price o the common
stock at the end o the period is used in computing the num#er o shares
assumed to #e reacquired.
T > '. 8oncon!erti#le preerred stock is e5cluded rom consideration in the
determination o #asic earnings per share during periods &here di!idends on
preerred stock are declared.
T > (. .etroacti!e treatment o common stock di!idends and splits is required or all
periodsC earnings per share data presented in the inancial statements.
T > *. % preerred stock di!idends are cumulati!e, the ull amount o the annual
di!idends should #e deducted rom net income in the determination o #asic
earnings per share, &hether or not the di!idends ha!e #een declared.
T > +. 1ny security &hose e5ercise or con!ersion &ould increase earnings per
share or reduce loss per share are reerred to as antidiluti!e securities.
T > 1-. 2hen a con!erti#le #ond is included in the determination o diluted earnings
per share, net income is ad=usted #y adding #ack the interest e5pense, and
the
num#er o shares o common stock outstanding is increased #y the num#er
o shares that &ould ha!e #een issued upon con!ersion.
22'
CHAPTER 19 -- QUI. & 8ame VVVVVVVVVVVVVVVVVVVVVVVVV
Section VVVVVVVVVVVVVVVVVVVVVVVV
1. %ncremental shares
B. )iluti!e securities
C. Treasury stock method
). Basic earnings per share
E. Simple capital structure
>. %0con!erted method
I. Primary earning per share
%. Con!erti#le securities
A. Comple5 capital structure
@. )iluted earnings
6. 1ntidiluti!e security
Select the term that #est its each o the ollo&ing deinitions and descriptions. %ndicate
your ans&er #y placing the appropriate letter in the space pro!ided
VVVV 1. Securities &hose assumed e5ercise or con!ersion results in a reduction in
earnings per share or an increase in loss per share.
VVVV 2. Securities, such as #onds and preerred stock, &hose terms permit the holder
to change the in!estment into the common stock.
VVVV ". /sed to ad=ust the earnings per share computation to consider the impact o
the possi#le con!ersion o con!erti#le securities.
VVVV 4. 1 company ha!ing only common or common and preerred stock.
VVVV $. 1 company &ith potential earnings per share dilution.
VVVV '. The num#er o shares issued upon e5ercising an option or &arrant less the
assumed num#er o shares reacquired ater applying the treasury stock
method o stock reacquisition.
VVVV (. Securities &hose assumed con!ersion or e5ercise results in an increase in
earnings per share or a decrease in a loss per share.
VVVV *. The amount o earnings attri#uta#le to each share o common stock
outstanding, including common stock equi!alents. This amount is no longer
reported under >1SB Statement 8o. 12*.
VVVV +. 1 method o recogni9ing the use o proceeds that &ould #e o#tained upon
e5ercise o options and &arrants in computing earnings per share.
VVVV 1-. 8et income di!ided #y &eighted0a!erage num#er o shares outstanding.
22(
CHAPTER 19 -- QUI. SOLUTIONS
Wui9 1
1. T
2. T
". >
4. T
$. >
'. >
(. T
*. T
+. T
1-. >
Wui9 B
1. B
2. %
". >
4. E
$. A
'. 1
(. 6
*. I
+. C
1-. )
3This page is let #lank intentionally.4