intermediate power point (16)

8/7/2019 Intermediate Power Point (16)

1/63

Chapter 16-1

Dilutive Securities and Dilutive Securities and Earnings Per Share Earnings Per Share

Chapter Chapter 1616

Intermediate Accounting12th Edition

Kieso, Weygandt, and Warfield

Prepared by Coby Harmon, University of California, Santa Barbara


2/63

Chapter 16-2

1. Describe the accounting for the issuance, conversion, andretirement of convertible securities .

2. Explain the accounting for convertible preferred stock .

3. Contrast the accounting for stock warrants and for stockwarrants issued with other securities .

4. Describe the accounting for stock compensation plansunder generally accepted accounting principles .

5. Discuss the controversy involving stock compensation plans .6. Compute earnings per share in a simple capital structure .

7. Compute earnings per share in a complex capital structure .

L earning Objectives L earning Objectives


3/63

Chapter 16-3

Debt and equityDebt and equityConvertible debtConvertible debtConvertibleConvertiblepreferred stockpreferred stockStock warrantsStock warrantsStockStockcompensationcompensationplansplans

Dilutive Securities and Earnings Per Share Dilutive Securities and Earnings Per Share

Dilu t iv e Sec u r it iesDilu t iv e Sec u r it iesand Compensat ionand Compensat ion

P lansP lans

Comp u t ing Earn ingsComp u t ing Earn ingsPer SharePer Share

Simple capitalSimple capitalstructurestructureComplex capitalComplex capitalstructurestructure


4/63

Chapter 16-4

Should companies report these instrumentsas a liability or equity .

Debt and Equity Debt and Equity

Stock Options Stock Options Convertible Convertible Securities Securities Preferred StockPreferred Stock


5/63

Chapter 16-5

(at the holders option)

Benefit of a Bond (guaranteed interest)

Privilege of Exchanging it for Stock

Bonds which can be converted into othercorporate securities are called convertible bonds.

+

Accounting for Convertible Debt Accounting for Convertible Debt

L O 1 Des cr ibe the a ccounting fo r the issuan ce, conv ers ion , and re ti remen t of conver tibl e sec u r iti es .


6/63

Chapter 16-6

Desire to raise equity capital without givingup more ownership control than necessary .

Obtain common stock financing at cheaperrates .

Tw o mai n reas ons corpora tions i ssu e conver tibl es:

Accou nti n g fo r Conver ti ble D eb t Accou nti n g fo r Conver ti ble D eb t

L O 1 D escr i be th e acc ou nti n g fo r th e i ssu ance, convers ion, and re ti re ment of conver ti ble sec u r iti es .


7/63

Chapter 16-7

A t T ime of I ssu ance

A ccou nti n g for Co nv ertibl e D ebt A ccou nti n g for Co nv ertibl e D ebt

L O 1 D esc rib e th e acc ou nti n g for th e i ssu ance, conv er sion, and r etir ement of conv ertibl e sec uriti es .

Convertible bonds recorded as straight debtissue, with any discount or premium amortizedover the term of the debt .


8/63

Chapter 16-8

BE 16BE 16--11:: Gall Inc. issued $ 5 ,000,000 par value, 7% Gall Inc. issued $ 5 ,000,000 par value, 7% convertible bonds at 99 for cash . If the bonds had notconvertible bonds at 99 for cash . If the bonds had notincluded the conversion feature, they would have soldincluded the conversion feature, they would have soldfor 9 5.for 9 5.

Cash 4 ,950,000

Bonds payable 5 ,000,000

J ou rnal ent ry at d at e of i ssu ance:

Discount on bonds payable 50,000

($5 ,000,000 x 99% = $4 ,950,000)

Accou nti n g fo r Conv er tib le D ebt Accou nti n g fo r Conv er tib le D ebt

L O 1 D escr ib e th e acc ou nti n g fo r th e i ssu ance, conv ers ion, and re ti remen t of conv er tib le sec u r iti es .


9/63

Chapter 16-9

A t T ime of Convers ion

A ccou nti n g fo r Conver tibl e D ebt A ccou nti n g fo r Conver tibl e D ebt

L O 1 D es c r ib e th e accou nti n g fo r th e i ssua nc e, convers ion, a nd re ti re ment of co nver tibl e se cu r iti es .

Companies use the book valu e method whenconverting bonds.

When the debt holder converts the debt toequity, the issuing company recognizes no gain

or loss upon conversion.


10/63

Chapter 16-10

BE 16BE 16--22: Yuen Corp. has outstanding 1,000, $ 1,000: Yuen Corp. has outstanding 1,000, $ 1,000bonds, each convertible into 50 shares of $ 10 par valuebonds, each convertible into 50 shares of $ 10 par valuecommon stock. The bonds are converted on Decembercommon stock. The bonds are converted on December31, 2008, when the unamortized discount is $ 30,000 and31, 2008, when the unamortized discount is $ 30,000 andthe market price of the stock is $ 21 per share . the market price of the stock is $ 21 per share .

Bonds payable 1,000,000

Common stock (50,000 x $10) 500,000

J ou rnal ent ry at convers ion:


Additional paid-in capital 47 0,000

Accou nti n g fo r Conver tib le D ebt Accou nti n g fo r Conver tib le D ebt

L O 1 D escr ib e th e acc ou nti n g fo r th e i ssu ance, convers ion, and re ti remen t of conver tib le sec u r iti es .


11/63

Chapter 16-11

Issuer wishes to encourage promptconversion.

Issuer offers additional consideration,called a sweetener .

Sweetener is an e xpense of the period .

A ccounting for Convertible Debt A ccounting for Convertible Debt

L O 1 Describe the accounting for the issuance , conversion , and retire m ent of convertible securities.

Induced Conversion


12/63

Chapter 16-12

BE 16BE 16--22: Yuen Corp. has outstanding 1,000, $ 1,000 bonds,: Yuen Corp. has outstanding 1,000, $ 1,000 bonds,each convertible into 50 shares of $ 10 par value commoneach convertible into 50 shares of $ 10 par value commonstock . Assume Yuen wanted to reduce its annual interest coststock . Assume Yuen wanted to reduce its annual interest costand agreed to pay the bond holders $ 70,000 to convert . and agreed to pay the bond holders $ 70,000 to convert .

Bonds payable 1,000,000

Common stock (50,000 x $10) 500,000

J ou rnal ent ry at convers ion:


Additional paid-in capital 47 0,000

Accou nti n g fo r Conver tib le D ebt Accou nti n g fo r Conver tib le D ebt

L O 1 D escr ib e th e acc ou nti n g fo r th e i ssu ance, convers ion, and re ti remen t of conver tib le sec u r iti es .

D ebt convers ion expense 70, 000Cash 70 , 000


13/63

Chapter 16-13

Recognized same as retiring debt that is notconvertible .

Difference between the acquisition price andcarrying amount should be reported as gain orloss in the income statement .

A ccounting for Convertible Debt A ccounting for Convertible Debt

L O 1 Describe the accounting for the issuance , conversion , and retire m ent of convertible securities.

Retire m ent of Convertible Debt


14/63

Chapter 16-14

Convertible preferred stock is consideredpart of stockholders equity .

No gain or loss recognized when converted .

Use book value method.

Co nvertible Preferred St o ckCo nvertible Preferred St o ck

L O 2 Explain the acc o unting f o r c o nvertible preferred st o ck.

Co nvertible preferred st o ck includes an optionfor the holder to convert preferred shares into afixed number of common shares .


15/63

Chapter 16-15

BEBE 1616--33: Gilbert Inc . issued: Gilbert Inc . issued 22 ,,000000 shares of $shares of $ 1010 par valuepar valuecommon stock upon conversion ofcommon stock upon conversion of11,,000000 shares of $shares of $ 5050 parparvalue preferred stock . The preferred stock was originallyvalue preferred stock . The preferred stock was originallyissued at $issued at $ 55 55 per share . The common stock is trading atper share . The common stock is trading at

$$26 26 per share at the time of conversion .per share at the time of conversion .

Preferred stock 50,000

Common stock (2 ,000 x $10 par) 20,000

J ou rnal ent ry to rec ord convers ion:

Paid-in capital Preferred stock 5 ,000

Paid-in capital Common stock 35 ,000

C onver tib le P referred Sto ck C onver tib le P referred Sto ck

L O 2 Exp lai n th e accou nti n g f or conver tib le preferred stock .


16/63

Chapter 16-16

Certificates entitling the holder to acquireCertificates entitling the holder to acquireshares of stock at a certain price within ashares of stock at a certain price within astated period . stated period .

Normally arise:Normally arise:1.1. To make a security more attractiveTo make a security more attractive2.2. As evidence of preemptive rightAs evidence of preemptive right3.3. As compensation to employeesAs compensation to employees

St o c k Warrants St o c k Warrants

L O 3 Co ntrast the acc o unting f o r st o c k warrants and f o r st o c k warrants issued with o ther securities.


17/63

Chapter 16-17

I ssu ed w ith Oth er S ecu r iti es

St o ck Wa rr ant sSt o ck Wa rr ant s

LO 3 Co nt ra st th e a cco unting f o r st o ck wa rr ant s an d f o r st o ck wa rr ant s i ssu ed w ith o th er sec u r iti es .

Detachable Stock Warrants :Proceeds allocated between the twosecurities .Allocation based on fair market values . Two methods of allocation :

(1) the proportional method and(2) the incremental method


18/63

Chapter 16-18

Propor tional Method

Stoc k W arran ts Stoc k W arran ts

L O 3 C ont ra st th e accou nti n g f or stoc k w arran ts and f or stoc k w arran ts issu ed with oth er s ecu r iti es.

Determine :1. value of the bonds without the warrants, and2. value of the warrants .

The propor tional method allocates the proceedsusing the proportion of the two amounts, based onfair values .


19/63

Chapter 16-19

BE 16-4 : Margolf Corp. issued 1,000, $ 1,000 bonds at 101. Each bond was issued with one detachable stock warrant . After issuance, the bonds were selling in the market at 98,and the warrants had a market value of $ 40. Use theproportional method to record the issuance of the bonds andwarrants .

Number Amount Price Total PercentBonds 1,000 x 1,000$ x 0.98$ = 980,000$ 96%Warrants 1,000 x 40$ = 40,000 4%

Total Fair Market Value 1,020,000$ 100%

Allocation: Bonds WarrantsIssue price 1,010,000$ 1,010,000$ Bond face value 1,000,000$Allocation % 96% 4% Allocated FMV 970,392 Total 970,392$ 39,608$ Discount 29,608$




20/63

Chapter 16-20

CashCash 1,010,0001,010,000

Bonds payableBonds payable 1,000,0001,000,000

Discount on bonds payableDiscount on bonds payable 2929,,608608

PaidPaid--in capitalin capital Stock warrantsStock warrants 39,60839,608

BE 16-4 : Margolf Corp. issued 1,000, $ 1,000 bonds at 101. Each bond was issued with one detachable stock warrant . After issuance, the bonds were selling in the market at 98,and the warrants had a market value of $ 40. Use theproportional method to record the issuance of the bonds andwarrants .




21/63

Chapter 16-21

I ncre ment al Method

Sto ck W arran ts Sto ck W arran ts

L O 3 C ont ra st th e accou nti n g f or sto ck w arran ts and f or sto ck w arran ts issu ed with oth er s ecu r iti es.

Where a company cannot determine the fair valueof either the warrants or the bonds .

Use the security for which fair value candetermined .

Allocate the remainder of the purchase priceto the security for which it does not know fairvalue.


22/63

Chapter 16-22

BE 16-5 : McCarthy Inc . issued 1,000, $ 1,000 bonds at 101. Eachbond was issued with one detachable stock warrant . Afterissuance, the bonds were selling in the market at 98 . Themarket price of the warrants, without the bonds, cannot bedetermined . Use the incremental method to record the issuanceof the bonds and warrants .

Number Amount Price Total PercentBonds 1,000 x 1,000$ x 0.98$ = 980,000$ 100%Warrants 1,000 x = - 0%

Total Fair Market Value 980,000$ 100%

Allocation: BondsIssue price 1,010,000$ Bond face value 1,000,000$Bonds 980,000 Allocated FMV 980,000 Warrants 30,000$ Discount 20,000$


L O 3Co

ntrast the acc o unting f

o r st

o c k warrants and f o r st o c k warrants issued with o ther securities.


23/63

Chapter 16-23

CashCash 11,,010010,,000000

Bonds payableBonds payable 1,000,0001,000,000

Discount on bonds payableDiscount on bonds payable 20,00020,000

PaidPaid--in capitalin capital Stock warrantsStock warrants 30,00030,000


L O 3Co

ntrast the acc o unting f

o r st

o c k warrants and f o r st o c k warrants issued with o ther securities.

BE 16-5 : McCarthy Inc . issued 1,000, $ 1,000 bonds at 101. Eachbond was issued with one detachable stock warrant . Afterissuance, the bonds were selling in the market at 98 . Themarket price of the warrants, without the bonds, cannot bedetermined . Use the incremental method to record the issuanceof the bonds and warrants .


24/63

Chapter 16-24

Conceptu al Qu es tions

Sto ck W arr ant sSto ck W arr ant s

L O 3 Co ntr as t th e accou nti n g f or stock w arr ant s and f or stock w arr ant s i ssu ed with oth er sec uriti es .

D et ach able w arr ant s involves two securities,

a debt security,

a warrant to purchase common stock .N onde t ach able w arran t s

no allocation of proceeds between the bonds andthe warrants,

companies record the entire proceeds as debt .


25/63

Chapter 16-25

Right s to Su bscr i be to A dditional Sh ares

Stock W arran t sStock W arran t s

L O 3C

ont ras t th e accou nti ng f or stock w arran t s and f or stock w arran t s i ssu ed with oth er sec u r iti es .

Stock Ri ght s - existing stockholders have theright (preemptive privilege) to purchase newlyissued shares in proportion to their holdings .

Price is normally less than current marketvalue.

Companies make only a memorandum entry.


26/63

Chapter 16-26

St o c k Co mp ensati o n Plans St o c k Co mp ensati o n Plans

L O 4 Describe the acc o unting f

o r st

o c k c

o mp ensati

o n p lans under generally acce p ted acc o unting p rinci p les.

St o c k O p ti o n - gives key employees option to purchasestock at a given price over e xtended period of time .

Effective compensation programs are ones that : 1. motivate employees,2. help retain e xecutives and recruit new talent,3. base compensation on performance,

4. maximize employees after-ta x benefit, and5. use performance criteria over which employee has

control .


27/63

Chapter 16-27

T h e Maj or Repor ti ng I ssu eNew FASB standard requires companies to recognizecompensation cost using the fair-value method .*

Under fai r - valu e method, companies use acceptableoption-pricing models to value the options at the dateof grant .

L O 4 D esc r ib e th e accounting fo r stoc k com pens ation plans un der g en erall y acc ep t ed accounting princi ples.

Stoc k C om pens ation P lans Stoc k C om pens ation P lans

*Accounting for Stock-Based Compensation,Statement of FinancialAccounting Standards No. 123 (Norwalk, Conn: FASB, 1995); and Share-Based Payment,Statement of Financial Accounting Standard No. 123 (R)(Norwalk, Conn: FASB, 2004).


28/63

Chapter 16-28

A ccou nti ng for Stock Compensa tionTwo main accounting issues:

1.How to determine compensation expense.

2. Over what periods to allocate compensationexpense.


o r st

o c k c

o mp ensati




29/63


30/63

Chapter 16-30

BE 16-12 On January 1, 2006 , Nichols Corporation granted10,000 options to key e xecutives . Each option allows theexecutive to purchase one share of Nichols $5 par valuecommon stock at a price of $ 20 per share . The options were

ex

ercisable within a2

-year period beginning January1,

2008,if the grantee is still employed by the company at the time of

the e xercise . On the grant date, Nichols stock was trading at$25 per share, and a fair value option-pricing modeldetermines total compensation to be $ 400,000 . On May1,2008, 8,000 options were e xercised when the market price ofNichols stock was $30 per share . The remaining optionslapsed in 2010 because e xecutives decided not to e xercisetheir options .


o r st

o c k c

o mp ensati




31/63


32/63

Chapter 16-32

BE 16-12 : Prepare the necessary journal entries related tothe stock option plan for the years 2006 through 2010.


o r st

o c k c

o mp ensati



CashCash ((88,,000000 x $x $2020)) 160160,,000000

Common stockCommon stock((88,,000000 x $x $55)) 4040,,000000

5/1/ 085/1/ 08

PaidPaid--in capitalin capital--stock optionsstock options 80,00080,000PaidPaid--in capitalin capital--expired optionsexpired options 80,00080,000

11//11//1 010

($400,000 x 8,000 / 10,000 = $ 32 0,000)

PaidPaid--in capitalin capital--stock optionsstock options 32 032 0,,000000

PaidPaid--in capital in excess of parin capital in excess of par 44 0,00044 0,000

($400,000 $ 32 0,000)


33/63

Chapter 16-33

Employee Stock Pu rc h ase PlansGenerally permit all employees to purchase stock at adiscounted price for a short period of time .

Compensatory unless it satisfies three conditions :

1. Substantially all full-time employees participateon an equitable basis .

2. The discount from market is small . 3. The plan offers no substantive option feature .


o r st

o c k c

o mp ensati




34/63

Chapter 16-34

Deba t e over Stock Option A ccou nti ngWhen first proposed, there was considerableopposition to the fair-value approach because itcould result in substantial, previously unrecognizedcompensation expense.

Offsetting such opposition is the need for greatertransparency in financial reporting .

L O 5 Discuss the c o ntr o versy inv o lving st o c k c o mp ensati o n p lans.



35/63

Chapter 16-35

Earn i ngs per sh are indicates the income earned byeach share of common stock .

Companies report earnings per share only forcommon stock.

When income statement contains intermediatecomponents of income, companies should discloseearnings per share for each component .

L O 6 Co mp ute earnings p er share in a si mp le ca p ital structure.

Secti o n 2Secti o n 2 Co mp uting Earnings Per Share Co mp uting Earnings Per Share

Illustrati o n 16Illustrati o n 16--77


36/63

Chapter 16-36 L O 6 Co mp ute earnings p er share in a si mp le ca p ital structure.

Earnings Per Share Earnings Per Share- -Si mp le C a p ital Structure Si mp le C a p ital Structure

Simple St ru ctu re --Only common stock; nopotentially dilutive securities .

Complex St ru ctu re --Potentially dilutivesecurities are present .

D i luti vemeans the ability to influence the EPSin a downward direction.


37/63


38/63



Weighte d- A v erage N u mber o f Shares

Companies must weight the shares by the fractionof the period they are outstanding .

Stock di v i dends or stock split s: companies needto restate the shares outstanding before thestock dividend or split .


39/63



E16-14 On January 1, 2008, Wilke Corp. had 480,000shares of common stock outstanding . During 2008, it hadthe following transactions that affected the commonstock account .

Fe ruary 1 Issued 120 haresarch 1 Issued a 10% stock di idenday 1 Ac uired 100,000 share of treasury stock

June 1 Issued a 3 for 1 stock splitOcto er 1 Reissued 60,000 shares of treasury stock

I nst ru ctions Determine the weighted a erage num er ofshares outstanding as of Decem er 3 1, 2008 .


40/63



Weighte d- A v erage N u mber o f Shares Wei hte

Cha e i hares Fracti 10% 3/1 A v era eDate hares Outsta i f Year Di v i e plit hares

Ja . 1 480,000 x 1/12 x 110% x 3 132,000 Feb. 1 120,000 600,000 x 1/12 x 110% x 3 165,000 Mar. 1 60,000 660,000 x 2/12 x 3 330,000 May 1 (100,000) 560,000 x 1/12 x 3 140,000 Ju e 1 3/1 split 1,680,000 x 4/12 x 560,000 Oct. 1 60,000 1,740,000 x 3/12 x 435,000

1,762,000


41/63

Chapter 16-41 L O 7 Co mp ute earnings p er share in a c o mp lex ca p ital structure.

Earnings Per Share Earnings Per Share- - Co mp lex C a p ital Structure Co mp lex C a p ital Structure

Co mp lex C a p ital Structure exists when a businesshas

convertible securities,

options, warrants, or other rights

that upon conversion or e xercise could di lut eearnings per share .

Company reports both basic and diluted earningsper share .


42/63



Diluted EPS includes the effect of all potential dilutivecommon shares that were outstanding during the period .

I llu st ra tion I llu st ra tion 1616--1717

Companies will not report diluted EPS if the securities intheir capital structure are antidilutive .


43/63

Chapter 16-43

D i lut ed E PS Conver ti ble Sec u r iti esMeasure the dilutive effects of potentialconversion on EPS using the if- conver t ed method.

This method for a convertible bond assumes :

(1) the conversion at the beginning of the period(or at the time of issuance of the security, ifissued during the period), and

(2) the elimination of related interest, net of ta x.

L O 7 C om p ut e ea rn i n gs per sha re i n a com p l ex ca p ital st ru ctu re .

Ea rn i n gs P er Sha reEa rn i n gs P er Sha re -- C om p l ex C a p ital St ru ctu reC om p l ex C a p ital St ru ctu re


44/63



E16-20 (Co n v erti ble Bo n ds) In 2006 Chirac Enterprisesissued, at par, 60, $ 1,000, 8 % bonds, each convertible into 100shares of common stock . Chirac had revenues of $ 17,500 andexpenses other than interest and ta xes of $8, 400 for 2007.

(Assume that the ta x rate is 40%.) Throughout 2007 , 2 ,000shares of common stock were outstanding; none of the bondswas converted or redeemed .I nst ru ctions

(a) Compute diluted earnings per share for 2007.(b) Assume same facts as those for Part (a), except the 60bonds were issued on September 1, 2007 (rather than in2006), and none have been converted or redeemed .


45/63



E16-20 (a) Compute diluted earnings per share for 2007.

e enues 17, 00

Expenses , 00 ond interest expense (60 x 1,000 x ) 4 ,800 n ome efore taxes 4 , 00 n ome taxes (40 ) 1,720

Net in ome 2, 80

Calcu lation of N et I ncomeCalcu lation of N et I ncome


46/63




When calculating D i lut ed EPS, begin with Bas i s EPS.

N et i ncome = $2 , 580

W ei ght ed average sh ares = 2 , 000== $1.29$1.29

Bas i c E PS


47/63


48/63



Revenues 17,500$Expenses 8,400 Bond interest expense (60 x $1,000 x 8% x 4/12) 1,600 Income before taxes 7,500 Income taxes (40%) 3,000 Net income 4,500$

Calcu lation of N et I ncomeCalcu lation of N et I ncome

E16-20 (b) Assume bondswere issued on Sept . 1, 2007 .


49/63



E16-20 (b) Assume bonds were issued on Sept . 1, 2007 .


$4 , 500

2, 000== $1.37$1.37

D i lut ed E PS$1 , 600 (1 - .40)

6, 000 x 4/12 yr .

$5 , 460

4, 000==

Effect on EPS = .48Basic EPS= 2.25

++

++


50/63



P16-7 (Variati o n- Co n v erti ble Preferre d St o ck) Prior to2007 , Prancer Company issued 30,000 shares of 6% convertible, cumulative preferred stock, $ 100 par value . Each share is convertible into 5 shares of common stock . Net income for 2007 was $1,200,000 . There were600,000 common shares outstanding during 2007. Therewere no changes during 2007 in the number of commonor preferred shares outstanding .

I nst ru ctions(a) Compute diluted earnings per share for 2007.


51/63



P16-7 (a) Compute diluted earnings per share for 2007.


N et i ncome $1 , 200 , 000 Pfd. D i v . $180 , 000*

W ei ght ed average sh ares = 600 , 000== $1.70$1.70

Bas i c E PS

* 30,000 shares x $100 par x 6% = $180,000 dividend* 30,000 shares x $100 par x 6% = $180,000 dividend


52/63




600 , 000==

$$11..6060

D i lut ed E PS$180 , 000

Basic EPS = 1.70

==

Effect onEPS =1.20

P16-7 (a) Compute diluted earnings per share for 2007.

$1 , 200 , 000 $180 , 000

150 , 000*

$1 , 200 , 000

750 , 000

**((3030,,000000 x x 55))

++

++


53/63



600 , 000==

$1.74$1.74

D ilute d EPS $180 , 000

Basic EPS = 1.70

==

Effect onEPS =2.00

P16-7 (a) Compute diluted earnings per share for 2007 assumingeach share of preferred is convertible into 3 shares of common stock .

$1 , 200 , 000 $180 , 000

90 , 000*

$1 , 200 , 000

750 , 000

**(30,000 x 3)(30,000 x 3)

++

++


54/63

Chapter

16-54 L O 7 Co mp ute earnings p er share in a c o mp lex ca p ital structure.


600 , 000==

$1.70$1.70

D ilute d EPS $180 , 000

Basic EPS = 1.70

==

Effect onEPS =2.00

$1 , 200 , 000 $180 , 000

90 , 000*

$1 , 200 , 000

750 , 000

**(30,000 x 3)(30,000 x 3)

A nti di luti ve

Bas i c = D i lut ed E PS

P16-7 (a) Compute diluted earnings per share for 2007 assumingeach share of preferred is convertible into 3 shares of common stock .

++

++


55/63

Chapter

16-55

D i lut ed E PS Options and W arran t sMeasure the dilutive effects of potentialconversion using the t reas u ry - stock method.

This method assumes :

(1) company exercises the options or warrants atthe beginning of the year (or date of issue iflater), and

(2) that it uses those proceeds to purchasecommon stock for the treasury .

L O 7 C om p ut e ear ning s per sh are in a com p l ex cap it al st ru ctu re .

E ar ning s P er Sh areE ar ning s P er Sh are -- C om p l ex C ap it al St ru ctu reC om p l ex C ap it al St ru ctu re


56/63

Chapter



E16-24 (EPS w ith O p ti o ns) Venzuela Companys net incomefor 2007 is $ 50,000 . The only potentially dilutive securitiesoutstanding were 1,000 options issued during 2006 , eachexercisable for one share at $ 6. None has been e xercised, and

10,000 shares of common were outstanding during 2007. Theaverage market price of the stock during 2007 was $20.

I nst ru ctions(a) Compute diluted earnings per share . (b) Assume the 1,000 options were issued on October 1,

2007 (rather than in 2006). The average market priceduring the last 3 months of 2007 was $20.


57/63

Chapter




Pro eeds if shares issued (1,000 ) ,000 Pur hase pri e for treasur shares 20

hares assumed pur hased 00 hares assumed issued 1,000

n remental share in rease700

T reas u ryT reas u ry -- S tock MethodS tock Method


58/63

Chapter





$50 , 000

10 , 000== $4.67$4.67

D i lut ed E PS++

700

Basic EPS= 5.00

$50 , 000

10 , 700==

Options

++


59/63

Chapter



Proceeds if shares issued (1, 000 x $ 6) 6 ,000$Purchase price for treasury shares 20$Shares assumed purchased 300 Shares assumed issued 1, 000

Incremental share increase 700 Weight for 3 months assumed outstanding 3 12Weighted incremental share increase 175

T reas u ryT reas u ry -- S tock MethodS tock Method

E16-24 (b) Compute diluted earnings per share assumingthe 1,000 options were issued on October 1, 2007.

xx


60/63

Chapter



E16-24 (b) Compute diluted earnings per share assumingthe 1,000 options were issued on October 1, 2007.

$50 , 000

10 , 000== $4.91$4.91

D i lut ed E PS

175

Basic EPS= 5.00

$50 , 000

10 , 175==

Options

++


61/63

Chapter

16-61

Conti ngent I ssu e A gree ment Contingent shares are issued as a result of the :

1. passage of time or

2. attainment of a certain earnings or marketprice level.

L O 7 Co mp ute earnings p er share in a c o mp lex ca p ital structure.


A nti diluti o n Re v isite dIgnore antidilutive securities in all calculations andin computing diluted earnings per share .


62/63

Chapter

16-62

E PS Presen t ation and D i sclosu reA company should show per share amounts for:

income from continuing operations,income before e xtraordinary items, andnet income.

Per share amounts for a discontinued operation oran extraordinary item should be presented on theface of the income statement or in the notes .

L O 7 Co mp ute earnings p er share in a c o mp lex ca p ital structure.



63/63

Chapter

Copyright 2006 John Wiley & Sons, Inc. All rights reserved . Reproduction or translation of this work beyond that permittedin Section 117 of the 1976 United States Copyright Act withoutthe e xpress written permission of the copyright owner isunlawful. Request for further information should be addressed

to the Permissions Department, John Wiley & Sons, Inc. Thepurchaser may make back-up copies for his / her own use onlyand not for distribution or resale . The Publisher assumes noresponsibility for errors, omissions, or damages, caused by theuse of these programs or from the use of the informationcontained herein .

Co p yright Co p yright

intermediate power point (16)

Documents