Question

MULTIPLE CHOICE. Choose the one alternative that best completas e B LO question. Each question is worth 4 points. 1) Which of the following does NOT represent potential shares for purposes of the diluted earnings per share calculation? A) Convertible bonds. B) Dividends on common shares. C) Stock options D) Convertible preferred stock. 2) During 2018, Angel Corporation had 900,000 shares of common stock and 50,000 shares of preferred stock outstanding. Angel declared and paid cash dividends of $150,000 to preferred shareholders during 2018 Angel's net income for the year ended December 31, 2018, was $6 million. What is Angel's basic earnings per share for 2018, rounded to the nearest cent? A) $6.50 B) $6.32 C) $6.67 D) 56.17 3) Basic earnings per share is computed using: A) The actual number of common shares outstanding at the end of the year, irrespective of share transactions during the year. B) Weighted average common shares outstanding for the year. C) A weighted average of both preferred and common shares D) The number of common shares outstanding plus potential common shares. 4) 4) On January 1, 2018, Frisbee Company had 250,000 shares of common stock issued and outstanding. On March 31, 2018, the company sold 50.000 additional shares. Frisbee's net income for the year ended December 31, 2018, was $700,000. During 2018, Frisbee declared and paid $80,000 in cash dividends on its nonconvertible preferred stock. What is the 2018 basic earnings per share (rounded to the nearest cent)? A) $2.16. B) $2.07. C) $2.33. D) $2.80. 5) The calculation of diluted earnings per share assumes, under the "treasury stock" method, that stock options are exercised and that cash proceeds from the exercise are used to buy treasury stock at: A) The average market price of the common shares during the reporting period. B) The stock's par value. C) The market price of the common shares at the end of the period. D) The exercise price for the options. B-1

Answer 1

1.Answer is B) Dividends on common shares

Explanation:

• Convertible bonds: Convertible into shares
• Stock options: Convertible into shares
• Convertible preferred stock: Convertible into shares

But, Dividends on common shares means profit distributed to common stock holders. Hence it’s not represent potential shares for purpose of diluted earnings per share.

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2.Answer is A)$6.50

Calculation:

Net income	$6,000,000
Preferred dividends	($150,000)
Net income available for common stock holders	$5,850,000
÷ Outstanding common shares	900,000
Earning per share	$6.50

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3. Answer is B)Weighted-average common shares outstanding for the year

Basic earnings per share

= Net income ÷ Weighted-average common shares outstanding for the year

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4.Answer is A)$2.16

Calculations:

Net income	$700,000
Preferred dividends	($80,000)
Net income available for common stock holders	$620,000
÷ Weighted average common shares outstanding*	287,500
Basic Earnings per share	$2.16

*Weighted average common shares outstanding:

1/1/2018	250,000	x	3 months	=	750,000
3/31/2018	300,000	x	9 months	=	2,700,000
Total			12 months		3,450,000

Weighted average common shares outstanding = 3,450,000/12 = 287,500

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5.Answer is A)The average market price of the common shares during the reporting period