Question 1

Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009 the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $11 while the average price for the year was $12. What number of shares of stock should be used in computing diluted earnings per share?
A)65,000.
B)56,667.
C)55,000.
D)61,667.40,000 + (20,000 9/12) + (10,000 - 8,333*) = 56,667 *(10,000 $10)/$12 = 8,333

Accepted Answer

The diluted earnings per share calculation includes all potentially dilutive securities, which include the shares issued during the year and the outstanding stock options. The shares issued during the year are included in full, but the stock options are only included to the extent that they are in the money (i.e. the exercise price is less than the average market price). Therefore, the number of shares used in computing diluted earnings per share is 40,000 + (20,000 x 9/12) + (10,000 - 8,333) = 56,667.

Question 2

Dulce Corporation had 200,000 shares of common stock outstanding during the current year. At the beginning of the year, options for 10,000 shares of common stock were granted with an exercise price of $20. The average market price of the common stock during the year was $25. Net income was $4 million. What is diluted EPS?
A)$20.00.
B)$19.80.
C)$19.23.
D)$18.18.*(10,000 $20)/$25 = 8,000

Accepted Answer

The answer of Dulce Corporation had 200,000 shares of common...

Question 3

When computing diluted earnings per share, stock options:
A)Are included if they are anti-dilutive.
B)Should be ignored.
C)Are included if they are dilutive.
D)Increase the numerator while not affecting the denominator.

Accepted Answer

Stock options should be included in diluted earnings per share if they are dilutive, meaning they would decrease earnings per share if exercised. This is because if the options were exercised, more shares would be outstanding and the earnings would be spread over a larger number of shares, resulting in a lower earnings per share. Options that are anti-dilutive, or would increase earnings per share if exercised, are not included in the calculation.

Question 4

In computing diluted earnings per share, the treasury stock method is used for:
A)Stock warrants.
B)Stock splits.
C)Reverse stock splits.
D)Convertible preferred stock.

Accepted Answer

The answer of In computing diluted earnings per share, the...

Question 5

What is Falwell's basic earnings per share for 2009, rounded to the nearest cent?
A)$3.14
B)$4.40
C)$5.00
D)None of these is correct.

Accepted Answer

The answer of What is Falwell's basic earnings per share...

Question 6

When we take into account the dilutive effect of stock options, rights, and warrants in the calculation of EPS, the method used is called the:
A)Optional method.
B)If converted method.
C)Dilution method.
D)Treasury stock method.

Accepted Answer

The answer of When we take into account the dilutive...

Question 7

On December 31, 2008, Beta Company had 300,000 shares of common stock issued and outstanding. Beta issued a 5% stock dividend on June 30, 2009. On September 30, 2009, 40,000 shares of common stock were reacquired as treasury stock. What is the appropriate number of shares to be used in the basic earnings per share computation for 2009?
A)315,000.
B)307,500.
C)305,000.
D)267,500.(300,000 1.05) (40,000 3/12) = 305,000

Accepted Answer

To calculate the appropriate number of shares to be used in the basic earnings per share computation for 2009, we start with the number of shares issued and outstanding at the beginning of the year (300,000). Then, we add the shares issued as a result of the stock dividend (300,000 x 5% = 15,000), which brings the total to 315,000. However, since 40,000 shares were reacquired as treasury stock, we need to subtract those from the total (315,000 - 40,000 = 275,000). Finally, we need to adjust for the time period during which the treasury shares were outstanding (3 months out of 12 months equals 25% of the year), so we multiply the treasury shares by 25% (40,000 x 25% = 10,000) and subtract that amount from the total (275,000 - 10,000 = 265,000). Therefore, the appropriate number of shares to be used in the basic earnings per share computation for 2009 is 305,000 (265,000 + 40,000 treasury shares issued for 9 months divided by 12).

Question 8

Which of the following will require a recalculation of weighted-average shares outstanding for all years presented?
A)Stock dividends and stock splits.
B)Stock dividends but not stock splits.
C)Stock splits but not stock dividends.
D)Stock rights.

Accepted Answer

Both stock dividends and stock splits will require a recalculation of weighted-average shares outstanding for all years presented. Stock dividends increase the number of shares outstanding while decreasing the par value per share, while stock splits increase the number of shares outstanding without changing the par value per share. Both actions affect the calculation of weighted-average shares outstanding, which is used in calculating earnings per share.

Question 9

Getaway Travel Company reported net income for 2009 in the amount of $50,000. During 2009, Getaway declared and paid $2,000 in cash dividends on its nonconvertible preferred stock. Getaway also paid $10,000 cash dividends on its common stock. Getaway had 40,000 common shares outstanding from January 1 until 10,000 new shares were sold for cash on July 1, 2009. A 2-for-1 stock split was granted on July 5, 2009. What is the 2009 basic earnings per share?
A)$.42.
B)$.47.
C)$.53.
D)$.56.

Accepted Answer

First, we need to adjust for the stock split. After the split, there would be 80,000 common shares outstanding.

Next, we need to calculate the weighted average number of shares outstanding. From January 1 to July 1, there were 40,000 shares outstanding. From July 1 to December 31, there were 80,000 shares outstanding.

Weighted average number of shares outstanding = (40,000 x 6/12) + (80,000 x 6/12) = 60,000

Now we can calculate basic earnings per share:

Net income - preferred dividends / weighted average number of shares outstanding

($50,000 - $2,000 - $10,000) / 60,000 = $38,000 / 60,000 = $.53 per share.

Therefore, the answer is C.

Question 10

The following information pertains to J Company's outstanding stock for 2009: What is the number of shares J should use to calculate 2009 basic earnings per share?
A)20,000.
B)22,500.
C)25,000.
D)27,000.

Accepted Answer

The answer of The following information pertains to J Company's...

Question 11

What is Falwell's diluted earnings per share for 2009, rounded to the nearest cent?
A)$3.14.
B)$4.90.
C)$4.34.
D)Cannot determine from the given information.The computation ($ in 000's) is as follows:
*10,000 options 20 shares/option = 200,000 shares;
Proceeds = 200,000 $29 = $5,800,000
$5,800,000 / $30 per share = 193,333 shares of treasury stock
Net shares added = 200,000 193,333 = 6,667

Accepted Answer

The diluted earnings per share can be calculated using the following formula:

Adjusted Net Income / Diluted Weighted Average Shares Outstanding

We are not given the adjusted net income in the given information. Therefore, we cannot calculate the diluted earnings per share.

Question 12

If a stock dividend were distributed, when calculating the current year's EPS, the shares distributed are treated as having been issued:
A)At the end of the year.
B)At the beginning of the year.
C)On the declaration date.
D)On the date of distribution.

Accepted Answer

The answer of If a stock dividend were distributed, when...

Question 13

On December 31, 2008, the Bennett Company had 100,000 shares of common stock issued and outstanding. On July 1, 2009, the company sold 20,000 additional shares for cash. Bennett's net income for the year ended December 31, 2009 was $650,000. During 2009, Bennett declared and paid $89,000 in cash dividends on its nonconvertible preferred stock. What is the 2009 basic earnings per share?
A)$5.91.
B)$5.61.
C)$5.10.
D)None of these is correct.

Accepted Answer

The answer of On December 31, 2008, the Bennett Company...

Question 14

Dublin Inc. had the following common stock record during the current calendar year: A 10% stock dividend was paid on December 1. What is the number of shares to be used in computing basic EPS?
A)2,075,000.
B)2,282,500.
C)2,475,000.
D)2,620,000.

Accepted Answer

To compute basic EPS, the weighted average number of shares outstanding during the year is used. The stock dividend increases the number of shares, and this adjustment is applied retroactively to the beginning of the year. If the original number of shares was 2,075,000, a 10% stock dividend increases this by 207,500 shares, resulting in 2,282,500 shares.

Question 15

The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to:
A)Buy common stock as an investment.
B)Retire preferred stock.
C)Buy treasury stock.
D)Increase net income.

Accepted Answer

The proceeds from exercising stock options are typically used to buy treasury stock, which reduces the number of outstanding shares and increases the value of earnings per share. Buying common stock as an investment or retiring preferred stock would not have the same effect on the number of outstanding shares, and increasing net income would not be directly related to the calculation of diluted earnings per share.

Question 16

Stock options do not affect the calculation of:
A)Diluted EPS.
B)Weighted-average common shares.
C)The denominator in the diluted EPS fraction.
D)Basic EPS.

Accepted Answer

Stock options are not considered in the calculation of basic EPS, which is calculated using the weighted-average number of common shares outstanding during the period. Diluted EPS, on the other hand, takes into account the potential dilution from stock options and other dilutive securities. Therefore, choices A, B, and C are incorrect.

Question 17

All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?
A)Decrease.
B)No effect if the shares are held as treasury shares.
C)Increase only if the shares are considered to be retired.
D)Increase.

Accepted Answer

The answer of All other things equal, what is the...

Question 18

Purple Cab Company had 50,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $11 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2009. What is the basic earnings per share?
A)$4.10.
B)$3.86.
C)$3.60.
D)$4.15.$269,915 / (50,000 + (20,000 9/12)) = $4.15

Accepted Answer

The basic earnings per share is calculated by dividing the net income by the weighted average number of common shares outstanding during the year. The weighted average number of common shares outstanding is calculated by adding the number of shares outstanding at the beginning of the year to the weighted average number of shares issued during the year. In this case, the weighted average number of common shares outstanding is (50,000 + (20,000 * 9/12)) = 65,000. Therefore, the basic earnings per share is calculated as $269,915 / 65,000 = $4.15. The correct answer is D.

Question 19

Burnet Company had 30,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009, the company issued 15,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $8 while the average for the year was $9. The company reported net income in the amount of $189,374 for 2009. What is the effect of the options?
A)The options are anti-dilutive.
B)The options will dilute EPS by $.09 per share.
C)The options will dilute EPS by $.33 per share.
D)The options will dilute EPS by $.17 per share.Market price is less than exercise price, so the options are ignored when computing EPS.

Accepted Answer

Since the market price is lower than the exercise price, the options are considered to be anti-dilutive and are ignored when calculating EPS. Therefore, the options have no effect on EPS.

Question 20

Blue Cab Company had 50,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009, the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $11 while the average price for the year was $12. The company reported net income in the amount of $269,915 for 2009. What is the diluted earnings per share?
A)$3.60.
B)$4.10.
C)$4.50.
D)$3.81.*(5,000 $10) / $12 = 4,167 from options, plus 50,000 + (20,000 9/12).

Accepted Answer

The answer of Blue Cab Company had 50,000 shares of...

Quiz 19: Share-Based Compensation and Earnings Per Share

When computing diluted earnings per share, stock options:

In computing diluted earnings per share, the treasury stock method is used for:

What is Falwell's basic earnings per share for 2009, rounded to the nearest cent?

When we take into account the dilutive effect of stock options, rights, and warrants in the calculation of EPS, the method used is called the:

Which of the following will require a recalculation of weighted-average shares outstanding for all years presented?

The following information pertains to J Company's outstanding stock for 2009: What is the number of shares J should use to calculate 2009 basic earnings per share?

What is Falwell's diluted earnings per share for 2009, rounded to the nearest cent?

If a stock dividend were distributed, when calculating the current year's EPS, the shares distributed are treated as having been issued:

Dublin Inc. had the following common stock record during the current calendar year: A 10% stock dividend was paid on December 1. What is the number of shares to be used in computing basic EPS?

The calculation of diluted earnings per share assumes that stock options were exercised and that the proceeds were used to:

Stock options do not affect the calculation of:

All other things equal, what is the effect on earnings per share when a corporation acquires shares of its own stock on the open market?