Eps MCQS
Eps MCQS
Eps MCQS
FAR511327
Ian Co. is calculating earnings per share amounts for inclusion in the Ian's annual
report to shareholders. Ian has obtained the following information from the
controller's office as well as shareholder services:
In addition, Ian has issued 10,000 incentive stock options with an exercise price
of $30 to its employees and a year-end market price of $25 per share. What amount
is Ian's diluted earnings per share for the year ended December 31?
$4.63
$4.85
$7.35
$7.94
Option (a), (b) and (c) are incorrect as per the above explanation.
2
FAR516993
For purposes of computing EPS in consolidated financial statements (both basic and
diluted), if one or more less-than-wholly-owned subsidiaries are included in the
consolidated group, income from continuing operations and net income shall include
the income attributable to the non-controlling interest in subsidiaries.
Preferred stock dividends that an issuer has paid or intends to pay in its own
common shares shall be deducted from net income in computing income available to
common stockholders.
Contingently issuable shares are included in basic EPS only if little or no cash
consideration upon the satisfaction of certain conditions and all the necessary
conditions for the issuance of such shares have been satisfied by the end of the
period.
Option (b) is incorrect because preferred stock dividends that an issuer has paid
or intends to pay in its own common shares shall be deducted from net income (or
added to the amount of a net loss) in computing income available to common
stockholders.
Option (d) is incorrect because contingently issuable shares (i.e. shares issuable
for little or no cash consideration upon the satisfaction of certain conditions)
are included in basic EPS only if all the necessary conditions for the issuance of
such shares have been satisfied by the end of the period (e.g., the issuance of
shares is no longer contingent on any conditions except for the passage of time).
3
FAR516991
Company Alpha has 3,000,000 number of shares of common stock were outstanding as on
January 1, 20X1. On January 15, 20X1, 100,000 shares of common stock were issued
for cash. On March 1, 20X1, an additional 150,000 shares of common stock were
issued for cash. On March 16, 20X1, 120,000 treasury shares were repurchased in
market transactions. On June 30, 20X1, 400,000 shares of common stock were issued
for cash. What would be the weighted average number of shares of common stock
outstanding for calculation of EPS for the year ended December 31, 20X1 (assume
there are 365 days in the period)? Round your answer to the nearest dollar.
3,520,328
3,328,986
3,530,000
3,126,246
3,000,000
Shares of common stock issued on January 15, 20X1 for cash [i.e. 100,000 x (351 /
365)] 96,164
Shares of common stock issued on March 1, 20X1 for cash [i.e. 150,000 x (306 /
365)] 125,753
Shares of common stock repurchased on March 16, 20X1 [i.e. 120,000 x (291 / 365)]
(95,671)
Shares of common stock issued on June 30, 20X1 for cash [i.e. 400,000 x (185 /
365)] 202,740
Weighted-average common shares outstanding for the year ended December 31, 20X1
3,328,986
Option (c) is incorrect because it does not consider the weighted average of shares
issued or repurchased (i.e. 3,530,000 = 3,000,000 + 100,000 + 150,000 “ 120,000 +
$400,000).
Option (d) is incorrect because it does not consider the weighted average of
400,000 shares issued on June 30, 20X1 (i.e. 3,126,246 = 3,328,986 - 202,740).
4
FAR511274
During the current year, Comma Co. had outstanding: 25,000 shares of common stock,
8,000 shares of $20 par, 10% cumulative preferred stock, and 3,000 bonds that are
$1,000 par and 9% convertible. The bonds were originally issued at par, and each
bond was convertible into 30 shares of common stock. During the year, net income
was $200,000, no dividends were declared, and the tax rate was 30%. What amount was
Comma's basic earnings per share for the current year?
$3.38
$7.36
$7.55
$8.00
Comma Co. would report basic EPS for the current year at $7.36.
Option (a) and (c) are incorrect as per the above explanation.
Option (d) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10%. ($8 = $200,000/25,000 shares).
5
FAR517455
Following is the capital structure of Owen Corporation for the prior and the
current year:
Owen also had 20,000 outstanding stock options which entitles the holders of the
options to purchase 20,000 common stock shares at $25 per share. These options were
exercised on 10/1/2XX2. The average market price of Owen/s stock was $50 during the
year. Calculate the number of shares used in computing diluted EPS for year ended
December 31, 2XX2.
200,000
230,000
240,000
30,000
In order to calculate the diluted earnings per share, numerator and denominator
need to be adjusted for dilution with respect to any convertible securities such
convertible securities, options / warrants.
In this question, the options have been exercised on 10/1/2XX2 for which 20,000
common shares were. However, for calculating the diluting earnings per share, it
will be assumed that the options have been exercised from the beginning the year.
The proceeds from the exercise of the options will be used to buy back common stock
(i.e., treasury stock method) at the average market price during the period.
Option (a) is incorrect because the shares outstanding at the beginning of the year
needs to be adjusted for changes to the common stock during the year as well as
incorporate the dilutive effect in case of a complex capital structure.
Option (c) is incorrect because the impact of treasury stock method has not been
provided.
Option (d) is incorrect because it is only the impact of the current year
transactions to the denominator.
6
FAR516997
Company XYZ has 200mn $20 shares in issue. The company also has 4mn $100
convertible bonds.
The bonds have an interest rate of 10%. Each bond is convertible into 10 shares and
the company has earning of $800mn for the period. Assuming the tax rate of 30% the
diluted earnings per share for company XYZ would be:
$3.45
$4.14
$4.00
$3.33
Add back the cost of interest that was payable on the bonds. The amount is to be
calculate after tax = 4mn x $100 x 10% (1-30%) = 28mn.
The profit excluding the interest payment = $800mn +$28mn = $828mn.
2. Add the number of new shares that would be issued, if all bonds were
converted, to the current number of shares: 200mn + (4mn x 10 shares) = 240mn
shares and potential shares.
The bonds may be converted in the future. If they were converted today, earnings
per share would fall from $4.00 per share. Whilst earnings would rise, due to
interest not needing to be paid, the number of shares would rise steeply to achieve
this, leaving existing shareholders with less value than they currently enjoy.
Option (b) is incorrect because it does not consider the additional number of
shares in denominator that would been outstanding if the securities were converted
to common stock at beginning of the year (i.e. $828mn / 200mn shares = $4.14 per
share.
Option (c) is incorrect because that is the basic earnings per share (i.e.,
$800mn / 200mn shares = $4 per share).
Option (d) is incorrect because it does not add back the cost of interest that was
payable on the bonds to the earnings (i.e. $800mn / 240mn shares = $3.33 per
share).
7
FAR516998
West Co. had earnings per share of $15.00 for 20X3 before considering the effects
of any convertible securities. No conversion or exercise of convertible securities
occurred during 20X3. However, possible conversion of convertible bonds, not
considered common stock equivalents, would have reduced earnings per share by
$0.75. The effect of possible exercise of common stock options would have increased
earnings per share by $0.10. What amount should West report as diluted earnings per
share for 20X3?
$14.25
$14.35
$15.00
$15.10
West has basic EPS of $15 for 20X3. Using the “If-converted method” convertible
bonds would have reduced the earnings per share by $0.75. This has a dilutive
effect on the basic EPS. Common stock options would have increased the EPS by
$0.10. This has an anti-dilutive effect on basic EPS and thus is ignored to
calculate diluted EPS.
Thus, diluted EPS = Basic EPS – effect on conversion of convertible bonds = $15 -
$0.75 = $14.25.
Option (c) is incorrect because $15 is the basic EPS. This does not give effect to
any dilutive effect on conversion of bonds or stock options. However, as explained
above, diluted EPS, giving effect to conversion of bonds would be $14.25.
Option (d) is incorrect because $15.10 is basic EPS + effect on conversion of stock
option = $15 + $0.10. However, here this conversion is anti-dilutive and thus
should be ignored to calculate diluted EPS. Instead the impact on conversion of
bonds that reduces the EPS by $0.75 should be given effect to.
8
FAR516916
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The
following events occurred during the year:
131,000
139,008
150,675
162,342
Date
Particulars
Calculation
Total outstanding
1/1
12 months
100,000 x 12/12
100,000
4/1
9 months
30,000 x 9/12
22,500
6/1
7 months
36,000 x 7/12
21,000
7/1
12 months for 5% of 100,000 shares, 9 months for 5% of 30,000 shares and 7 months
for 5% of 36,000 shares
7,175
9/1
4 months
35,000 x 4/12
(11,667)
139,008
Option (a) is incorrect because the 5% stock dividend has been ignored and all
shares are taken as though they were outstanding for the whole year (i.e. 131,000 =
100,000 + 30,000 + 36,000 -35000).
Option (c) is incorrect because the treasury stock transaction on September 1 has
not been accounted for.
Option (d) is incorrect because the purchase of treasury shares has been added
rather than subtracted.
9
FAR516988
An entity that reports a discontinued operation in a period shall present basic and
diluted per-share amounts for that line item either on the face of the statement of
income or in the notes to the financial statements.
EPS data shall be presented for all periods for which a statement of income or
summary of earnings is presented. If diluted EPS data are reported for at least one
period, they shall be reported for all periods presented.
Options (a), (b) and (d) are incorrect based on the above explanation.
10
FAR517000
The if-converted method of computing earnings per share data assumes conversion of
convertible securities as of the
Under the “If-converted method” convertible securities are assumed to have been
converted at the beginning of the period or at the time of issuance, whichever is
later. “Anybody who could covert does so.” If the date of issue was prior to
current year, conversion effect is taken from beginning of current year. If
convertible securities were issued during the year, their impact to calculate
diluted EPS would be given effect from the date of issue. These securities did not
exist at the beginning of the period and cannot be converted as of that date.
11
FAR511702
Coffee Co. had the following information related to common and preferred shares
during the year:
Coffee reported net income of $2,000,000 at December 31. What amount of shares
should Coffee use as the denominator in the computation of basic earnings per
share?
684,000
700,000
702,000
740,000
Option (a) is incorrect because it does not calculate the outstanding number of
shares on weighted average basis. (684,000 = 700,000 C/S - 20,000 T/S + 40,000 C/S
- 36,000 T/S).
Option (b) is incorrect because it does not consider the share repurchases which
would be deducted from common shares o/s on prorated basis and preferred shares
converted during the year should be included for the number of months P/S was
outstanding.
Option (d) is incorrect because it does not include the share repurchases which
would be deducted from common shares o/s on prorated basis and preferred shares
converted during the year should be included for the number of months P/S was
outstanding. (740,000 = 700,000 C/S + 40,000 P/S).
12
FAR511354
Prompt Co. is calculating earnings per share amounts for inclusion in the annual
report to shareholders. Prompt has obtained the following information from the
controller's office as well as shareholder services:
In addition, Prompt has $1,000,000 face value 10-year convertible bonds outstanding
on January 1. The bonds were issued three years ago at a discount, which is being
amortized in the amount of $7,000 per year. The stated rate of interest on the
bonds is 8%, and the bonds were issued to yield 9%. Each $1,000 bond is
convertible to 30 shares of Prompt's stock.
Assuming the bonds are antidilutive securities, what amount is Prompt's diluted
earnings per share for the year ended December 31?
$9.57
$14.86
$7.53
$17.13
Option (b), (c) and (d) are incorrect as per the above explanation.
13
FAR517230
A CPA candidate asked his instructor whether there will be any impact of
declaration of cash, stock dividend and stock split on the calculation of earnings
per share. As an instructor, help the CPA candidate to crack the question.
No Yes No
No No Yes
Yes Yes No
Yes No No
The correct answer is (c).
Earnings per share (EPS) = (Income available to common shareholders) / (Weighted
average number of common shares outstanding).
Stock dividends are additional stocks issued to existing common stockholders with
no distribution of entity’s cash / assets and no addition to stockholder’s
interests. The accounting entry is recorded to transfer from retained earnings to
common stock and additional paid in capital, if any.
Stock splits are issued in exchange for old stock so as to increase number of
outstanding stocks (and reduce market value per stock to enable wider
distribution); accounted for by adjusting par value of the new stock for the split
by a memorandum entry.
As declaration of both stock dividends and stock splits would lead to the change in
the average number of common shares outstanding (denominator), the calculation of
basic EPS would get affected.
However, cash dividends do not impact the calculation of EPS as such dividends are
not deducted from net income available to common stock holders. These impact
neither the numerator nor the denominator of the EPS calculations.
Options (a), (b) and (d) are incorrect based on the above explanation.
14
FAR516854
A company had 400,000 shares of common stock issued and outstanding on January 1,
year 1, and had the following equity transactions for year 1:
Transactions
Date
Issued 200,000 new shares for cash April 1
Issued new shares as a result of a 3-for-1 stock split July 1
Purchased 300,000 shares treasury stock for cash October 1
What should the company use as the denominator for the calculation of basic
earnings per share for year ended December 31, year 1?
1,650,000
1,575,000
1,325,000
1,075,000
Date
Particulars
Calculation
Total outstanding
1/1
12 months
400,000 x 12 / 12
400,000
4/1
9 months
200,000 x 9 / 12
150,000
7/1
Issued new shares as a result of a 3 for 1 stock split (retroactively adjusted from
the time of issue)
(400,000 x 2) + (150,000 x 2)
1,100,000
10/1
3 months
300,000 x 3 / 12
(75,000)
15,75,000
Option (a) is incorrect because the purchase of 300,000 shares treasury stock for
cash on October 1 has not been accounted for.
15
FAR517443
Would there be any effect on basic earnings per share or diluted earnings per share
due to dilution from contingently issuable stock considering all the conditions for
issuance are met?
Yes Yes
No No
Yes No
No Yes
The correct answer is (a).
Contingent stock is stock issuable for little or no cash consideration upon the
satisfaction of certain conditions pursuant to a contingent stock agreement
(usually associated with business combinations).
Do note that if the conditions for issuance are not met by the end of the period,
contingent shares that would be issuable if the end of the reporting period were
the end of the contingency period are only included in the calculation of diluted
earnings per share. These contingently issuable stocks shall be included as of the
beginning of the period (or date of contingent stock agreement, if later)
Options (b), (c) and (d) are incorrect based on the above explanation.
16
FAR511283
Jen Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value
cumulative preferred stock. No dividends on common stock were declared during the
year. Net income was $2,000,000. What was Jen's basic earnings per share?
$9.00
$9.09
$10.00
$11.11
Jen Co. would report basic EPS for the current year at $9.
Option (b) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10% and adds the preferred shares O/S to common shares.
[$9.09 = $2,000,000/(200,000 C/S + 20,000 P/S)].
Option (c) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10%. ($10 = $2,000,000/200,000 shares).
Option (d) is incorrect because it does not deduct the dividends payable to
preferred shareholders at 10% and deducts the preferred shares o/s from common
shares. [$11.11 = $2,000,000/(200,000 C/S - 20,000 P/S)].
17
FAR517711
MCL Corp.’s net income is $235,000 and has 10,000 outstanding common stock shares.
It has 1,000 outstanding preferred shares of 10%, $100 par, 8% bond issued at par
last year for $300,000 with face value of $1,000 —each bond is convertible to 100
shares of common stock. Calculate the diluted EPS assuming the tax rate is 40% and
the debt is converted into shares at the end of the year.
$5.63
$6.24
$5.99
$2.39
Diluted EPS = [Net income – Preferred dividends + interest expense saved net of
tax/ (Number of outstanding shares + Convertible debt shares) = ($235,000 – $10,000
+ $14,400) / (10,000 + 30,000) = $5.99.
Note: When there are preference shares, cumulative or not, they have a preference
over the equity shares. Therefore, unless there is an explicit statement saying
there are no dividends declared, you assume they get their dividends. In fact,
preference shareholders are entitled to dividend unless otherwise declared in the
meetings. If cumulative, then even if the question mentions that dividends are not
declared the dividends would still be subtracted which would not be done for non
cumulative. But if the question is silent then we take it that dividends are
declared. Preference shares get preference, so when there is a positive income,
they will get dividends usually, unless otherwise specifically mentioned.
Option (a) is incorrect because this represents omitting the convertible interest
from the numerator of the diluted EPS formula (i.e. $5.63 = $225,000 / 40,000).
Option (b) is incorrect because this represents omitting the preferred dividend
from the numerator of the diluted EPS formula (i.e. $6.24 = $249,400 / 40,000).
Option (c) is incorrect because this represents omitting the convertible shares
from the denominator of the diluted EPS formula (i.e. $2.39 = $239,400 / 10,000)
18
FAR517234
The basic earnings per share have been calculated. What would be the adjustment of
the following on the numerator and denominator while calculating diluted earnings
per share?
Calculating diluted EPS (if convertible bonds outstanding with dilutive effect):
Numerator – Add back interest on convertible debt (as these were deducted to
compute net income (after making adjustments for:
Options (b), (c) and (d) are incorrect based on the above explanation.
19
FAR511329
A firm has basic earnings per share of $1.29. If the tax rate is 30%, which of the
following securities would be dilutive?
Ten percent convertible bonds, issued at par, with each $1,000 bond convertible
into 20 shares of common stock.
Seven percent convertible bonds, issued at par, with each $1,000 bond convertible
into 40 shares of common stock.
Six percent, $100 par cumulative convertible preferred stock, issued at par, with
each preferred share convertible into four shares of common stock.
Option (a) is incorrect because preferred stock is not convertible and would not
have a dilutive effect.
Option (b) is incorrect because if the 10% bonds were converted, it will be $3.5
per share [($100-$30)/20], which would not dilute the EPS.
Option (d) is incorrect because the effect of conversion will be $1.5 per share
[($100 x 6%)/4], which would not dilute the EPS.
20
FAR516999
Neither.
Options (a), (b) and (c) are incorrect based on the above explanation.
21
FAR516878
$1.00
$1.09
$1.20
$1.33
The common shares issued on May 1 will be appropriated for 8 months: 500,000 x 8 /
12 = 333,333 shares.
Option (a) is incorrect because the new issue on May 1 has to be prorated as
outstanding for 8 months of the year.
Option (d) is incorrect because the new issue on May 1 is ignored in calculating
the average number of shares.
22
FAR511241
The following information is relevant to the computation of Chan Co.'s earnings per
share to be disclosed on Chan's income statement for the year ending December 31:
Net income for 20X2 is $600,000.$5,000,000 face value 10-year convertible bonds
outstanding on January 1. The bonds were issued four years ago at a discount which
is being amortized in the amount of $20,000 per year. The stated rate of interest
on the bonds is 9%, and the bonds were issued to yield 10%. Each $1,000 bond is
convertible into 20 shares of Chan's common stock. Chan's corporate income tax rate
is 25%.Chan has no preferred stock outstanding, and no other convertible
securities. What amount should be used as the numerator in the fraction used to
compute Chan's diluted earnings per share assuming that the bonds are dilutive
securities?
$130,000
$247,500
$952,500
$1,070,000
Option (a) is incorrect because the interest expense is deducted from net income,
instead of adding it to NI and after tax expense impact is not considered.
[$130,000 = $600,000 - $470,000].
Option (b) is incorrect because the interest expense is deducted from net income,
instead of adding it to NI. {$247,500 = $600,000 - [$470,000 x (1- 25%)]}.
Option (d) is incorrect because the interest expense should be added after tax to
NI. [$1,070,000 = $600,000 + $470,000].
23
FAR511356
The senior accountant for Carlton Co., a public company with a complex capital
structure, has just finished preparing Carlton's income statement for the current
fiscal year. While reviewing the income statement, Carlton's finance director
noticed that the earnings per share data has been omitted. What changes will have
to be made to Carlton's income statement as a result of the omission of the
earnings per share data?
No changes will have to be made to Carlton's income statement. The income statement
is complete without the earnings per share data.
Carlton's income statement will have to be revised to include the earnings per
share data.
Carlton's income statement will only have to be revised to include the earnings per
share data if Carlton's market capitalization is greater than $5,000,000.
Carlton's income statement will only have to be revised to include the earnings per
share data if Carlton's net income for the past two years was greater than
$5,000,000.
24
FAR516990
Company Alpha has 3,000,000 number of shares of common stock were outstanding as on
January 1, 20X1. On January 15, 20X1, 100,000 shares of common stock were issued
for cash. On March 1, 20X1, an additional 150,000 shares of common stock were
issued for cash. On March 16, 20X1, 120,000 treasury shares were repurchased in
market transactions.
What would be the weighted average number of shares of common stock outstanding
for calculation of EPS for the first quarter ended March 31, 20X1 (assume there are
90 days in the period)?
3,136,111 shares.
3,000,000 shares.
3,114,778 shares.
3,130,000 shares.
3,000,000
Shares of common stock issued on January 15, 20X1 for cash [i.e. 100,000 x (76 /
90)] 84,444
Shares of common stock issued on March 1, 20X1 for cash [i.e. 150,000 x (31 / 90)]
51,667
Shares of common stock repurchased on March 16, 20X1 [i.e. 120,000 x (16 / 90)]
(21,333)
Weighted-average common shares outstanding for the first quarter ended March 31,
20X1 3,114,778
Option (a) is incorrect because it does not subtract the weighted average of common
stock repurchased on March 16, 20X1.
Option (b) is incorrect because it does not consider the shares issued or
repurchased during the year.
Option (d) is incorrect because it does not consider the weighted average of shares
issued or repurchased during the year.
25
FAR517127
On June 30, year 1, Regal, Inc. issued forty $5,000, 8% bonds at par. Each bond was
convertible into 100 shares of common stock. On January 1, year 2, 10,000 shares of
common stock were outstanding. The bondholders converted all the bonds on July 1,
year 2. The following amounts were reported in Regal’s statement of income for the
year ended December 31, year 2:
Revenues $950,000
Operating expenses 882,000
Interest on bonds 8,000
Income before income tax 60,000
Income tax at 30% 18,000
Net income 42,000
What is Regal’s basic and diluted earnings per share? Is the security anti-
dilutive?
4.2 3.4 No
3.5 3.4 No
4.2 3.97 No
The correct answer is (b).
Number of shares converted from bonds = 4,000 shares (i.e. 40 bonds, each bond
converted to 100 shares).
Diluted earnings per share (EPS) is calculated using “If-converted method” for
convertible securities where conversion of bonds is assumed to be done at the
beginning of the year (irrespective of when they were actually done). The total
number of shares outstanding would be the 10,000 shares already outstanding plus
the shares that are assumed to be converted at the beginning of the year = 4,000
shares (i.e. 40 bonds, each bond converted to 100 shares), a total of 14,000
shares. The shares are assumed to be converted at the beginning of the year they do
not have to be time weighted and all the shares are deemed outstanding.
Interest expense, net of tax would be added back to net income of $42,000 as, if
all the bonds were converted to securities, there would be no interest income.
Thus, the net income will increase by the interest amount net of tax = $42,000 +
($8,000 x (1 – 30%)) = $42,000 + $5,600 = $47,600. Diluted EPS = $47,600 / 14,000 =
$3.4
If the calculation of diluted EPS results in an EPS number which is greater than
the basic EPS number, then the security is anti-dilutive and is not included in the
reported diluted EPS. Basic EPS is greater than the diluted EPS, the security is
not anti-dilutive.
Option (a) is incorrect because it calculates basic EPS only on the total number of
shares outstanding at the beginning of the year which is 10,000. The converted
shares are not considered. Shares converted on July must be time-weighted. The
diluted EPS calculation is correct.
Option (c) is incorrect because this calculates basic EPS by dividing the entire
14,000 shares instead of time-weighting. Diluted EPS is also incorrect because this
calculates diluted EPS by adding the entire interest of $8,000 and does not
consider it net of tax. If the calculation of diluted EPS results in an EPS number
which is greater than the basic EPS number, then the security is anti-dilutive and
is not included in the reported diluted EPS.
Option (d) is incorrect because it calculates basic EPS only on the total number of
shares outstanding at the beginning of the year which is 10,000. The converted
shares are not considered. Shares converted on July must be time-weighted. Diluted
EPS is also incorrect because this calculates the diluted EPS by taking the
weighted average number of shares, time weighting the newly converted shares for 6
months thereby taking 10,000 + 2,000 shares. This is incorrect because the if-
converted method assumes all shares are converted at the beginning of the year
itself and the number of shares should be 14,000.
26
FAR516989
Company Net income / loss ($) Less preferred stock dividends ($) Income
(loss) attributable to common stockholders ($)
X 1,100,000 300,000 800,000
Y 250,000 300,000 (50,000)
Z (500,000) - (500,000)
Additional note: If company X or Y had income (loss) from discontinued operations,
the preferred stock dividends also would be deducted from income (loss) from
continuing operations to compute EPS from continuing operations, even if doing so
resulted in a loss from continuing operations.
Options (b), (c) and (d) are incorrect based on the above explanation.
27
FAR517231
Following is the capital structure of Owen Corporation for the prior and the
current year:
Owen also had 20,000 outstanding stock options which entitles the holders of the
options to purchase 20,000 common stock shares at $25 per share. The average market
price of Owen’s stock was $50 during the year. Calculate the number of shares used
in computing diluted EPS for year ended December 31, 2XX2.
200,000
240,000
230,000
10,000
In order to calculate the diluted earnings per share, we need to adjust the
numerator and denominator for dilution with respect to any convertible securities
such as convertible debt or stock options / warrants. Stock options / warrants are
added to the denominator using the treasury method by assuming that the options /
warrants are exercised and use the proceeds to buy back as treasury stock at
average current market price.
Thus, total weighted average number of common shares outstanding is: (i) + (ii) +
(iii) = 200,000 + 20,000 + 10,000 = 230,000.
Option (a) is incorrect because the shares outstanding at the beginning of the year
needs to be adjusted for changes to the common stock during the year as well as
incorporate the dilutive effect in case of a complex capital structure.
Option (d) is incorrect because it is only the adjustment to the denominator and
not the denominator to calculate diluted EPS.
28
FAR516528
Ute Co. had the following capital structure during 20X2 and 20X3:
Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding
$250,000
Common stock, $5 par, 200,000 shares issued and outstanding$1,000,000
Preferred stock is not considered a common stock equivalent. Ute reported net
income of $500,000 for the year ended December 31, 20X3. Ute paid no preferred
dividends during 20X2 and paid $16,000 in preferred dividends during 20X3. In its
December 31, 20X3 income statement, what amount should Ute report as basic earnings
per share?
$2.42
$2.45
$2.48
$2.50
Options (a) and (c) are incorrect because the $16,000 actually paid as dividends
have no bearing in the income available calculation. Income available to common
shareholders = Net income - cumulative dividends attributable to this year for
preference shareholders, irrespective of any amounts paid.
Option (d) is incorrect because for cumulative preference shares, the cumulative
dividends attributable to this year for the preference shareholders have to be
deducted from the net income for basic EPS calculation.
29
FAR511703
Based on the stock transactions below, what is the weighted average number of
shares outstanding as of December 31, year 1, that should be used in the
calculation of basic earnings per share in financial statements issued on March 1,
year 2?
Date Transactions
January 1, year 1 Beginning balance 100,000
April 1, year 1 Issued 30,000 shares for cash
June 1, year 1 50% stock dividend
February 15, year 2 2 for 1 stock split
March 15, year 2 Issued 40,000 shares for cash
147,500
183,750
295,000
367,500
Shares Outstanding
a Beginning balance year 100,000 C/S 100,000
b Issued 30,000 shares for cash, Apr 1, Year 1 = (30,000 C/S) x (9/12) 22,500
c Shares outstanding before stock split (a+b)
122,500
d 50% Stock dividend, Jun 1, Year 1 = 122,500 x 150% 183,750
e 2 for 1 stock split Feb 15, Year 2 = (183,750 C/S) x 2 367,500
Option (a), (b) and (c) are incorrect because the weighted average number of common
stock for the portion of the year outstanding has to be calculated. The stock split
and the stock dividend should to be considered for the financial year.
30
FAR517229
Yes Yes No
No No Yes
No Yes Yes
The correct answer is (a).
Earnings per share (EPS) refers to the amount of earnings attributable to each
share of common stock. Publicly-held companies required to present basic EPS and
dilutive EPS on:
Options (b), (c) and (d) are incorrect based on the above explanation.
31
FAR516996
On June 30, 20X8, Lomond, Inc. issued twenty $10,000, 7% bonds at par. Each bond
was convertible into 200 shares of common stock. On January 1, 20X9, 10,000 shares
of common stock were outstanding. The bondholders converted all the bonds on July
1, 20X9. The following amounts were reported in Lomond’s income statement for the
year ended December 31, 20X9:
Revenues $977,000
Operating expenses 920,000
Interest on bonds 7,000
Income before income tax 50,000
Income tax at 30% 15,000
Net income 35,000
What is Lomond’s 20X9 diluted earnings per share?
$2.50
$2.85
$2.92
$3.50
Diluted earnings per share (EPS) is calculated using “If-converted method” for
convertible securities where conversion of bonds is assumed to be done at the
beginning of the year (irrespective of when they were actually done). Interest
expense, net of tax would be added back to net income of $35,000 as, if all the
bonds were converted to securities, there would be no interest income. This
amounts to $4,900 [Interest expense $7,000 x (1 - tax rate) = $7,000 x (1 - 30%) =
$4,900]. The net income would be $35,000 + $4,900 = $39,900.
If the conversion had taken place, additional shares that would have been issued is
200 common shares for each bond. Total common shares to be issued = 20 bonds x 200
shares = 4,000 shares. This potential conversion issue is added to the weighted
average common shares outstanding. 4,000 shares are added to the 10,000 shares
already outstanding. The total shares is 14,000.
Option (a) is incorrect because $2.5 is calculated as net income of $35,000 divided
by 14,000 shares. While number of shares have been adjusted for impact on
conversion, net income should be increased for interest expense saved on account of
conversion. As explained above, this would be $4,900.
Option (c) is incorrect because this calculates the basic EPS and not the diluted
EPS. Basic EPS is equal to the income available to common shareholders / weighted
average number of common shares outstanding. All the bonds were converted to 4,000
shares on July 1, 20X9, the weighted average number of common shares outstanding is
equal to the 10,000 shares outstanding for the full year + 2,000 shares that were
converted at the middle of the year (time-weighted:- 4,000 shares but for 6 months
only) = 12,000 shares. The basic EPS = $35,000 / 12,000 = $2.92.
32
FAR517001
Deducted from weighted-average common shares outstanding for diluted earnings per
share.
Option (a) is incorrect because interest expense, net of tax is not added back to
weighted-average common shares outstanding for diluted EPS. The number of shares
issuable on conversion of debt is added to weighted-average common shares
outstanding.
Option (c) is incorrect because interest expense, net of tax is added to net income
and not reduced to calculate diluted EPS.
33
FAR511314
The following information pertains to Ceil Co., a company whose common stock trades
in a public market:
What is the weighted - average number of shares Ceil should use to calculate its
basic earnings per share for the year ended December 31?
120,500
123,000
126,500
129,000
Option (a) is incorrect because it includes the prorated number of stock dividend.
Stock splits are retroactively adjusted.
Option (b) is incorrect because it includes the prorated number of stock dividend.
Stock splits are retroactively adjusted. It fails to prorate the stock issued on
6/30.
Option (d) is incorrect because it does not prorate the stock issuance at 6/30.
The basic earnings per share is calculated. No dividends were declared during the
year. What would be the adjustment with respect to convertible non-cumulative
preferred stock on the numerator and denominator while calculating diluted earnings
per share?
Numerator Denominator
No change Increase
No change Decrease
However, it is given in the question that no dividends were declared during the
year and the numerator would remain the same because the preference shares are non-
cumulative. There would be an increase in the denominator assuming the preferred
stock got converted at the beginning of the period (or at the time of issuance, if
later).
Options (a), (c) and (d) are incorrect based on the above explanation.
35
FAR511338
On April 1, year 2, the company sold 8,000 shares of previously unissued common
stock. No dividends were in arrears on January 1, year 2, and no dividends were
declared or paid during year 2. Net income for year 2 totaled $236,000. What amount
is basic earnings per share for the year ended December 31, year 2?
$3.66
$3.79
$4.07
$4.21
Option (a) is incorrect because shares issued on April 1 are not prorated. {$3.66 =
[($236,000 - $24,000)/(50,000 shares + 8,000 shares sold)]}.
Option (c) is incorrect because it does not deduct the preferred dividends from net
income and fails to prorate the shares issued on April 1. {$4.07 =
[$236,000/(50,000 shares + 8,000 shares sold)]}.
Option (d) is incorrect because it does not deduct the preferred dividends from net
income. {$4.21 = [$236,000/(50,000 shares + (8,000 x 9/12) shares sold)]}.
36
FAR516995
20X1: $1,500,000
20X2: $3,750,000
Select what would be the EPS and adjusted EPS for years 20X2 and 20X1 respectively?
6.250 3.000
6.250 2.500
7.500 3.000
9.375 3.750
The correct answer is (b).
Stock dividends (or bonus issue), stock splits are treated as if they had always
been outstanding and included at full amount for current year. If prior periods are
presented, the effects of stock dividends and stock splits must be retroactively
adjusted for those periods.
In this case company Zee should treat the bonus issue as if it had occurred prior
to January 1, 20X1, the earliest period presented. The calculation is as follows:
Note: Earnings per share has been calculated with the help of below formula:
Option (a) is incorrect because adjusted EPS for year 20X1 has not been calculated
assuming the bonus issue was incurred prior to January 1, 20X1. Bonus shares are
treated as if they had always been outstanding and included at full amount for
current year.
In a capitalization issue (or bonus issue or a share split), shares are issued to
existing shareholders, for no additional consideration. The number of shares
outstanding is increased without an increase in resources.
If prior periods are presented, the effects of stock dividends and stock splits
must be retroactively adjusted for those periods.
Option (c) is incorrect because it does consider the bonus shares for calculation
of EPS for both the years.
Option (d) is incorrect because for both years EPS calculation bonus shares have
been reduced from weighted average number of common shares outstanding calculation
(i.e. 500,000 -100,000 = 400,000).
37
FAR517232
WB co. reported net income of $80,000 for the year (and has an effective tax rate
of 20%). You are required to calculate the diluted earnings per share with the
following capital structure:
$17.78
$15.56
$12.31
$40
In order to calculate the diluted earnings per share, we need to adjust the
numerator and denominator for the complex capital structure with convertible stock
or securities using the “If converted method”.
Calculation of numerator:
Total
$80,000
Calculation of denominator:
Calculation of weighted average number of common shares outstanding for the year:
Preferred stock (if converted would result in additional 2,000 shares of common
stock) 2,000
Total
6,500
Option (a) is incorrect because while calculating the diluted EPS using the if-
converted method, the denominator should also increase by the number of shares that
would increase if the convertible preference shares were converted (i.e. $17.78 =
$80,000 / 4,500).
Option (d) is incorrect because the diluted EPS has been calculated by dividing
only 2,000 (if-converted) shares instead of 6,500 (i.e. $40 = $80,000 / 2,000).
38
FAR511330
Wood Co.'s dividends on noncumulative preferred stock have been declared but not
paid. Wood has not declared or paid dividends on its cumulative preferred stock in
the current or the prior year and has reported a net loss in the current year. For
the purpose of computing basic earnings per share, how should the income available
to common stockholders be calculated?
The current-year dividends and the dividends in arrears on the cumulative preferred
stock should be added to the net loss, but the dividends on the noncumulative
preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock should be added to the net loss,
but the current-year dividends and the dividends in arrears on the cumulative
preferred stock should not be included in the calculation.
The dividends on the noncumulative preferred stock and the current-year dividends
on the cumulative preferred stock should be added to the net loss.
Neither the dividends on the noncumulative preferred stock nor the current-year
dividends and the dividends in arrears on cumulative preferred stock should be
included in the calculation.
Option (b) is incorrect because the current year dividends for cumulative preferred
shares is added to net loss.
Option (d) is incorrect because the current year dividends should be included in
net loss for non-cumulative preference shares and for cumulative preference shares.
39
FAR517451
Under U.S GAAP, earnings per share should be reported for:
Yes Yes
Yes No
No No
No Yes
The correct answer is (c).
Earnings per share refer to the amount of earnings attributable to each share of
common stock. It also measures the performance of an entity over the reporting
period.
Options (a), (b) and (d) are incorrect based on the above explanation.
40
FAR517233
Ronny corp. reported net income of $800,000 for the year ended December 31, 2XX2
(and has an effective tax of 30%).
$6.42
$4.64
$4.60
$6.40
Any contingent shares issued are included for calculation of basic EPS if the
conditions for the same have been met. The contingent shares were issued in
relation to an acquisition in Year 2XX1. We assume all conditions for issuance have
been met in Year 2XX2 and the same are included to calculate the basic EPS.
Convertible bonds are included in calculation of diluted EPS using the “If
converted method”.
Option (a) is incorrect because it does not consider the contingent shares issued
in relation to an acquisition (i.e. $6.42 = $651,470 / 101,500).
Option (b) is incorrect because this represents the basic earnings per share.
Option (d) is incorrect because it doesn’t add back the interest on convertible
bonds and also does not consider the contingent shares (i.e. $6.40 = $650,000 /
101,500).
41
FAR516994
Banking companies.
All companies.
It should be noted that the scope of ASC 260 excludes non-public entities and
entities whose publicly traded securities only include debt. However, an entity
that is not required to present EPS, but does so voluntarily, should present EPS in
accordance with the guidance in ASC 260.
Options (a), (b) and (d) are incorrect based on the above explanation.
42
FAR517693
British Airway’s net income is $470,000 and has 100,000 outstanding common stock
shares. It has 1,000 outstanding preferred shares of 10%, $100 par, 8% bond issued
at par last year for $200,000 with face value of $1,000 —each bond is convertible
to 50 shares of common stock. Calculate the basic EPS if the tax rate is 40%.
$4.60
$4.70
$4.18
$4.27
Option (b) is incorrect because this represents dividing the net income by the
number of outstanding shares without accounting for the preference dividend (i.e.
$4.7 = $470,000 / 100,000).
Option (c) is incorrect because this represents converting the convertible shares
(200 × 50 = 10,000) and adding them to the denominator in the basic EPS formula
(i.e. $4.18 = $460,000 / 110,000).
Option (d) is incorrect because this represents omitting the preferred dividends
from numerator and by converting the convertible shares (200 × 50 =10,000) and
adding them to the denominator in the basic EPS formula (i.e. $4.27 = $470,000 /
110,000).