Concept explainers
Real World Case 19–12
Reporting EPS; discontinued operations; Kaman Corporation
• LO19–13
Real World Financials
Kaman Corporation, headquartered in Bloomfield, Connecticut, was incorporated in 1945. It is a diversified company that conducts business in the aerospace and distribution markets. The following is an excerpt from the comparative income statements (beginning with earnings from continuing operations) from Kaman’s 2015 annual report ($ in thousands). A disclosure note from Kaman’s 2015 annual report is shown below.
An income statement sometimes includes discontinued operations. Kaman Corporation reports income from discontinued operations.
17. COMPUTATION OF EARNINGS PER SHARE (in part)
The computation of basic earnings per share is based on net earnings divided by the weighted average number of shares of common stock outstanding for each year. The computation of diluted earnings per share includes the common stock equivalency of dilutive options granted to employees under the Stock Incentive Plan.
Excluded from the diluted earnings per share calculation for the years ended December 31, 2015, 2014 and 2013, respectively, are 487,071, 342,994 and 391,717 shares associated with equity awards granted to employees that are anti-dilutive based on the average stock price. Convertible Notes for the years ended December 31, 2015, 2014 and 2013, shares issuable under the Convertible Notes that were dilutive during the period were included in the calculation of earnings per share as the conversion price for the Convertible Notes was less than the average share price of the Company’s stock. Warrants excluded from the diluted earnings per share calculation for the years ended December 31, 2015, 2014 and 2013, respectively were 3,422,477, 3,411,539, and 3,404,626 shares, issuable under the warrants sold in connection with the Company’s Convertible Note offering as they would be anti-dilutive.
Required:
1. The disclosure note shows adjustments for “shares issuable under the Convertible Notes that were dilutive during the period were included in the calculation of earnings per share.” What other adjustments might be needed? Explain why and how these adjustments are made to the weighted-average shares outstanding.
2. The disclosure note indicates that the effect of some of the equity awards granted to employees were not included because they would be antidilutive. What does that mean? Why not include antidilutive securities?
3. Based on the information provided, prepare the presentation of basic and diluted earnings per share for 2015, 2014, and 2013 that Kaman reports in its 2015 annual report.
(1)
Earnings per share (EPS): The amount of earnings made available to each common share is referred to as earnings per share. Dilutive securities like convertible bonds, convertible preferred stock, and stock options, reduce the EPS by increasing the common shares.
Use the following formula to determine EPS:
To indicate: The other adjustments required for computation of diluted EPS
Explanation of Solution
The following are the other adjustments required for computation of diluted EPS:
- Dilutive securities like restricted stock awards, restricted stock units, conversion, and contingent shares increase the potential number of shares.
- If the stock options would be considered while computing diluted EPS, if the share price on that date is less than average market price. This is because exercisable options are assumed to be exercised, and eventually increase the number of shares.
- Additional number of shares would be issued under certain contingent conditions, or occurrence of some situation in future. So, the fulfilled contingent agreement would increase the number of weighted average number of shares while computing diluted EPS.
- While computing diluted EPS, it is assumed that the convertible bonds are converted into common shares. This increases the number of common shares in the denominator, and increases the numerator, earnings available to common shareholders, as after-tax interest which had been avoided due to conversion of bonds, increases net income. This conversion dilutes the EPS.
(2)
To indicate: The reason for not including antidilutive securities in the computation of diluted EPS.
Explanation of Solution
The amount of earnings made available to each common share is referred to as earnings per share (EPS). In the computation of basic EPS, dilutive securities like are convertible bonds, convertible preferred stock, and stock options are not included. But in the computation of diluted EPS, dilutive securities are included, if the effect of the securities is not antidilutive. If the conversion of dilutive securities would not reduce the diluted EPS in comparison to basic EPS, the effect of conversion of securities into common shares is antidilutive. Such securities which have nil effect on dilution of EPS are referred to as antidilutive.
(3)
To prepare: The presentation of basic and diluted EPS for 2015, 2014, and 2013 as reported by Corporation K in its 2015 annual report.
Explanation of Solution
Corporation K would present the basic and diluted earnings per share, in its 2015 annual report, as shown below:
Earnings per share | 2015 | 2014 | 2013 |
Basic: | |||
Earnings per share from continuing operations | $2.22 | $2.43 | $2.21 |
Earnings per share from discontinued operations | - | (0.11) | (0.09) |
Earnings per share from disposal of discontinued operations | - | (0.18) | 0.02 |
Basic earnings per share | $2.22 | $2.14 | $2.14 |
Diluted: | |||
Earnings per share from continuing operations | $2.17 | $2.37 | $2.17 |
Earnings per share from discontinued operations | - | (0.11) | (0.09) |
Earnings per share from disposal of discontinued operations | - | (0.18) | 0.02 |
Diluted earnings per share | $2.17 | $2.08 | $2.10 |
Table (1)
Working Notes:
Compute basic earnings per share from continuing operations in 2013.
Compute basic earnings per share from loss of discontinued operations in 2013.
Compute basic earnings per share from disposal of discontinued operations in 2013.
Compute total basic earnings per share in 2013.
Compute diluted earnings per share from continuing operations in 2013.
Compute diluted earnings per share from discontinued operations in 2013.
Compute diluted earnings per share from disposal of discontinued operations in 2013.
Compute total diluted earnings per share in 2013.
Compute basic earnings per share from continuing operations in 2014.
Compute basic earnings per share from discontinued operations in 2014.
Compute basic earnings per share from disposal of discontinued operations in 2014.
Compute total basic earnings per share in 2014.
Compute diluted earnings per share from continuing operations in 2014.
Compute diluted earnings per share from discontinued operations in 2014.
Compute diluted earnings per share from disposal of discontinued operations in 2014.
Compute total diluted earnings per share in 2014.
Compute basic earnings per share from continuing operations in 2015.
Compute basic earnings per share in 2015.
Compute basic earnings per share from continuing operations in 2015.
Compute total diluted earnings per share in 2015.
Want to see more full solutions like this?
Chapter 19 Solutions
INTERMEDIATE ACCOUNTING CONNECT
- Contingent liabilities Altria Group, Inc., has more than 12 pages dedicated to describing contingent liabilities in the notes to recent financial statements. These pages include extensive descriptions of multiple contingent liabilities. Use the Internet to research Altria Group, Inc., at www.altria.com. a. What are the major business units of Altria Group? b. Based on your understanding of this company, why would Altria Group require more than 12 pages of contingency disclosure?arrow_forwardInvestment reporting O'Brien Industries Inc. is a hook publisher. The comparative unclassified balance sheets for December 31, Year 2 and Year 1 follow. Selected missing balances are shown by letters. Brien Industries Inc. Balance Sheet December 31, Year 2 and Year 1 Dec. 31, Year 2 Dec 31, Year 1 cash 233,000 220,000 Accounts receivable (net) 136,530 138,000 Available for sale investments (at cost)Note 1 a 103,770 Less valuation allowance for available-for-sale investments b. 2,500 Available for-sale investments (fair value) c 101,270 Interest receivable d Investment in Jolly Roger Co. stockNote 2 e. 77,000 Office equipment (net) 115,000 130,000 Total assets f. 666,270 Accounts payable 69.400 65,000 Common stock 70.000 70,000 Excess of issue price over par 225,000 225,000 Retained earnings g 308,770 Unrealized gain (loss) on available for-sale investments h. (2,500) Total liabilities and Stockholders equity i. 666,270 Note 1. Investments are classified as available for sale. The investments at cost and fair value on December 31, Year 1, are as follows: No. of Shares Cost per Share Total Cost Total Fair Value Bernard Co. stock 2,250 17 38,250 37,500 Chadwick Co. stock 1,260 52 65,520 63,770 103,770 101,270 Note 2. The investment in Jolly Roger Co. stock is an equity method investment representing 30% of the outstanding .shares of Jolly Roger Co. The following selected investment transactions occurred during Year 2: May 5. Purchased 3,080 shares of Gozar Inc. at 30 per share including brokerage commission. Gozar Inc. is classified as an available-for-sale security. Oct. 1. Purchased 40,000 of Nightline co. 6%, 10-Year bonds at 100. The bonds are classified as available for sale. The bonds pay interest on October 1 and April 1. 9. Dividends of 12,500 are received on the Jolly Roger co. investment. Dec. 31 Jolly Roger co. reported a total net income of 112,000 for year 2. O'Brien industries Inc. recorded equity earnings for its share of Jolly Roger co. net income. 31. Accrued three months of interest on the Nightline bonds. 31. Adjusted the available-for-sale investment portfolio to fair value, using the following fair value per-share amounts: Available-for-Sale Investments Fair Value Bernard Co. stock 15,40 per share Chadwick Co. stock 46,00 per share Gozar Inc. stock 32,00 per share Nightline Co. bonds 98 per 100 of face amount Dec. 31. Closed the OBrien Industries Inc. net income of 146,230. O'Brien Industries Inc. paid no dividends during the year. Instructions Determine the missing letters in the unclassified balance sheet. Provide appropriate supporting calculations.arrow_forwardInvestment reporting Teasdale Inc. manufactures and sells commercial and residential security equipment. The comparative unclassified balance sheets for December 31, Year 2 and Year 1 are provided below. Selected missing balances are shown by letters. Teasdale Inc. Balance Sheet December 31, Year 2 and Year 1 Dec. 31, Year 2 Dec. 31, Year 1 Cash 160,000 156,000 Accounts receivable (net) 11S.OOO 108,000 Available for-sale investments (at cost)Note 1 a. 91,200 Plus valuation allowance for available-for-sale investments b. 8,776 Available for-sale investments (fair value) c 99,976 Interest receivable d. Investment in Wright Co. stockNote 2 e. 69,200 Office equipment (net) 96,000 105,000 Total assets f. 5538,176 Accounts payable 91,000 72,000 Common stock 80,000 80,000 Excess of issue price over par 250,000 250,000 Retained earnings g 127,400 Unrealized gain (loss) on available for-sale investments h. 8,776 Total liabilities and stockholders' equity S i. 5538,176 Note 1. Investments are classified as available for sale. The investments at cost and fair value on December 31, Year 1, are as follows: No. of Shares Cost per Share Total Cost Total Fair Value Alvarez Inc stock 960 38,00 36,480 39,936 Hirsch Inc. stock 1,900 28,80 4,720 60,040 91,200 99,976 Note 2. The Investment in Wright Co. stack is an equity method investment representing 30% of the outstanding shares of Wright Co. The following selected investment transactions occurred during Year 2: Mar. 18. Purchased 800 shares of Richter Inc. at 40, including brokerage commission. Richter is classified as an available-for-sale security. July 12. Dividends of 12,000 art: received on the Wright Co. investment. Oct 1. Purchased 24,000 of Toon Co. 4%, 10-year bonds at 100. the bonds are classified as available for sale. The bonds pay interest on October 1 and April 1. December 31. Wright Co. reported a total net income of 80,000 for Year 2. Teasdale recorder equity earnings for its share of Wright Co. net income. 31. Accrued interest for three months on the Toon Co. bonds purchased on October 1. 31. Adjusted the available-for-sale investment portfolio to fair value, using the following fair value per-share amounts: Available for Sale Investments Fair Value Alvarez Inc. stock 41,50 per share Hirsch Inc stock 26,00 per share Richter Inc. stock 48,00 per share Toon Co. bonds 101 per 100 of face amount 31. Closed the Teasdale Inc. net income of 51,240. Teasdale Int. paid no dividends during the year. Instructions Determine the missing letters in the unclassified balance sheet. Provide appropriate supporting calculations.arrow_forward
- Nineteen measures of solvency and profitability The comparative financial statements of Bettancort Inc. are as follows. The market price of Bettancort Inc. common stock was 71.25 on December 31, 2016. Bettancort Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015 2016 2015 Retained earnings. January 1......................................... 2,655,000 2,400,000 Add net income for year............................................. 300,000 280,000 Total............................................................... 2,955,000 2,680,000 Deduct dividends: On preferred stock................................................ 15,000 15,000 On common stock................................................. 10,000 10,000 Total........................................................... 25,000 25,000 Retained earnings. December 31..................................... 2,930,000 2,655,000 Bettancort Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015 2016 2015 Sales...................... 1,200,000 1,000,000 Cost of goods sold............ 500,000 475,000 Gross profit............... 700,000 525,000 Selling expenses.......... 240,000 200,000 Administrative expenses...... 180,000 150,000 Total operating expenses.. 420,000 350,000 Income from operations.. 280,000 175,000 Other income............. 166,000 225,000 446,000 400,000 Other expense (Interest)... 66,000 60,000 Income before income tax 380,000 340,000 Income tax expense....... 80,000 60,000 Net income............... 300,000 280,000 Bettancort Inc. Comparative Retained Earnings Statement For the Years Ended December 31, 2016 and 2015 Dec.31, 2016 Dec. 31, 2015 Assets Current Assets: Cash.................................... 450,000 400,000 Marketable securities.................... 300,000 260,000 Accounts receivable (net)................. 130,000 110,000 Inventories.............................. 67,000 58,000 Prepaid expenses........................ 153,000 139,000 Total current assets..................... 1,100,000 967,000 Long-term investments.................... 2,350,000 2,200,000 Property, plant and equipment (net)....... 1,320,000 1,118,000 Total assets............................... 4,770,000 4,355,000 Liabilities Current liabilities.......................... 440,000 400,000 Long-term liabilities: Mortgage note payable, 8.8%, due 2021... 100,000 0 Bonds payable, 9%, due 2017............. 1,000,000 1,000,000 Total long term liabilities............... 1,100,000 1,000,000 Total liabilities............................ 1,540,000 1,400,000 Stockholders' equity Preferred stock 0.90, 10 par.. 200,000 200,000 Common stock. 5 par..................... 100,000 100,000 Retained earnings......................... 2,930,000 2,665,000 Total stockholders equity............... 3,230,000 2,955,000 Total liabilities and stockholders' equity..... 4,770,000 4,355,000 Instructions Determine the following measures for 2016, rounding to one decimal place: 1. Working capital 2. Current ratio 3. Quick ratio 4. Accounts receivable turnover 5. Number of days' sales in receivables 6. Inventory turnover 7. Number of days' sales in inventory 8. Ratio of fixed assets to long-term liabilities 9. Ratio of liabilities to stockholders equity 10. Number of times interest charges are earned 11. Number of times preferred dividends are earned 12. Ratio of sales to assets 13. Rate earned on total assets 14. Rate earned on stockholders' equity 15. Rate earned on common stockholders' equity 16. Earnings per share on common stock 17. Price-earnings ratio 18. Dividends per share of common stock 19. Dividend yieldarrow_forwardLiquidating partnershipscapital deficiency Nettles, King, and Tanaka are partners sharing income 3:2:1. After the firm's loss from liquidation is distributed, the capital account balances were as follows: Nettles, 15,000 Dr.; King, 46,000 Cr; and Tanaka, 71,000 Cr. If Nettles is personally bankrupt and unable to pay any of the 15,000, what will be the amount of cash received by King and Tanaka upon liquidation?arrow_forward
- Corporate Financial AccountingAccountingISBN:9781305653535Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningAccountingAccountingISBN:9781337272094Author:WARREN, Carl S., Reeve, James M., Duchac, Jonathan E.Publisher:Cengage Learning,Financial & Managerial AccountingAccountingISBN:9781285866307Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage Learning
- Accounting (Text Only)AccountingISBN:9781285743615Author:Carl Warren, James M. Reeve, Jonathan DuchacPublisher:Cengage LearningCorporate Financial AccountingAccountingISBN:9781337398169Author:Carl Warren, Jeff JonesPublisher:Cengage Learning