Dilutive Securities and Earnings per Share
16 – 21
67. On January 1, 2021, Ritter Company granted stock options to officers and key employees
for the purchase of 20,000 shares of the company’s $1 par common stock at $20 per
share as additional compensation for services to be rendered over the next three years.
The options are exercisable during a five-year period beginning January 1, 2024 by
grantees still employed by Ritter. The Black-Scholes option pricing model determines total
compensation expense to be $180,000. The market price of common stock was $26 per
share at the date of grant. The journal entry to record the compensation expense related
to these options for 2021 would include a credit to the Paid-in Capital—Stock Options
account for
a. $0.
b. $36,000.
c. $40,000.
d. $60,000.
68. On January 1, 2021, Evans Company granted Tim Telfer, an employee, an option to buy
5,000 shares of Evans Co. stock for $25 per share, the option exercisable for 5 years from
date of grant. Using a fair value option pricing model, total compensation expense is
determined to be $37,500. Telfer exercised his option on September 1, 2021, and sold his
5,000 shares on December 1, 2021. Quoted market prices of Evans Co. stock during
2021 were
January 1 $25 per share
September 1 $30 per share
December 1 $34 per share
The service period is for three years beginning January 1, 2021. As a result of the option
granted to Telfer, using the fair value method, Evans should recognize compensation
expense for 2021 on its books in the amount of
a. $45,000.
b. $37,500.
c. $12,500.
d. $ 7,500.
69. On December 31, 2020, Kessler Company granted some of its executives options to
purchase 60,000 shares of the company’s $10 par common stock at an option price of
$50 per share. The options become exercisable on January 1, 2021, and represent
compensation for executives’ services over a three-year period beginning January 1,
2021. The Black-Scholes option pricing model determines total compensation expense to
be $360,000. At December 31, 2021, none of the executives had exercised their options.
What is the impact on Kessler’s net income for the year ended December 31, 2021 as a
result of this transaction under the fair value method?
a. $120,000 increase
b. $0
c. $120,000 decrease
d. $360,000 decrease
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 22
70. Weiser Corp. on January 1, 2018, granted stock options for 60,000 shares of its $10 par
value common stock to its key employees. The market price of the common stock on that
date was $23 per share and the option price was $20. The Black-Scholes option pricing
model determines total compensation expense to be $630,000. The options are exercisable
beginning January 1, 2021, provided those key employees are still in Weiser’s employ at the
time the options are exercised. The options expire on January 1, 2022.
The amount of compensation expense Weiser should record for 2020 under the fair value
method is
a. $0.
b. $105,000.
c. $210,000.
d. $315,000.
71. On December 31, 2020, Houser Company granted some of its executives options to
purchase 150,000 shares of the company‘s $50 par common stock at an option price of $60
per share. The Black-Scholes option pricing model determines total compensation expense
to be $3,000,000. The options become exercisable on January 1, 2021, and represent
compensation for executives’ past and future services over a three-year period beginning
January 1, 2021. What is the impact on Houser’s total stockholders‘ equity for the year
ended December 31, 2020, as a result of this transaction under the fair value method?
a. $3,000,000 decrease
b. $1,000,000 decrease
c. $0
d. $1,000,000 increase
72. On June 30, 2018, Norman Corporation granted compensatory stock options for 75,000
shares of its $20 par value common stock to certain of its key employees. The market
price of the common stock on that date was $36 per share and the option price was $30.
The Black-Scholes option pricing model determines total compensation expense to be
$900,000. The options are exercisable beginning January 1, 2021, provided those key
employees are still in Norman’s employ at the time the options are exercised. The options
expire on June 30, 2022.
On January 4, 2021, when the market price of the stock was $42 per share, all 75,000
options were exercised. What should be the amount of compensation expense recorded
by Norman Corporation for the calendar year 2020 using the fair value method?
a. $0.
b. $360,000.
c. $450,000.
d. $900,000.
Dilutive Securities and Earnings per Share
16 – 23
73. In order to retain certain key executives, Jensen Corporation granted them incentive stock
options on December 31, 2020. 100,000 options were granted at an option price of $35
per share. Market prices of the stock were as follows:
December 31, 2021 $46 per share
December 31, 2022 51 per share
The options were granted as compensation for executives’ services to be rendered over a
two-year period beginning January 1, 2021. The Black-Scholes option pricing model
determines total compensation expense to be $1,000,000. What amount of compensation
expense should Jensen recognize as a result of this plan for the year ended December
31, 2021 under the fair value method?
a. $500,000.
b. $1,000,000.
c. $1,100,000.
d. $3,500,000.
74. Grant, Inc. had 80,000 shares of treasury stock ($10 par value) at December 31, 2020,
which it acquired at $11 per share. On June 4, 2021, Grant issued 40,000 treasury shares
to employees who exercised options under Grant’s employee stock option plan. The
market value per share was $13 at December 31, 2020, $15 at June 4, 2021, and $18 at
December 31, 2021. The stock options had been granted for $12 per share. The cost
method is used. What is the balance of the treasury stock on Grant’s balance sheet at
December 31, 2021?
a. $280,000.
b. $360,000.
c. $440,000.
d. $480,000.
On January 1, 2020, Korsak, Inc. established a stock appreciation rights plan for its executives. It
entitled them to receive cash at any time during the next four years for the difference between the
market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current
market prices of the stock are as follows:
January 1, 2020 $35 per share
December 31, 2020 38 per share
December 31, 2021 30 per share
December 31, 2022 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning
January 1, 2020.
*75. What amount of compensation expense should Korsak recognize for the year ended
December 31, 2020?
a. $ 360,000
b. $ 540,000
c. $ 450,000
d. $2,160,000
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 24
On January 1, 2020, Korsak, Inc. established a stock appreciation rights plan for its executives. It
entitled them to receive cash at any time during the next four years for the difference between the
market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current
market prices of the stock are as follows:
January 1, 2020 $35 per share
December 31, 2020 38 per share
December 31, 2021 30 per share
December 31, 2022 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning
January 1, 2020.
*76. What amount of compensation expense should Korsak recognize for the year ended
December 31, 2021?
a. $0
b. $60,000
c. $600,000
d. $300,000
On January 1, 2020, Korsak, Inc. established a stock appreciation rights plan for its executives. It
entitled them to receive cash at any time during the next four years for the difference between the
market price of its common stock and a pre-established price of $20 on 120,000 SARs. Current
market prices of the stock are as follows:
January 1, 2020 $35 per share
December 31, 2020 38 per share
December 31, 2021 30 per share
December 31, 2022 33 per share
Compensation expense relating to the plan is to be recorded over a four-year period beginning
January 1, 2020.
*77. On December 31, 2022, 25,000 SARs are exercised by executives. What amount of
compensation expense should Korsak recognize for the year ended December 31, 2022?
a. $570,000
b. $390,000
c. $1,170,000
d. $156,000
Multiple Choice Answers—Dilutive Securities, Computational
Dilutive Securities and Earnings per Share
16 – 25
MULTIPLE CHOICE—Dilutive Securities, CPA Adapted
78. On January 2, 2021, Farr Co. issued 10-year convertible bonds at 105. During 2021,
these bonds were converted into common stock having an aggregate par value equal to
the total face amount of the bonds. At conversion, the market price of Farr’s common
stock was 50 percent above its par value. On January 2, 2021, cash proceeds from the
issuance of the convertible bonds should be reported as
a. paid-in capital for the entire proceeds.
b. paid-in capital for the portion of the proceeds attributable to the conversion feature and
as a liability for the balance.
c. a liability for the face amount of the bonds and paid-in capital for the premium over the
face amount.
d. a liability for the entire proceeds.
79. Lang Co. issued bonds with detachable common stock warrants. Only the warrants had a
known market value. The sum of the fair value of the warrants and the face amount of the
bonds exceeds the cash proceeds. This excess is reported as
a. Discount on Bonds Payable.
b. Premium on Bonds Payable.
c. Common Stock Subscribed.
d. Paid-in Capital in Excess of Par—Stock Warrants.
80. On January 1, 2020, Sharp Corp. granted an employee an option to purchase 15,000
shares of Sharp’s $5 par value common stock at $20 per share. The Black-Scholes option
pricing model determines total compensation expense to be $350,000. The option
became exercisable on December 31, 2021, after the employee completed two years of
service. The market prices of Sharp’s stock were as follows:
January 1, 2020 $30
December 31, 2021 50
For 2021, should recognize compensation expense under the fair value method of
a. $225,000.
b. $75,000.
c. $175,000.
d. $0.
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 26
*81. On January 2, 2021, for past services, Rosen Corp. granted Nenn Pine, its president,
30,000 stock appreciation rights that are exercisable immediately and expire on
January 2, 2022. On exercise, Nenn is entitled to receive cash for the excess of the
market price of the stock on the exercise date over the market price on the grant date.
Nenn did not exercise any of the rights during 2021. The market price of Rosen‘s stock
was $30 on January 2, 2021, and $45 on December 31, 2021. As a result of the stock
appreciation rights, Rosen should recognize compensation expense for 2021 of
a. $0.
b. $180,000.
c. $450,000.
d. $900,000.
Multiple Choice Answers—Dilutive Securities, CPA Adapted
MULTIPLE CHOICE—Earnings Per Share—Conceptual
82. With respect to the computation of earnings per share, which of the following would be
most indicative of a simple capital structure?
a. Common stock, preferred stock, and convertible securities outstanding in lots of even
thousands
b. Earnings derived from one primary line of business
c. Ownership interest consisting solely of common stock
d. Ownership interest not consisting solely of common stock
83. In computing earnings per share for a simple capital structure, if the preferred stock is
cumulative, the amount that should be deducted as an adjustment to the numerator
(earnings) is the
a. preferred dividends in arrears.
b. preferred dividends in arrears times (one minus the income tax rate).
c. annual preferred dividend times (one minus the income tax rate).
d. annual preferred dividend
84. In computations of weighted average of shares outstanding, when a stock dividend or
stock split occurs, the additional shares are
a. weighted by the number of days outstanding.
b. weighted by the number of months outstanding.
c. considered outstanding at the beginning of the year.
d. considered outstanding at the beginning of the earliest year reported.
Dilutive Securities and Earnings per Share
16 – 27
85. What effect will the acquisition of treasury stock have on stockholders’ equity and
earnings per share, respectively?
a. Decrease and no effect
b. Increase and no effect
c. Decrease and increase
d. Increase and decrease
S86. Due to the importance of earnings per share information, it is required to be reported by all
Public Companies Nonpublic Companies
a. Yes Yes
b. Yes No
c. No No
d. No Yes
P87. A convertible bond issue should be included in the diluted earnings per share computation
as if the bonds had been converted into common stock, if the effect of its inclusion is
Dilutive Antidilutive
a. Yes Yes
b. Yes No
c. No Yes
d. No No
88. When computing diluted earnings per share, convertible bonds are
a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.
89. Dilutive convertible securities must be used in the computation of
a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. neither diluted nor basic earnings per share
90. In computing earnings per share, the equivalent number of shares of convertible preferred
stock are added as an adjustment to the denominator (number of shares outstanding). If
the preferred stock is cumulative, which amount should then be added as an adjustment
to the numerator (net earnings)?
a. Annual preferred dividend
b. Annual preferred dividend times (one minus the income tax rate)
c. Annual preferred dividend times the income tax rate
d. Annual preferred dividend divided by the income tax rate
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 28
91. In the diluted earnings per share computation, the treasury stock method is used for
options and warrants to reflect assumed reacquisition of common stock at the average
market price during the period. If the exercise price of the options or warrants exceeds the
average market price, the computation would
a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a
prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of shares
assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.
92. In applying the treasury stock method to determine the dilutive effect of stock options and
warrants, the proceeds assumed to be received upon exercise of the options and warrants
a. are used to calculate the number of common shares repurchased at the average
market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per
share.
c. are disregarded in the computation of earnings per share if the exercise price of the
options and warrants is less than the ending market price of common stock.
d. are not used to calculate the number of common shared repurchased at the average
market price, when computing diluted earnings per share
93. Antidilutive securities
a. should be included in the computation of diluted earnings per share but not basic
earnings per share.
b. are those whose inclusion in earnings per share computations would cause basic
earnings per share to exceed diluted earnings per share.
c. include stock options and warrants whose exercise price is less than the average
market price of common stock.
d. should be ignored in all earnings per share calculations.
*94. A company uses income from continuing operations to determine whether potential
common stock is dilutive or antidilutive, and this is referred to as
a. the control number.
b. the potential number.
c. dilutive information.
d. impact information.
*95. Assume there are two dilutive convertible securities. The one that should be used first to
recalculate earnings per share is the security with the
a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.
Dilutive Securities and Earnings per Share
16 – 29
Solution to Multiple Choice question for which the answer is “none of these.”
83. annual preferred dividend.
MULTIPLE CHOICE—Earnings Per Share—Computational
96. Hill Corp. had 600,000 shares of common stock outstanding on January 1, issued 900,000
shares on July 1, and had income applicable to common stock of $2,940,000 for the year
ending December 31, 2021. Earnings per share of common stock for 2021 would be
a. $4.90.
b. $2.32.
c. $2.80.
d. $3.28.
97. At December 31, 2021, Hancock Company had 500,000 shares of common stock issued
and outstanding, 400,000 of which had been issued and outstanding throughout the year
and 100,000 of which were issued on October 1, 2021. Net income for the year ended
December 31, 2021, was $1,700,000. What should be Hancock’s 2021 earnings per
common share, rounded to the nearest penny?
a. $36
b. $4.25
c. $4.00
d. $3.78
98. Milo Co. had 800,000 shares of common stock outstanding on January 1, issued 126,000
shares on May 1, purchased 63,000 shares of treasury stock on September 1, and issued
54,000 shares on November 1. The weighted average shares outstanding for the year is
a. 851,000.
b. 872,000.
c. 893,000.
d. 914,000.
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 30
99. On January 1, 2021, Gridley Corporation had 375,000 shares of its $2 par value common
stock outstanding. On March 1, Gridley sold an additional 750,000 shares on the open
market at $20 per share. Gridley issued a 20% stock dividend on May 1. On August 1,
Gridley purchased 420,000 shares and immediately retired the stock. On November 1,
600,000 shares were sold for $25 per share. What is the weighted-average number of
shares outstanding for 2021?
a. 1,530,000
b. 1,125,000
c. 716,665
d. 516,666
100. The following information is available for Barone Corporation:
January 1, 2021 Shares outstanding 4,000,000
April 1, 2021 Shares issued 640,000
July 1, 2021 Treasury shares purchased 240,000
October 1, 2021 Shares issued in a 100% stock dividend 4,400,000
The number of shares to be used in computing earnings per common share for 2021 is
a. 9,041,600.
b. 8,760,000.
c. 8,720,000.
d. 5,460,000.
101. At December 31, 2020 Rice Company had 300,000 shares of common stock and 10,000
shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were
declared on either the preferred or common stock in 2020 or 2021. On January 30, 2022,
prior to the issuance of its financial statements for the year ended December 31, 2021,
Rice declared a 100% stock dividend on its common stock. Net income for 2021 was
$1,140,000. In its 2021 financial statements, Rice’s 2021 earnings per common share
should be
a. $1.80.
b. $1.89.
c. $3.60.
d. $3.80.
102. Fultz Company had 300,000 shares of common stock issued and outstanding at
December 31, 2020. During 2021, no additional common stock was issued. On January 1,
2021, Fultz issued 400,000 shares of nonconvertible preferred stock. During 2021, Fultz
declared and paid $180,000 cash dividends on the common stock and $150,000 on the
nonconvertible preferred stock. Net income for the year ended December 31, 2021, was
$960,000. What should be Fultz‘s 2021 earnings per common share, rounded to the
nearest penny?
a. $1.15
b. $2.10
c. $2.70
d. $3.20
Dilutive Securities and Earnings per Share
16 – 31
103. At December 31, 2020 Pine Company had 200,000 shares of common stock and 10,000
shares of 6%, $100 par value cumulative preferred stock outstanding. No dividends were
declared on either the preferred or common stock in 2020 or 2021. On February 10, 2022,
prior to the issuance of its financial statements for the year ended December 31, 2021,
Pine declared a 100% stock dividend on its common stock. Net income for 2021 was
$960,000. In its 2021 financial statements, Pine’s 2021 earnings per common share
should be
a. $4.54.
b. $4.27.
c. $2.25.
d. $1.33.
104. Stine Inc. had 1,000,000 shares of common stock issued and outstanding at December
31, 2020. On July 1, 2021 an additional 1,000,000 shares were issued for cash. Stine also
had stock options outstanding at the beginning and end of 2021 which allow the holders to
purchase 300,000 shares of common stock at $28 per share. The average market price of
Stine’s common stock was $35 during 2021. The number of shares to be used in
computing diluted earnings per share for 2021 is
a. 2,240,000
b. 2,060,000
c. 1,740,000
d. 1,560,000
105. Kasravi Co. had net income for 2021 of $600,000. The average number of shares
outstanding for the period was 200,000 shares. The average number of shares under
outstanding options, at an option price of $30 per share is 12,000 shares. The average
market price of the common stock during the year was $36. What should Kasravi Co.
report for diluted earnings per share for the year ended 2021?
a. $3.00
b. $2.97
c. $2.86
d. $2.83
106. On January 2, 2021, Worth Co. issued at par $2,000,000 of 5% convertible bonds. Each
$1,000 bond is convertible into 10 shares of common stock. No bonds were converted
during 2021. Worth had 200,000 shares of common stock outstanding during 2021.
Worth’s 2021 net income was $900,000 and the income tax rate was 30%. Worth’s diluted
earnings per share for 2021 would be (rounded to the nearest penny):
a. $4.85.
b. $4.41.
c. $4.50
d. $4.55.
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 32
107. Beaty Inc. purchased Dunbar Co. and agreed to give stockholders of Dunbar Co. 10,000
additional shares in 2023 if Dunbar Co.’s net income in 2022 is $500,000; in 2021 Dunbar
Co.’s net income is $520,000. Beaty Inc. has net income for 2021 of $450,000 and has an
average number of common shares outstanding for 2021 of 100,000 shares. What should
Beaty report as diluted earnings per share for 2021?
a. $5.00
b. $4.50
c. $4.09
d. $3.76
108. Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred
stock, and $1,500,000 of 5% convertible bonds outstanding during 2021. The preferred
stock is convertible into 40,000 shares of common stock. During 2021, Hanson paid
dividends of $.90 per share on the common stock and $3 per share on the preferred
stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income
for 2021 was $600,000 and the income tax rate was 30%.
Basic earnings per share for 2021 is (rounded to the nearest penny)
a. $2.20.
b. $2.42.
c. $2.50.
d. $2.70.
109. Hanson Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred
stock, and $1,500,000 of 5% convertible bonds outstanding during 2021. The preferred
stock is convertible into 40,000 shares of common stock. During 2021, Hanson paid
dividends of $.90 per share on the common stock and $3 per share on the preferred
stock. Each $1,000 bond is convertible into 30 shares of common stock. The net income
for 2021 was $600,000 and the income tax rate was 30%.
Diluted earnings per share for 2021 is (rounded to the nearest penny)
a. $2.08.
b. $2.12.
c. $2.29.
d. $2.50.
110. Fugate Company had 1,500,000 shares of common stock issued and outstanding at
December 31, 2020. On July 1, 2021 an additional 1,250,000 shares were issued for
cash. Fugate also had stock options outstanding at the beginning and end of 2021 which
allow the holders to purchase 375,000 shares of common stock at $20 per share. The
average market price of Fugate‘s common stock was $25 during 2021. What is the
number of shares that should be used in computing diluted earnings per share for the year
ended December 31, 2021?
a. 2,825,000
b. 2,425,000
c. 2,218,750
d. 2,200,000
Dilutive Securities and Earnings per Share
16 – 33
111. Shipley Corporation had net income for the year of $720,000 and a weighted average
number of common shares outstanding during the period of 250,000 shares. The company has a
convertible bond issue outstanding. The bonds were issued four years ago at par ($3,000,000),
carry a 7% interest rate, and are convertible into 50,000 shares of common stock. The company
has a 40% tax rate. Diluted earnings per share are
a. $1.98
b. $2.68.
c. $2.82.
d. $3.10.
112. Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey Inc.
50,000 additional shares in 2023 if Massey Inc.’s net income in 2022 is $600,000 or more;
in 2021 Massey Inc.’s net income is $615,000. Colt has net income for 2021 of
$1,500,000 and has an average number of common shares outstanding for 2021 of
500,000 shares. What should Colt report as earnings per share for 2021?
Basic Earnings Diluted Earnings
Per Share Per Share
a. $3.00 $3.00
b. $2.73 $3.00
c. $3.00 $2.73
d. $2.73 $2.73
113. On January 2, 2021, Perez Co. issued at par $10,000 of 6% bonds convertible in total into
1,000 shares of Perez’s common stock. No bonds were converted during 2021.
Throughout 2021, Perez had 1,000 shares of common stock outstanding. Perez’s 2021
net income was $4,500, and its income tax rate is 30%. No potentially dilutive securities
other than the convertible bonds were outstanding during 2021. Perez’s diluted earnings
per share for 2021 would be (rounded to the nearest penny)
a. $2.25.
b. $2.46.
c. $2.55.
d. $4.92.
114. At December 31, 2020, Kifer Company had 800,000 shares of common stock outstanding.
On October 1, 2021, an additional 160,000 shares of common stock were issued. In
addition, Kifer had $10,000,000 of 5% convertible bonds outstanding at December 31,
2020, which are convertible into 360,000 shares of common stock. No bonds were
converted into common stock in 2021. The net income for the year ended December 31,
2021, was $2,500,000. Assuming the income tax rate was 30%, the diluted earnings per
share for the year ended December 31, 2021, should be (rounded to the nearest penny)
a. $3.39.
b. $2.50.
c. $2.38.
d. $2.08.
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 34
115. On January 2, 2021, Mize Co. issued at par $300,000 of 6% convertible bonds. Each
$1,000 bond is convertible into 60 shares. No bonds were converted during 2021. Mize
had 100,000 shares of common stock outstanding during 2021. Mize ‘s 2021 net income
was $160,000 and the income tax rate was 30%. Mize‘s diluted earnings per share for
2021 would be (rounded to the nearest penny)
a. $1.35.
b. $1.46.
c. $1.51.
d. $1.60.
116. At December 31, 2020, Sager Co. had 1,200,000 shares of common stock outstanding. In
addition, Sager had 450,000 shares of preferred stock which were convertible into
750,000 shares of common stock. During 2021, Sager paid $1,200,000 cash dividends on
the common stock and $800,000 cash dividends on the preferred stock. Net income for
2021 was $6,800,000 and the income tax rate was 40%. The diluted earnings per share
for 2021 is (rounded to the nearest penny)
a. $2.48.
b. $3.49.
c. $5.00.
d. $5.66.
117. Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred
stock, and $600,000 of 10% convertible bonds outstanding during 2021. The preferred
stock is convertible into 40,000 shares of common stock. During 2021, Lerner paid
dividends of $.55 per share on the common stock and $1.80 per share on the preferred
stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income
for 2021 was $360,000 and the income tax rate was 30%.
Basic earnings per share for 2021 is (rounded to the nearest penny)
a. $1.25.
b. $145.
c. $1.50.
d. $1.62.
118. Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred
stock, and $600,000 of 10% convertible bonds outstanding during 2021. The preferred
stock is convertible into 40,000 shares of common stock. During 2021, Lerner paid
dividends of $.55 per share on the common stock and $1.80 per share on the preferred
stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income
for 2021 was $360,000 and the income tax rate was 30%.
Diluted earnings per share for 2021 is (rounded to the nearest penny)
a. $1.35.
b. $1.39.
c. $1.51.
d. $1.57.
Dilutive Securities and Earnings per Share
16 – 35
119. Yoder, Incorporated, has 4,200,000 shares of common stock outstanding on
December 31, 2020. An additional 800,000 shares of common stock were issued on
April 1, 2021, and 400,000 more on July 1, 2021. On October 1, 2021, Yoder issued
20,000, $1,000 face value, 8% convertible bonds. Each bond is convertible into 20 shares
of common stock. No bonds were converted into common stock in 2021. What is the
number of shares to be used in computing basic earnings per share and diluted earnings
per share, respectively?
a. 5,000,000 and 5,000,000
b. 5,000,000 and 5,100,000
c. 5,000,000 and 5,400,000
d. 5,400,000 and 6,200,000
120. Nolte Co. has 4,800,000 shares of common stock outstanding on December 31, 2020. An
additional 200,000 shares are issued on April 1, 2021, and 480,000 more on September
1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is
convertible into 40 shares of common stock. No bonds have been converted. The number
of shares to be used in computing basic earnings per share and diluted earnings per
share on December 31, 2021 is
a. 5,110,000 and 5,110,000.
b. 5,110,000 and 5,170,000.
c. 5,110,000 and 3,050,000.
d. 5,880,000 and 5,320,000.
121. At December 31, 2020, Tatum Company had 2,000,000 shares of common stock
outstanding. On January 1, 2021, Tatum issued 500,000 shares of preferred stock which
were convertible into 1,000,000 shares of common stock. During 2021, Tatum declared
and paid $1,200,000 cash dividends on the common stock and $400,000 cash dividends
on the preferred stock. Net income for the year ended December 31, 2021, was
$5,000,000. Assuming an income tax rate of 30%, what should be diluted earnings per
share for the year ended December 31, 2021? (Round to the nearest penny.)
a. $1.50
b. $1.67
c. $2.50
d. $2.07
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 36
122. At December 31, 2020, Emley Company had 1,200,000 shares of common stock
outstanding. On October 1, 2021, an additional 400,000 shares of common stock were
issued. In addition, Emley had $14,000,000 of 6% convertible bonds outstanding at
December 31, 2020, which are convertible into 800,000 shares of common stock. No
bonds were converted into common stock in 2021. The net income for the year ended
December 31, 2021, was $5,250,000. Assuming the income tax rate was 30%, what
should be the diluted earnings per share for the year ended December 31, 2021, rounded
to the nearest penny?
a. $2.22
b. $2.89
c. $2.78
d. $4.02
123. Grimm Company has 2,900,000 shares of common stock outstanding on December 31,
2020. An additional 150,000 shares of common stock were issued on July 1, 2021, and
300,000 more on October 1, 2021. On April 1, 2021, Grimm issued 6,000, $1,000 face
value, 8% convertible bonds. Each bond is convertible into 40 shares of common stock.
No bonds were converted into common stock in 2021. What is the number of shares to be
used in computing basic earnings per share and diluted earnings per share, respectively,
for the year ended December 31, 2021?
a. 3,050,000 and 3,230,000
b. 3,050,000 and 3,050,000
c. 3,050,000 and 3,290,000
d. 3,350,000 and 3,530,000
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2021 2020
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
6% convertible bonds $2,400,000 $2,400,000
During 2021, Piper paid dividends of $0.80 per share on its common stock and $2.00 per share
on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock.
The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income
for the year ended December 31, 2021, was $400,000. Assume that the income tax rate was
30%.
124. What should be the basic earnings per share for the year ended December 31, 2021,
rounded to the nearest penny?
a. $1.67
b. $1.87
c. $2.47
d. $2.67
Dilutive Securities and Earnings per Share
16 – 37
Information concerning the capital structure of Piper Corporation is as follows:
December 31,
2021 2020
Common stock 150,000 shares 150,000 shares
Convertible preferred stock 15,000 shares 15,000 shares
6% convertible bonds $2,400,000 $2,400,000
During 2021, Piper paid dividends of $0.80 per share on its common stock and $2.00 per share
on its preferred stock. The preferred stock is convertible into 30,000 shares of common stock.
The 6% convertible bonds are convertible into 75,000 shares of common stock. The net income
for the year ended December 31, 2021, was $400,000. Assume that the income tax rate was
30%.
125. What should be the diluted earnings per share for the year ended December 31, 2021,
rounded to the nearest penny?
a. $2.09
b. $1.96
c. $1.78
d. $2.23
126. Warrants exercisable at $20 each to obtain 80,000 shares of common stock were
outstanding during a period when the average market price of the common stock was $25.
Application of the treasury stock method for the assumed exercise of these warrants in
computing diluted earnings per share will increase the weighted average number of
outstanding shares by
a. 80,000.
b. 64,000.
c. 16,000.
d. 20,000.
127. Terry Corporation had 800,000 shares of common stock outstanding at December 31,
2021. In addition, it had 150,000 stock options outstanding, which had been granted to
certain executives, and which gave them the right to purchase shares of Terry’s stock at
an option price of $37 per share. The average market price of Terry‘s common stock for
2021 was $50. What is the number of shares that should be used in computing diluted
earnings per share for the year ended December 31, 2021?
a. 800,000
b. 852,703
c. 911,000
d. 839,000
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 38
Multiple Choice Answers—Earnings Per Share—Computational
Dilutive Securities and Earnings per Share
16 – 39
MULTIPLE CHOICE—Earnings Per Share—CPA Adapted
128. Didde Co. had 300,000 shares of common stock issued and outstanding at December 31,
2020. No common stock was issued during 2021. On January 1, 2021, Didde issued
200,000 shares of nonconvertible preferred stock. During 2021, Didde declared and paid
$100,000 cash dividends on the common stock and $80,000 on the preferred stock. Net
income for the year ended December 31, 2021 was $620,000. What should be Didde’s
2021 earnings per common share?
a. $2.07
b. $1.80
c. $1.73
d. $1.47
129. At December 31, 2021 and 2020, Miley Corp. had 180,000 shares of common stock and
12,000 shares of 6%, $100 par value cumulative preferred stock outstanding. No
dividends were declared on either the preferred or common stock in 2021 or 2020. Net
income for 2021 was $450,000. For 2021, earnings per common share amounted to
a. $2.49.
b. $2.10.
c. $1.83.
d. $1.70.
130. Marsh Co. had 2,400,000 shares of common stock outstanding on January 1 and
December 31, 2021. In connection with the acquisition of a subsidiary company in June
2020, Marsh is required to issue 100,000 additional shares of its common stock on July 1,
2022, to the former owners of the subsidiary. Marsh paid $200,000 in preferred stock
dividends in 2021, and reported net income of $3,400,000 for the year. Marsh‘s diluted
earnings per share for 2021 should be
a. $1.42.
b. $1.36.
c. $1.34.
d. $1.28.
131. Foyle, Inc., had 830,000 shares of common stock issued and outstanding at December 31,
2020. On July 1, 2021, an additional 40,000 shares of common stock were issued for
cash. Foyle also had unexercised stock options to purchase 32,000 shares of common
stock at $15 per share outstanding at the beginning and end of 2021. The average market
price of Foyle’s common stock was $20 during 2021. What is the number of shares that
should be used in computing diluted earnings per share for the year ended
December 31, 2021?
a. 850,000
b. 858,000
c. 878,000
d. 882,000
Test Bank for Intermediate Accounting, Seventeenth Edition
16 – 40
132. When computing diluted earnings per share, convertible securities are
a. ignored.
b. recognized only if they are dilutive.
c. recognized only if they are antidilutive.
d. recognized whether they are dilutive or antidilutive.
133. In determining diluted earnings per share, dividends on nonconvertible cumulative
preferred stock should be
a. disregarded.
b. added back to net income whether declared or not.
c. deducted from net income only if declared.
d. deducted from net income whether declared or not.
134. The if-converted method of computing earnings per share data assumes conversion of
convertible securities as of the
a. beginning of the earliest period reported (or at time of issuance, if later).
b. beginning of the earliest period reported (regardless of time of issuance).
c. middle of the earliest period reported (regardless of time of issuance).
d. ending of the earliest period reported (regardless of time of issuance).
Multiple Choice Answers—Earnings Per Share—CPA Adapted