Before adjusting its current investments in equity securities, Caldwell Company has total current assets and current liabilities of $45,000 and $15,000, respectively. During the current year, Caldwell has net income of $243,750 with 75,000 shares of common stock outstanding. This amount excludes the effects of yearend adjustments related to the investments. Included in current assets are equity securities recorded at their original cost of $13,000. However, the current market value of those securities is $4,000 at yearend. If Caldwell properly accounts for equity securities, what is Caldwell's earnings per share amount before and after the investment adjustment, respectively?

Question

Quizplus · Accepted Answer

Before the investment adjustment:
Earnings per share = Net Income / Number of shares outstanding
= $243,750 / 75,000
= $3.25 per share

After the investment adjustment:
The equity securities need to be adjusted to their fair market value of $4,000. This results in a loss of $9,000 ($13,000 - $4,000) which should be recognized in the income statement as a separate line item, "Loss on adjustment of equity securities".
So, the net income will be $243,750 - $9,000 = $234,750

Earnings per share = Net Income / Number of shares outstanding
= $234,750 / 75,000
= $3.13 per share

Therefore, the answer is B) $3.25 and $3.13.

Before Adjusting Its Current Investments in Equity Securities, Caldwell Company