16 Dilutive Securities and Earnings per Share EXERCISES 16.2
E16-21 (L04) (EPS: Simple Capital Structure) At January 1, 2017, Langley Company’s outstanding shares included the following…
Instructions
Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in March 2018.
E16-22 (L05) (EPS with Convertible Bonds, Various Situations) In 2016, Chirac Enterprises issued, at par, 60 $1,000, 8% bonds, each convertible into 100 shares of common stock. Chirac had revenues of $17,500 and expenses other than interest and taxes of $8,400 for 2017. (Assume that the tax rate is 40%.) Throughout 2017, 2,000 shares of common stock were outstanding; none of the bonds was converted or redeemed.
Instructions
(a) Compute diluted earnings per share for 2017.
(b) Assume the same facts as those assumed for part (a), except that the 60 bonds were issued on September 1, 2017 (rather than in 2016), and none have been converted or redeemed. Compute diluted earnings per share for 2017.
(c) Assume the same facts as assumed for part (a), except that 20 of the 60 bonds were actually converted on July 1, 2017. Compute diluted earnings per share for 2017.
E16-23 (L05) (EPS with Convertible Bonds) On June 1, 2015, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.
On April 1, 2017, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2017.
Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2017. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date.
Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.)
Instructions
Determine the following for 2017.
(a) The number of shares to be used for calculating:
(1) Basic earnings per share.
(2) Diluted earnings per share.
(b) The earnings figures to be used for calculating:
(1) Basic earnings per share.
(2) Diluted earnings per share.
(CMA adapted)
E16-24 (L05) (EPS with Convertible Bonds and Preferred Stock) The Simon Corporation issued 10-year, $5,000,000 par, 7% callable convertible subordinated debentures on January 2, 2017. The bonds have a par value of $1,000, with interest payable annually. The current conversion ratio is 14:1, and in 2 years it will increase to 18:1. At the date of issue, the bonds were sold at 98. Bond discount is amortized on a straight-line basis. Simon’s effective tax was 35%. Net income in 2017 was $9,500,000, and the company had 2,000,000 shares outstanding during the entire year.
Instructions
(a) Prepare a schedule to compute both basic and diluted earnings per share.
(b) Discuss how the schedule would differ if the security was convertible preferred stock.
E16-25 (L05) (EPS with Convertible Bonds and Preferred Stock) On January 1, 2017, Crocker Company issued 10-year, $2,000,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 15 shares of Crocker common stock. Crocker’s net income in 2017 was $300,000, and its tax rate was 40%. The company had 100,000 shares of common stock outstanding throughout 2017. None of the bonds were converted in 2017.
Instructions
(a) Compute diluted earnings per share for 2017.
(b) Compute diluted earnings per share for 2017, assuming the same facts as above, except that $1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred share is convertible into 5 shares of Crocker common stock.
E16-26 (L05) (EPS with Options, Various Situations) Venzuela Company’s net income for 2017 is $50,000. The only potentially dilutive securities outstanding were 1,000 options issued during 2016, each exercisable for one share at $6. None has been exercised, and 10,000 shares of common were outstanding during 2017. The average market price of Venzuela’s stock during 2017 was $20.
Instructions
(a) Compute diluted earnings per share. (Round to nearest cent.)
(b) Assume the same facts as those assumed for part (a), except that the 1,000 options were issued on October 1, 2017 (rather than in 2016). The average market price during the last 3 months of 2017 was $20.
E16-27 (L05) (EPS with Contingent Issuance Agreement) Winsor Inc. recently purchased Holiday Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Holiday’s income for 2017 was $110,000 or more, 10,000 additional shares would be issued to Holiday’s stockholders in 2018. Holiday’s income for 2016 was $120,000.
Instructions
(a) Would the contingent shares have to be considered in Winsor’s 2016 earnings per share computations?
(b) Assume the same facts, except that the 10,000 shares are contingent on Holiday’s achieving a net income of $130,000 in 2017. Would the contingent shares have to be considered in Winsor’s earnings per share computations for 2016?
E16-28 (L05) (EPS with Warrants) Howat Corporation earned $360,000 during a period when it had an average of 100,000 shares of common stock outstanding. The common stock sold at an average market price of $15 per share during the period. Also outstanding were 15,000 warrants that could be exercised to purchase one share of common stock for $10 for each warrant exercised.
Instructions
(a) Are the warrants dilutive?
(b) Compute basic earnings per share.
(c) Compute diluted earnings per share.
E16-29 (L06) (Stock-Appreciation Rights) On December 31, 2013, Beckford Company issues 150,000 stock-appreciation rights to its officers entitling them to receive cash for the difference between the market price of its stock and a pre-established price of $10. The fair value of the SARs is estimated to be $4 per SAR on December 31, 2014; $1 on December 31, 2015; $10 on December 31, 2016; and $9 on December 31, 2017. The service period is 4 years, and the exercise period is 7 years.
Instructions
(a) Prepare a schedule that shows the amount of compensation expense allocable to each year affected by the stockappreciation rights plan.
(b) Prepare the entry at December 31, 2017, to record compensation expense, if any, in 2017.
(c) Prepare the entry on December 31, 2017, assuming that all 150,000 SARs are exercised.
E16-30 (L06) (Stock-Appreciation Rights) Capulet Company establishes a stock-appreciation rights program that entitles its new president Ben Davis to receive cash for the difference between the market price of the stock and a pre-established price of $30 (also market price) on December 31, 2013, on 30,000 SARs. The date of grant is December 31, 2013, and the required employment (service) period is 4 years. President Davis exercises all of the SARs in 2019. The fair value of the SARs is estimated to be $6 per SAR on December 31, 2014; $9 on December 31, 2015; $15 on December 31, 2016; $6 on December 31, 2017; and $18 on December 31, 2018.
Instructions
(a) Prepare a 5-year (2014–2018) schedule of compensation expense pertaining to the 30,000 SARs granted president Davis.
(b) Prepare the journal entry for compensation expense in 2014, 2017, and 2018 relative to the 30,000 SARs.
