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

Question 1:Dividend on equity shares

Potential shares refer to those financial instruments or other contracts that entitle, or may entitle the holder to equity shares.In the given options Convertible bonds,Convertible preferred stock and stock options can be converted to equity.Hence dividends on equity have no option or contract to be converted to equity and shall not be considered at potential equity.

Question 2: A)$6.7 per share

Basic earning per share=Net profit/loss attributable to equity shares/ weighted average no of equity shares

=($6000000-$150000)/900000 shares= $6.5 per share.

Question 3: B) weighted average of common stock outstanding for the year.

Please refer to the above formula of BEPS in question 2

Question 4: Answer: $2.81( choosing the nearest answer)

Net profit available to equity shareholders =

	No.of shares	Outstanding for	Weighted average
1-Jan	250000	12 months	250000
31-Mar	50000	9 months	37500
			287500

Net income 2018	700000
Less :Cash dividend paid to preferred stock	80000
Net profit available to equity holders	620000
BEPS	2.917647059

Question 4: A)average market price during the period

Treasury stock method assumes that options and warrants are exercised at the beginning of the reporting period, and a company uses exercise proceeds to purchase common shares at the average market price during the period.