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Case 19–2 (concluded)
Writing (20%)
5 Terminology and tone appropriate to the audience of controller.
6 Organization permits ease of understanding.
19–82 Intermediate Accounting, 8/e
Ethics Case 19–3
Discussion should include these elements:
Facts:
The choice of method will affect earnings. FIFO will increase reported net
income.
Ethical Dilemma:
Is the auditor’s obligation to challenge the questionable change in methods
greater than the obligation to the financial interests of the CPA firm and its
client?
Who is affected?
You, the auditor
Managers
CPA firm (lost fees? reputation? legal action?)
Trueblood Accounting Case 19–4
A solution and extensive discussion materials accompany each case in the Deloitte &
Real World Case 19–5
Requirement 1
Whether an incentive plan is a stock option plan, a stock award plan, a
performance award plan, or one of the various similar plans, the intention is to provide
Requirement 2
The $378 million Walmart reported as share-based expense in 2013 includes,
among amounts for other forms of share-based compensation, that period’s portion of
19–84 Intermediate Accounting, 8/e
Analysis Case 19–6
Requirement 1
The total compensation is measured as:
$15.62* weighted average fair value per option
x 609,000* options granted
= $9,512,580 fair value of awards
Requirement 2
Restricted stock awards cliff vest after the requisite service period, which is four
years for restricted stock awards and one year for restricted stock awarded to
Real World Case 19–7
PetSmart’s disclosure notes for the year ending February 2, 2014, included the
following:
Employee Stock Purchase Plan (in part). We have an Employee Stock Purchase Plan, or
Share purchases and proceeds were as follows (in thousands):
Year Ended
February 2,
2014
February 3,
2013
January 29,
2012
(52 weeks)
(53 weeks)
(52 weeks)
Employee share purchase plans allow employees to buy company stock under
convenient or favorable terms. Most such plans are considered compensatory and
require the fair value of any discount to be recorded as compensation expense.
PetSmart’s employee purchases during the year ending February 2, 2014, can be
summarized as follows:
($ in 000s)
19–86 Intermediate Accounting, 8/e
Ethics Case 19–8
Discussion should include these elements.
Effect of share repurchase on EPS.
Reducing the number of shares will increase earnings per share. That impact
Ethical Dilemma:
Apparently, a more productive use for available funds will be offered by
Who is affected?
Mashburn
Lane
Creditors
Real World Case 19–9
Requirement 1
The note indicates that that Best Buy does not include potentially dilutive shares
of common stock when calculating EPS for the twelve months ended March 3, 2012.
incorporates the dilutive effect of all potential common shares.
Requirement 2
Best Buy’s diluted earnings per share assumes the conversion of the company's
previously outstanding convertible bonds into 8.8 million shares common stock and
adds back the related after-tax interest expense of $1.5 million. Apparently, these
We still would assume conversion for the period before actual conversion
because they were potentially dilutive during that period. The 8.8 million shares
19–88 Intermediate Accounting, 8/e
Case 19–9 (concluded)
Requirement 3
Best Buy does not include potentially dilutive shares when calculating EPS for
the twelve months ended March 3, 2012. Whenever a company reports a net loss, as
Best Buy did, it reports a loss per share. In that situation, stock options or restricted
Analysis Case 19–10
Requirement 1
When calculating basic earnings per share, the numerator in the computation is
the earnings available to common shareholders. This will be net income reduced by
Requirement 2
When calculating basic earnings per share, the denominator in the computation is
the weighted-average number of common shares outstanding during 2014. Thus, the 8
million shares outstanding at January l, 2014, plus a portion of the shares sold will
Requirement 3
When calculating diluted earnings per share, the numerator in the computation is
the earnings available to common shareholders. Proactive will not reduce net income
19–90 Intermediate Accounting, 8/e
Case 19–10 (continued)
Requirement 4
When calculating diluted earnings per share, the denominator in the computation
is the weighted-average number of common shares outstanding during the reporting
period. But since potential common shares exist in a complex capital structure, as in
this situation, the calculation of the denominator becomes more involved.
We begin by determining the weighted-average of the number of common shares
outstanding only for the six months of 2014.
For diluted EPS, two adjustments are needed to the denominator. First, we treat
the convertible preferred stock as if the preferred shares were converted and 4 million
additional common shares were outstanding, unless including these shares in the
denominator would increase earnings per share (be antidilutive). As noted in
Requirement 2, this means also that we would not reduce the numerator for the
preferred dividends as we would do if the preferred shares were assumed still
outstanding.
Second, we treat the stock options outstanding under the employee stock option
Case 19–10 (concluded)
The options outstanding for only part of the reporting period are included in the
denominator on a time-weighted basis. For the 1.5 million options granted during the
year, the denominator would include the appropriate incremental shares (determined
by the treasury stock method) times the appropriate time-weighting fraction for the
19–92 Intermediate Accounting, 8/e
Analysis Case 19–11
Requirement 1
Earnings per share is a way to summarize the performance of business
enterprises into a single number. It is simply earnings expressed on a per share
Requirement 2
When calculating earnings per share, shares outstanding prior to a stock split (or
stock dividend) are retroactively restated to reflect the increase in shares. That is, it
Requirement 3
If the number of shares changes, it’s necessary to find the weighted-average of
the shares outstanding during the period the earnings were generated. If shares are
Judgment Case 19–12
Although net income declined during the period, a combination of events caused
EPS to increase in spite of declining profits. Specifically, retiring the preferred shares
2014
net preferred Basic
income dividends EPS
$145 – $16* $129
——————————————————— = —— = $2.15
60 60
shares
at Jan. 1
