80) During 2018, Falwell Inc. had 500,000 shares of common stock and 50,000 shares of 6%
cumulative preferred stock outstanding. The preferred stock has a par value of $100 per share.
Falwell did not declare or pay any dividends during 2018.
Falwell’s net income for the year ended December 31, 2018, was $2.5 million. The income tax
rate is 40%. Falwell granted 10,000 stock options to its executives on January 1 of this year.
Each option gives its holder the right to buy 20 shares of common stock at an exercise price of
$29 per share. The options vest after one year. The market price of the common stock averaged
$30 per share during 2018.
What is Falwell’s diluted earnings per share for 2018, rounded to the nearest cent?
A) $3.14.
B) $4.90.
C) $4.34.
D) Cannot determine from the given information.
81) On December 31, 2017, Beta Company had 300,000 shares of common stock issued and
outstanding. Beta issued a 5% stock dividend on June 30, 2018. On September 30, 2018, 40,000
shares of common stock were reacquired as treasury stock. What is the appropriate number of
shares to be used in the basic earnings per share computation for 2018?
A) 315,000.
B) 307,500.
C) 305,000.
D) 267,500.
82) On December 31, 2017, the Bennett Company had 100,000 shares of common stock issued
and outstanding. On July 1, 2018, the company sold 20,000 additional shares for cash. Bennett’s
net income for the year ended December 31, 2018, was $650,000. During 2018, Bennett
declared and paid $89,000 in cash dividends on its nonconvertible preferred stock. What is the
2018 basic earnings per share?
A) $5.91.
B) $5.61.
C) $5.10.
D) None of these answer choices are correct.
83) Getaway Travel Company reported net income for 2018 in the amount of $50,000. During
2018, Getaway declared and paid $2,000 in cash dividends on its nonconvertible preferred
stock. Getaway also paid $10,000 cash dividends on its common stock. Getaway had 40,000
common shares outstanding from January 1 until 10,000 new shares were sold for cash on July
1, 2018. A 2-for-1 stock split was granted on July 5, 2018. What is the 2018 basic earnings per
share (rounded)?
A) $.42.
B) $.47.
C) $.53.
D) $.56.
84) Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2018. On
April 1, 2018, the company issued 20,000 shares of common stock. The company had
outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not
been exercised by its executives. The average market price of common stock for the year was
$12. What number of shares of stock (rounded) should be used in computing diluted earnings
per share?
A) 65,000.
B) 56,667.
C) 55,000.
D) 46,667.
85) Blue Cab Company had 50,000 shares of common stock outstanding on January 1, 2018. On
April 1, 2018, the company issued 20,000 shares of common stock. The company had
outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not
been exercised by its executives. The end-of-year market price of common stock was $13 while
the average price for the year was $12. The company reported net income in the amount of
$269,915 for 2018. What is the diluted earnings per share (rounded)?
A) $3.60.
B) $4.10.
C) $4.50.
D) $3.81.
86) Purple Cab Company had 50,000 shares of common stock outstanding on January 1, 2018.
On April 1, 2018, the company issued 20,000 shares of common stock. The company had
outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not
been exercised by its executives. The average market price of common stock was $12. The
company reported net income in the amount of $269,915 for 2018. What is the basic earnings
per share (rounded)?
A) $4.10.
B) $3.86.
C) $3.60.
D) $4.15.
87) Burnet Company had 30,000 shares of common stock outstanding on January 1, 2018. On
April 1, 2018, the company issued 15,000 shares of common stock. The company had
outstanding fully vested incentive stock options for 5,000 shares exercisable at $10 that had not
been exercised by its executives. The average market price of common stock was $9. The
company reported net income in the amount of $189,374 for 2018. What is the effect of the
options?
A) The options are antidilutive.
B) The options will dilute EPS by $.09 per share.
C) The options will dilute EPS by $.33 per share.
D) The options will dilute EPS by $.17 per share.
88) Dulce Corporation had 200,000 shares of common stock outstanding during the current
year. There were also fully vested options for 10,000 shares of common stock were granted with
an exercise price of $20. The market price of the common stock averaged $25 for the year. Net
income was $4 million. What is diluted EPS (rounded)?
A) $20.00.
B) $19.80.
C) $19.23.
D) $18.18.
89) Cracker Company had 2 million shares of common stock outstanding all through 2017. On
April 1, 2018, an additional 100,000 shares were sold and issued. On September 30, 2018,
Cracker declared a 2-for-1 stock split. Net income in 2018 and 2017 was $10 million and $8
million, respectively. In the 2018 comparative financial statements, EPS (rounded) would be
reported as follows:
2018 EPS
2017 EPS
a.
$
2.41
$
2.00
b.
$
2.41
$
4.00
c.
$
4.82
$
4.00
d.
$
4.82
$
4.00
A) Option A
B) Option B
C) Option C
D) Option D
90) Dublin Inc. had the following common stock record during the current calendar year:
Outstanding-beginning of year
2,000,000
Additional shares issued 6/30
100,000
Additional shares issued 9/30
100,000
A 10% stock dividend was paid on December 1. What is the number of shares to be used in
computing basic EPS?
A) 2,075,000.
B) 2,282,500.
C) 2,475,000.
D) 2,620,000.
91) Morrison Corporation had the following common stock record during the current calendar
year:
Outstanding-January 1
2,000,000
Additional shares issued 3/31
100,000
Distributed a 10% stock dividend on 6/30
Additional shares issued 9/30
100,000
What is the number of shares to be used in computing basic EPS?
A) 2,000,000.
B) 2,205,000.
C) 2,307,500.
D) 2,335,000.
92) Gear Corporation had the following common stock record during the current calendar year:
Outstanding-January 1
100,000
Additional shares issued 3/31
5,000,000
Distributed a 10% stock dividend on 6/30
Shares reacquired 9/30
100,000
What is the number of shares to be used in computing basic EPS?
A) 5,500,000.
B) 4,210,000.
C) 5,303,750.
D) 5,050,000.
93) When computing earnings per share, noncumulative preferred dividends not declared should
be:
A) Ignored.
B) Deducted from earnings for the year.
C) Added to earnings for the year.
D) Deducted, net of tax effect, from earnings for the year.
94) A company has cumulative preferred stock. When computing earnings per share, the current
year’s dividends not declared on the preferred stock should be:
A) Deducted from earnings for the year.
B) Deducted, net of tax effect, from earnings for the year.
C) Added to earnings for the year.
D) Ignored.
95) At December 31, 2018 and 2017, G Co. had 50,000 shares of common stock and 5,000
shares of 5%, $100 par value cumulative preferred stock outstanding. No dividends were
declared on either the preferred or common stock in 2018 or 2017. Net income for 2018 was
$500,000. For 2018, basic earnings per common share amounted to:
A) $5.00.
B) $9.50.
C) $9.00.
D) $10.00.
96) Preferred dividends are subtracted from earnings when computing basic earnings per share
whether or not the dividends are declared or paid if the preferred stock is:
A) Callable.
B) Convertible.
C) Participating.
D) Cumulative.
97) Preferred dividends would not be subtracted from earnings when computing basic earnings
per share in a year when the dividends are not declared if the preferred stock is:
A) Noncumulative.
B) Convertible.
C) Participating.
D) Cumulative.
98) At December 31, 2018, Hansen Corporation had 50,000 shares of common stock and 5,000
shares of 6%, $100 par cumulative preferred stock outstanding. No dividends were declared or
paid in 2018. Net income was reported as $200,000. What is basic EPS?
A) $4.00.
B) $3.40.
C) $3.64.
D) $4.02.
99) Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100
par convertible preferred stock outstanding during the year. Net income for the year was
$400,000 and dividends were paid to both common and preferred shareholders. Rudyard’s
effective tax rate is 40%.
What is Rudyard’s basic EPS?
A) $2.13.
B) $4.80.
C) $4.00.
D) $3.20.
100) Rudyard Corporation had 100,000 shares of common stock and 10,000 shares of 8%, $100
par convertible preferred stock outstanding during the year. Net income for the year was
$400,000 and dividends were paid to both common and preferred shareholders. Rudyard’s
effective tax rate is 40%.
Each share of preferred stock is convertible into five shares of common stock. What is Rudyard’s
diluted EPS (rounded)?
A) $2.13.
B) $2.67.
C) $3.20.
D) $4.80.
101) On January 1, 2018, Hage Corporation granted incentive stock options to purchase 18,000
of its common shares at $7 each. The options are exercisable after one year. The market price of
common averaged $9 per share during the quarter ending on March 31, 2018. There was no
change in the 100,000 shares of outstanding common stock during the quarter ended March 31,
2018. Net income for the quarter was $8,268. The number of shares to be used in computing
diluted earnings per share for the quarter is:
A) 100,000.
B) 104,000.
C) 106,000.
D) 118,000.
102) On January 2, 2018, L Co. issued at face value $20,000 of 4% bonds convertible in total
into 1,000 shares of L’s common stock. No bonds were converted during 2018.
Throughout 2018, L had 1,000 shares of common stock outstanding. L’s 2018 net income was
$2,000. L’s income tax rate is 50%.
No potential common shares other than the convertible bonds were outstanding during 2018.
L’s diluted earnings per share for 2018 would be:
A) $1.00.
B) $1.20.
C) $1.40.
D) $2.00.
103) During 2018, M Co. had the following two classes of stock issued and outstanding for the
entire year:
• 400,000 shares of common stock, $1 par.
• 2,000 shares of 4% preferred stock, $100 par, convertible share-for-share into common stock.
M’s 2018 net income was $1,800,000, and its income tax rate for the year was 30%. In the
computation of diluted earnings per share for 2018, the amount to be used in the numerator is:
A) $1,792,000.
B) $1,796,000.
C) $1,800,000.
D) $1,802,400.
104) When we assume conversion of convertible bonds, the numerator is increased by:
A) The amount of after-tax interest.
B) The gross amount of interest.
C) The weighted-average interest.
D) The amount of cash paid during the current year for interest.
105) When we take into account the dilutive effect of convertible securities in the calculation of
EPS, the method used is called the:
A) Treasury stock method.
B) If converted method.
C) Optional method.
D) Dilution method.
106) Contingently issuable shares may be included in:
A) Basic EPS.
B) Diluted EPS.
C) Basic EPS and Diluted EPS.
D) None of these answer choices are correct.
107) If convertible bonds were issued at a discount, when computing diluted EPS, the
amortization of the bond discount:
A) Will have no effect.
B) Will decrease the numerator.
C) Will increase the numerator.
D) May increase or decrease the numerator, depending on the amortization method used.
108) XYZ paid $10,000 in dividends in January of the current year to its preferred shareholders.
The preferred stock is nonconvertible and noncumulative. The dividend:
A) Will be added to the denominator of the earnings per share fraction for the current year.
B) Will be added to the numerator of the earnings per share fraction for the current year.
C) Will be subtracted from the numerator of the earnings per share fraction for the current year.
D) May not affect earnings per share depending on the declaration date.
109) During the current year, East Corporation had 2 million shares of common stock
outstanding. Two thousand 8% convertible bonds, each with $1,000 face value, were issued at
face amount at the beginning of the year. East reported income before tax of $3 million and net
income of $1.8 million for the year. Each bond is convertible into 10 shares of common stock.
What is diluted EPS (rounded)?
A) $0.90.
B) $0.95.
C) $0.89.
D) $0.94.
110) During the current year, High Corporation had 3 million shares of common stock
outstanding. Five thousand $1,000, 6% convertible bonds were issued at face amount at the
beginning of the year. High reported income before tax of $4 million and net income of $2.4
million for the year. Each bond is convertible into 10 shares of common. What is diluted EPS
(rounded)?
A) $0.85.
B) $0.86.
C) $0.80.
D) $0.79.
111) Ignatius Corporation had 7 million shares of common stock outstanding during the current
calendar year. It issued ten thousand $1,000, convertible bonds on January 1. Each bond is
convertible into 50 shares of common stock. The bonds were issued at face amount and pay
interest semiannually at an annual rate of 10%. On June 30, Ignatius issued 100,000 shares of
$100 par 6% cumulative preferred stock. Dividends are declared and paid quarterly. Ignatius has
an effective tax rate of 40%. Ignatius would report the following EPS data (rounded) on its net
income of $20 million:
Basic EPS
Diluted EPS
a.
$
2.77
$
2.67
b.
$
2.81
$
2.71
c.
$
2.85
$
2.67
d.
$
2.81
$
2.68
A) Option A
B) Option B
C) Option C
D) Option D
112) Jet Corporation had 8 million shares of common stock outstanding during the current
calendar year. On July 1, Jet issued ten thousand $1,000 face value, convertible bonds. Each
bond is convertible into 50 shares of common stock. The bonds were issued at face amount and
pay interest semiannuallly for 20 years. They have a stated rate of 12%. Jet had income before
tax of $30 million and a net income of $18 million. Jet would report the following EPS data
(rounded):
Basic EPS
Diluted EPS
a.
$
2.25
$
2.23
b.
$
2.25
n/a antidilutive
c.
$
2.25
$
2.16
d.
$
2.25
$
2.12
A) Option A
B) Option B
C) Option C
D) Option D
=
$2.25
8,000,000
113) Horrocks Company granted 180,000 restricted stock awards of its no par common shares to
executives, subject to forfeiture if employment is terminated within three years. Horrocks’
common shares have a market price of $10 per share on January 1, 2017, the grant date, and at
December 31, 2018, averaging $10 throughout the year. When calculating diluted EPS at
December 31, 2018, the net increase in the denominator of the EPS fraction will be:
A) 0 shares.
B) 60,000 shares.
C) 120,000 shares.
D) 180,000 shares.
114) The single accounting number in the annual report that receives the most attention by
investors is:
A) Total revenue.
B) Book value per share.
C) Equity per share.
D) Earnings per share.