Exam 4 Practice Questions

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Southern Illinois University, Edwardsville *

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302

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Accounting

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Jan 9, 2024

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docx

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1. Koda Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value cumulative preferred stock with $100,000 of dividends in arrears. Dividends in the amount of $250,000 were declared during the year. Net income was $2,000,000. What was Koda’s basic earnings per share? PS = (Net Income - Pfd Div Adjustment) / Avg Weighted-Shares Outstanding EPS = ($2,000,000 - Pfd Div Adjustment ) / 200,000 Since CUMULATIVE declaration does NOT matter... just adjust by current year's accumulation Cumulative Pfd Div Adj = 20,000 X 10% X $100 = $200,000 EPS = ($2,000,000 - $200,000) / 200,000 = $9.00 per share 2. Koda Co. had 200,000 shares of common stock and 20,000 shares of 10%, $100 par value non-cumulative preferred stock with o dividends paid last year. Dividends in the amount of $150,000 were declared during the current year. Net income was $2,000,000. What was Koda’s basic earnings per share? EPS = (Net Income - Pfd Div Adjustment) / Avg Weighted-Shares Outstanding EPS = ($2,000,000 - Pfd Div Adjustment ) / 200,000 Since NON-cumulative preferred stock, calculate actual preferred dividend Non-Cumulative Pfd Div Current year accumulation 20,000 X 10% X $100 = $200,000 Declared Dividend $150,000 Actual preferred dividend $150,000 EPS = ($2,000,000 - $150,000) / 200,000 = $9.25 per share 3. On January 1, 2009, Davis Inc. reports 300,000 shares outstanding. On July 1, the company has a 2:1 stock split. On November 1, the company issues 600,000 new shares. Basic weighted-average shares equals Change in Shares Shares Outstanding Time Weighting Stock Split Factor Stock Div Adj Factor Weighted Shares Outstanding 1/1/2001 $ 300,000 6/12 2 1 300,000 7/1/2001 $ 300,000 $ 600,000 4/12 1 1 200,000 11/1/2001 $ 600,000 $ 1,200,000 2/12 1 1 200,000 Average weighted-shares outstanding 700,000 4. On January 1, 2009, Davis Inc. reports 300,000 shares outstanding. On July 1, the company has a 50% stock dividend. On November 1, the company issues 600,000 new

shares. Basic weighted-average shares equals Change in Shares Shares Outstanding Time Weighting Stock Split Factor Stock Div Adj Factor Weigthed Shares Outstanding 1/1/2001 300,000 6/12 1 1.5 225,000 7/1/2001 $ 150,000 450,000 4/12 1 1 150,000 11/1/2001 $ 600,000 1,050,000 2/12 1 1 175,000 Average weighted-shares outstanding 5. 550,000 WantMore EPS, Inc. Year Ended December 31, 2016 Potentially Dilutive Securities Outstanding at Fiscal Year End 1 Convertible Bond A : $10,000,000, 5% issued at par in prior year, convertible into 20 shares of common stock. 2 Convertible Bond B : $5,000,000, 8% issued at par on 4/1 current year, convertible into 30 shares of common stock. Per Share Effect for Bonds = [ (9/12) X $5M X 8% X (1-40%) ] / [(9/12) X 30 X ($5,000,000 / $1,000) ] Per Share Effect for Bonds = 300,000 / 200,000 = $1.60 per share effect 6. Lovata, Inc.’s income attributable to common shareholders is $300,000 and its basic weighted-average shares outstanding is 300,000. Information related to potentially- dilutive convertible securities under the if-converted methods is in the table below. Interest Expense , Net of Tax, Avoided under If- Converted Method Change in Weighted Shares under If-Converted Method Bond A $50,000 100,000 Bond B $125,000 100,000 What is Lovata, Inc.’s diluted EPS? Basic EPS = $300,000 / 300,00 = $1.00 per share Per-Share Effect A = $50,000 / 100,000 = $0.50 THEREFORE Dilutive ... include in diluted EPS

Per-Share Effect B = $125.000 / 100,000 = $1.25 THEREFORE Anti-dilutive ... Exclude from diluted EPS Diluted EPS = ($300,000 + $50,000) / (300,000 + 100,000) = $0.88 7. Lovata, Inc.’s income attributable to common shareholders is $300,000 and its basic weighted-average shares outstanding is 300,000. Stock options to purchase 400,000 shares at $10 per share are outstanding at year end. The average market price per share during the year was $20. What is Lovata, Inc.’s diluted EPS? Basic EPS = $300,000 / 300,00 = $1.00 per share # Shares Under Treasury Stock Method = 400,000 X [ (20-10) / 10 ] = 200,000 Diluted EPS = ($300,000) / (300,000 + 200,000) = $0.60 1. When a bond issuer offers some form of additional consideration (a “sweetener”) to induce conversion, the sweetener is accounted for as a(n) Expense 2. Convertible bonds are usually converted into Common stock 3. When a callable bond is called The bond issuer buys the bond back 4. Clay Corp. had $600,000 convertible 8% bonds outstanding at June 30. Each $1,000 bond was convertible into 10 shares of Clay's $50 par value common stock. On July 1, the interest was paid to bondholders, and the bonds were converted into common stock, which had a fair market value of $75 per share. The unamortized premium on these bonds was $12,000 at the date of conversion. Under the book value method, this conversion increased The book value of the common stock issue equals the book value of the bond converted: $600,000 face value plus $12,000 premium = $612,000 # of Shares Issued = # bonds X # shares issued per bond = (Face Value / $1,000) X 10 = ($600,000/$1,000) X 10 = 6,000 shares issued upon conversion Putting it all together... Book Value of C/S 612,000 Par Value = # shrs X par value

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