On December 31,2013,Overachiever,Inc.had 500,000 shares of common stock issued and outstanding.Overachiever issued a 10 percent stock dividend on June 1,2014.On November 1,2014,Overachiever reacquired 30,000 shares of its common stock and recorded the purchase using the cost method of accounting for treasury stock.What number of shares should be used in computing basic earnings per share for the year ended December 31,2014?

Question

Quizplus · Accepted Answer

To compute basic earnings per share, we need to use the weighted-average number of common shares outstanding during the year. Here's how we can compute this:

Weighted-average number of common shares outstanding = 
(number of shares outstanding at beginning of year x portion of year they were outstanding) + 
(number of shares issued in stock dividend x portion of year they were outstanding) + 
(number of shares outstanding at end of year x portion of year they were outstanding)

Number of shares outstanding at beginning of year = 500,000
Portion of year they were outstanding = 12/12 = 1

Number of shares issued in stock dividend = 500,000 x 10% = 50,000
Portion of year they were outstanding = 7/12

Number of shares outstanding at end of year = 500,000 - 30,000 = 470,000
Portion of year they were outstanding = 2/12

Weighted-average number of common shares outstanding = 
(500,000 x 1) + 
(50,000 x 7/12) + 
(470,000 x 2/12) = 
500,000 + 29,167 + 78,333 = 
524,167

Therefore, choice C) 524,167 is the correct answer.