Question

TI Problem Set 11 011-020 (Total 30 pts.: 3 pts each) CLEARLY indicate on your scantron the BEST answer to each of the following questions $2,100.000 Assume that the following data relative to Kane Company for 2018 is available: Net Income tax rate of 409) Change Transactions in Common Shares Jan 1, 2018, Beginning number Mar. 1. 2018, Purchase of treasury shares June 1, 2018, Stock split 2-1 Nov. 1. 2018, Issuance of shares (60.000) 640,000 120.000 Cumulative 700.000 640.000 1.280.000 1.400.000 8% Cumulative Convertible Preferred Stock Sold at par, convertible into 200,000 shares of common (adjusted for split). $1,000,000 Stock Options Exercisable at the option price of $25 per share. Average market price in 2018, $30 (market price and option price adjusted for split). 60,000 shares Convertible Bonds On March 1, 2018, issued 15 year, 5600,000, 10% bonds at par to yield 10%. Face value $1,000 per bond. Each bond can be converted into 90 shares of common stock. (adjusted for split) 11. In determining basic earnings per share, dividends on nonconvertible cumulative preferred stock should be a. disregarded. b. deducted from net income only if the preferred stock is convertible. c deducted from net income only if the preferred stock is noncumulative. d. deducted from net income if the preferred stock is cumulative. 12. In computations of weighted average of shares outstanding, when a stock dividend or stock split occurs, the additional shares are a. weighted by the number of days outstanding. b. weighted by the number of months outstanding. c. considered outstanding at the beginning of the year. d. disregarded. 13. What is the weighted number of shares of common stock outstanding in the calculation of basic EPS for 2018? a. 1,005,000 b. 1,043,333. c. 1,320,000 d. 1,400,000

Answer 1

Solution:
Point 11:
Option d is correct which is deduced from net profit only if it is cumulative
Explanation: In case of non cumulative the dividend right lapses if it is not declared and therefore adjusted with
net profit depending upon whether declared or not.
However in case of cumulative it needs to be deducted from net profit irrespective whether declared or not
Point 12
Option c is correct:
Stock dividend or stock split are merely book adjustment doesn't not have any effect on resources which are used
for earning. Therefore it needs to be considered as outstanding at the beginning of the year.
Example:
Suppose the earning of and entity is 1000 and outstanding shares are 100 then EPS would be 10
But if the entity split the stocks in 1:2 ratio on the last day of year say 31st December then it would have major
impact on EPS if only 1 day is considered for weighted average. Hence any adjustment in stock which doesn’t contribute to
actual resources are taken outstanding at the beginning of the year
Point 13
Calculation of Weighted Average number of shares
Date	Number of Share Outstanding				Months Outstanding		Weighted Average based on 12 months
Jan-01	700000				2		116666.7
Mar-01	640000				3		160000
Jun-01	1280000				7		746666.7
Nov-01	120000				2		20000
							1043333
Weighted average number of shares would be 1043333 and hence option b is correct
Point 15
Option b is correct
The purpose of adjustment is to show the maximum dilutive effect on earning but if the adjustments have
anti dilutive effect, these are ignored and therefore these are recognized only if they are dilutive