In applying the treasury stock method of computing diluted earnings per share,when is it appropriate to use the average market price of common stock during the year as the assumed repurchase price?
A) Always
B) Never
C) When the average market price is lower than the exercise price
D) When the average market price is higher than the exercise price

Question

Quizplus · Accepted Answer

It is appropriate to use the average market price of common stock during the year as the assumed repurchase price when the average market price is higher than the exercise price. This is because the assumed repurchase price cannot be lower than the exercise price, as that would result in a negative impact on diluted earnings per share. Using the average market price as the assumed repurchase price in this scenario is more conservative and realistic, as it reflects the current market value of the common stock.

In Applying the Treasury Stock Method of Computing Diluted Earnings