CHAPTER 16
Dilutive Securities and Earnings Per Share
SOLUTIONS TO B PROBLEMS
PROBLEM 16-1B
(a) 1. Memo Entry (memo entry made to indicate the number of rights
issued).
2. Cash ………………………………………………………… 1,060,000
Discount on Bonds Payable* …………………….. 30,000
Bonds Payable ………………………………….. 1,000,000
Paid-in Capital—Stock Warrants** ………. 90,000
3. Cash* ………………………………………………………. 892,500
Common Stock (42,500 X $1) ……………… 42,500
4. Cash* ………………………………………………………. 22,800
Paid-in Capital—Stock Warrants
PROBLEM 16-1B (Continued)
6. For options exercised:
Cash (105,000 X $27) ………………………………… 2,835,000
For options lapsed:
Paid-in Capital—Stock Options…………………. 52,000
Compensation Expense …………………….. 52,000
(Note to instructor: This entry provides an opportunity to indicate that
a credit to Compensation Expense occurs when the employee fails to
(b) Stockholders’ Equity:
Paid-in Capital:
Common Stock, $1 par value, authorized
5,000,000 shares, 948,700 shares
PROBLEM 16-1B (Continued)
Calculations:
Common Stock
Paid-in Capital
in Excess of Par
At beginning of year …………………..
800,000 shares
$16,100,000
From stock rights (entry #3) ……….
From stock warrants (entry #4) …..
Total …………………………………..
948,700 shares
PROBLEM 16-2B
(a) Entries at October 1, 2015
Bonds Payable ………………………………………………… 600,000
Discount on Bonds Payable (Schedule 1) …… 10,800
Common Stock (15 X 600 X $1) ………………….. 9,000
Interest Payable ………………………………………………. 9,000
Cash ($600,000 X 6% X 3/12) ……………………… 9,000
(b) Entries at October 31, 2015
Interest Expense ……………………………………………… 1,760
Discount on Bonds Payable (Schedule 1) ….. 1,760
(To record amortization of one month’s
discount on $2,250,000 of bonds)
PROBLEM 16-2B (Continued)
Schedule 1
Monthly Amortization Schedule
Unamortized discount on bonds payable:
Amount to be amortized over 60 months …………………………..……. $120,000
Amount of monthly amortization ($120,000 ÷ 60) …………………….. $ 2,000
Schedule 2
Interest Expense Schedule
Amortization of bond discount charged to bond interest expense in 2015 would
be as follows:
Interest on Bonds:
6% on $5,000,000 …………………………………………………………………… $300,000
Total interest
Amortization of discount ……………… $ 23,280
Cash interest paid ……………………….. 291,000
Bond interest expense ………………… $314,280
PROBLEM 16-3B
2013 No journal entry would be recorded at the time the stock option plan
2014 January 2
No entry
December 31
options at $3.20)
2015 December 31
Compensation Expense …………………………….. 131,200
Paid-in Capital—Stock Options …………… 131,200
(To record compensation expense
2016 December 31
Cash (41,000 X $26) …………………………………… 1,066,000
Paid-in Capital—Stock Options
(41,000 X $3.20) ………………………………………. 131,200
PROBLEM 16-4B
(a) 1/1/14 No entry
12/31/14 Compensation Expense ($2 X 75,000 ÷ 4) …. 37,500
Paid-in Capital—Stock Options ………… 37,500
(c) No change for part (a), unless the fair value of the options change.
For part (b):
PROBLEM 16-5B
The computation of Detroit Industries’ basic earnings per share and the
diluted earnings per share for the fiscal year ended March 31, 2014, are shown
below.
1Preferred dividend = 0.05 X $5,000,000 = $250,000
(b)
Diluted earnings per share
=
Net income – Preferred dividends +
Interest (net of tax)
Average common shares + Potentially
dilutive common shares
2Use “if converted” method for 4% bonds
Adjustment for interest expense (net of tax)
($8,000,000 X 0.04 X 0.70) ………………………………… $224,000
PROBLEM 16-5B (Continued)
4Use treasury stock method to determine incremental
shares outstanding
PROBLEM 16-6B
(a) Orlando Corporation has a simple capital structure since it does not have
any potentially dilutive securities.
(b) The weighted-average number of shares that Orlando Corporation would
use in calculating earnings per share for the fiscal years ended August
31, 2014, and August 31, 2015, is 2,530,000 and 3,040,000 respectively,
calculated as follows:
Event
Dates
Outstanding
Shares
Outstanding
Restatement
Fraction
of Year
Weighted
Shares
Beginning balance
Sep. 1–Dec. 1
New Issue
Stock Dividend
Jan. 1-Aug. 31
1,760,000
2,530,000
Event
Dates
Outstanding
Shares
Outstanding
Restatement
Fraction
of Year
Weighted
Shares
Beginning balance
Sep 1–Mar. 1
1,320,000
New Issue
3,040,000
(c) ORLANDO CORPORATION
Comparative Income Statement
For Fiscal Years Ended August 31, 2014 and 2015
2014
2015
Income from operations ……………………………………
$1,250,000
$1,800,000
Interest expense1 ……………………………………………..
180,000
180,000
Income taxes at 40% …………………………..…………….
428,000
648,000
Income before extraordinary item ………………………
taxes of $160,000 …………………………………………..
Net income ……………………………………………………….
$ 642,000
$ 732,000
Earnings per share:
Income before extraordinary loss ……………….
$0.152
$0.243
Extraordinary loss ……………………………………..
Net income ………………………………………………..
$0.15
$0.165
PROBLEM 16-6B (Continued)
=
3,040,000
=
=
=
*Preferred dividends = (No. of Shares X Par Value X Dividend %)
= (50,000 X $100 X 0.05)
= $250,000,000 per year
5Earnings per share
=
Net Income – Preferred Dividends
Weighted-Average Common Shares
=
$732,000 – $240,000
3,040,000
=
$0.16
PROBLEM 16-7B
(a) The number of shares used to compute basic earnings per share is
10,847,500, as calculated below.
Event
Dates
Outstanding
Shares
Outstanding
Restatement
Fractio
n
of Year
Weighted
Shares
Beginning Balance,
including 2 for 1
stock split
Jan. 1–Apr. 1
9,000,000
1.1
3/12
2,475,000
9,500,000
1.1
3/12
Conversion of
Oct. 1–Nov. 1
11,550,000
1/12
Purchase of Treasury
(b) The number of shares used to compute diluted earnings per share is
5,791,000, as shown below.
Number of shares to compute
basic earnings per share …………………………... 10,847,500
(c) The adjusted net income to be used as the numerator in the basic earnings
per share calculation for the year ended December 31, 2015, is $6,090,000, as
computed below.
After-tax net income …………………………..……….. $6,890,000
PROBLEM 16-8B
(a)
Basic EPS
=
$8,670,000 – ($2,500,000 X 0.04)
9,500,000
=
$0.90 per share
=
=
=
b$5,000,000 X 0.06 X (1 – 0.40)
cMarket price – Option price
X Number of options = incremental shares
Market price
PROBLEM 16-9B
(a)
Weighted-Average Shares
Before Stock
Dividend
After Stock
Dividend
Total as of November 1, 2013
2,000,000
2,300,000
Issue of February 1, 2014
600,000
690,000
Total as of October 31, 2015
2,990,000
2,990,000 X 9/12 =
2,242,500
Total
2,817,500
2,990,000
(b) PRAWNER CORPORATION
Comparative Income Statement
For the Years Ended October 31, 2015 and 2014
2015
2014
Income from operations before income taxes …..
$3,750,000
$3,200,000
Income taxes ………………………………………………….
1,500,000
1,280,000
Income before extraordinary item ……………………
2,250,000
1,920,000
Net income …………………………………………………….
$1,560,000
Per share of common stock
Income before extraordinary item …………………
Extraordinary loss, net of tax ……………………….
Net income …………………………………………………….
PROBLEM 16-9B (Continued)
EPS calculations =
Net income – Preferred dividends
Weighted-average common shares
(c) 1. A corporation’s capital structure is regarded as simple if it consists
only of common stock or includes no potentially dilutive securities.
2. A corporation having a complex capital structure would be required
to make a dual presentation of earnings per share; i.e., both basic
earnings per share and diluted earnings per share. This assumes that
the potentially dilutive securities are not antidilutive.