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P15-12. Calculating EPS when the capital structure is complex (LO
15-6)
Requirement 1:
The preferred stock pays a 10% dividend ($500,000), so there
must be $5 million of preferred stock outstanding. Since each
each $100 par value preferred share must convert into 4 shares of
common.
Requirement 2:
The after-tax interest on the Series B debt was $300,000. Since
this equals gross interest divided by one minus the 40% tax rate,
convert into 40 common shares (200,000 shares/5,000
certificates).
Requirement 3:
The after-tax interest on the $5 million of Series A debt was
common stock at 50 shares per certificate.
Requirement 4:
Under the treasury stock method, the proceeds received from
exercising stock options are used to buy back shares on the open
share ($1 million/16,666 shares).
Requirement 5:
One reason Series A debt carries a lower interest rate (8%) than
certificates.
P15-13. Analyzing shareholders’ equity (LO 15-1, LO 15-5)
(AICPA adapted)
Requirement 1: Statement of retained earnings
Trask Corp.
Statement of Retained Earnings
For the Year Ended December 31, 2017
Balance, December 31, 2016, as originally reported
Net Income 2,400,000
Balance, December 31, 2017
$17,400,000
Requirement 2: Shareholder’ equity section
Trask Corp.
Shareholders’ Equity Section of Balance Sheet
December 31, 2017
Preferred stock, $100 par value, 6% cumulative;
[4]
Retained earnings 17 ,400,000
47,875,000
[2] Property dividend issued
Fair value of Harbor stock distributed
(15,000 shares @ $60) $900 ,000
Amount of common shares issued
Amount of common shares issued, 12/31/16 $7,875,000
x $5 ($10 cost–$5 par value)] (125,000)
Amount received upon issuance of common
Total amount of additional paid-in capital $16 ,975,000
*Additional paid-in capital includes $300,000 related to stock
paid-in capital, but this transfer does not affect the net amount of
Additional paid-in capital.
Requirement 3: Computation of book value per share
Total stockholders’ equity $47,375,000
$25.68
P15-14. Stockholders’ equity (LO 15-1, LO 15-3, LO 15-5)
Part A:
Requirement 1:
There are 300,000 shares of preferred stock outstanding. The par
Requirement 2:
The journal entry to record the sale of 10,000 shares of preferred
CR Additional paid-in capital
240,000
Requirement 3:
The journal entry to record the $0.10 annual dividend on the
$1,000
Requirement 4:
There were 98.1 million shares of Class A common shares
Requirement 5:
“Authorized” shares is the upper limit on the number of shares that
can be sold (issued) and is set by the company’s board of
company, they are “treasury” shares.
Requirement 6:
Some companies issue two classes of stock to separate voting
Requirement 7:
According to the cash flow statement, new shares were issued
Part B:
The schedule below shows the calculations.
Common Common Additional Total
Shares Stock $0.01 Paid-In Retained
Stockholders’
Issued Par Value Capital Earnings
Equity
Balance at May 31, Year 3: 14,750,000 $147,500 $2,282,000
49,589,000
Dividends paid (240,830,000)
(240,830,000)
50,059,000
Dividends paid (14,080,000)
(14,080,000)
would be $0.01 per share or $172,500.
P15-15. Computing basic and diluted EPS (LO 15-6)
Requirement 1. Basic EPS
Weighted average of outstanding shares
Portion
Date Transaction Change Outstanding of Year Weighted
204,16
Basic denominator 339,583
Requirement 2. Diluted
339,5
P15-16. Computing basic and diluted EPS (LO 15-6)
Requirement 1: Basic EPS
Weighted average of outstanding shares
Portion
Date Transaction Change O/S of Year Weighted
1/1/2017 Beginning 257,000 0.75 192,750
(32,000
Requirement 2: Diluted EPS
Basic Interest
825,000
65,00
0a =
890,00
0
249,000
30,00
0a
77,500b
356,50
0
Basic Bonds Options
= 2.50
aBonds
Numerator
bOptions
Outstanding
125,00
0
Additional shares
77,50
0
P15-17. Stock option accounting (LO 15-7, LO 15-8)
Requirement 1 - Pretax journal entries
To record annual expense
July 1, 2019
DR Add'l paid-in capital - options 1,600,000
Requirement 2 - Tax journal entries
31-Dec 2017 2018
DR DIT Asset (0.35 x 800,000) 280,000 280,000
DR Income tax expense - deferred
560,000
CR DIT Asset 560,000
Permanent difference ,500,000) 35% (525,000)
Requirement 3: Effect on income tax expense and effective tax rate
Income tax expense-deferred 560,000
(1,085,000
As shown above, the exercise will reduce income tax expense, which will reduce the
Darth’s effective tax rate below the 35% statutory rate.
Requirement 4: Presentation in statement of cash flows
P15-18. Stock option accounting (LO 15-7, LO 15-8)
Requirement 1 - Journal entries from 2017 to 2019
Tax rate 35%
Requirement 2 - Journal entries at exercise
Additional PIC - Options DIT Asset
166,667 58,333
1/2/2021 375,000 131,250
1/2/2021 125,000 43,750
Intrinsic value at 1/2/2021 [30,000 x ($26-$10)] 480,000
To record exercise
Pretax Tax rate Tax savings
GAAP Compensation 375,000 35% 131,250 DIT asset
Requirement 3 - Journal entries at exercise
Income tax expense-deferred 131,250
the reduction in income tax expense will reduce the effective rate below the 35% statutory
rate.
