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McGraw-Hill Education 2,000 Review Questions for the CPA Exam

Denise M Stefano; Darrel Surett

Chapter 32

Earnings Per Share - all with Video Answers

Educators

Chapter Questions

Problem 353

According to US generally accepted accounting principles (GAAP), which of the following entities are NOT required to present earnings per share (EPS) on the face of the income statement?
I. Private entities that have yet to go public or make a filing for a public offering
II. Entities whose shares are traded on a US securities exchange
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 354

A company can report basic EPS and not have to report diluted EPS if it has:
I. common stock outstanding, no preferred stock, and options that are convertible into common stock
II. common stock outstanding, no preferred stock, and bonds that are convertible into common stock
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 355

For purposes of calculating basic EPS, income available to common shareholders is determined by:
I. deducting dividends declared in the period on noncumulative preferred stock (regardless of whether they have been paid)
II. deducting dividends accumulated in the period on cumulative preferred stock (regardless of whether they have been declared)
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 357

When calculating the weighted average number of shares outstanding during the period, which of the following is treated as if it were outstanding since the beginning of the year?
I. Stock dividends declared in July and paid in September
II. Stock issued above par in August
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 358

Sadie Co., Inc. reported the following for Year 3:
$$
\begin{array}{lr}
\text { 1/1, Year } 3 \text { common shares outstanding: } & 300,000 \\
\text { 7/1, Year } 3 \text { additional shares issued: } & 50,000
\end{array}
$$
40,000 shares of common stock at $$\$ 15$$ per share. The average market price of Sadie's common stock was $$\$ 20$$ per share during Year 3. What is the number of shares that Sadie should use in computing diluted EPS for Year 3?
A. 365,000
B. 360,000
C. 335,000
D. 325,000

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Problem 359

When calculating basic EPS, which of the following is correct regarding the calculation of weighted average common shares outstanding?
I. Include the convertible preferred shares that were converted during the period in the calculation of weighted average common shares outstanding, and time-weight them.
II. Ignore convertible preferred shares unless they are converted.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 360

At December 31, Year 11 and Year 10, Baum Inc. had 60,000 shares of common stock and 10,000 shares of preferred stock outstanding. The preferred stock was $$5 \% \$ 100$$ par value cumulative preferred stock, and no dividends were paid on any class of stock for the past 5 years. Net income for Year 11 was $$\$ 1,400,000$$. For 2011, basic EPS amounted to:
A. $$\$ 23.33$$
B. $$\$ 22.50$$
C. $$\$ 25.50$$
D. $$\$ 31.90$$

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Problem 360

How do dividends in arrears from Year 1 relate to a Year 2 basic EPS calculation when attempting to compute net income available to common shareholders?
I. Year 1 dividends in arrears are subtracted from Year 2 net income along with Year 2 unpaid dividends if the preferred stock is cumulative.
II. Year 1 dividends in arrears are added to a Year 2 net loss if the preferred stock is cumulative.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 361

For the current year, Year 1, Frenzy, Inc. reports net income of $$\$ 500,000$$ and pays its preferred stockholders cash dividends of $$\$ 60,000$$. There are 100,000 shares of common stock outstanding so that basic EPS to be reported is $$\$ 4.40$$. During Year 1, Frenzy also had 10,000 convertible bonds outstanding. Each bond was sold at face, pays $$\$ 7$$ in interest each year, and can be converted into two shares of common stock. Frenzy has a tax rate of $30 \%$. What amount should Frenzy report as diluted EPS for Year 1?
A. $$\$ 3.08$$
B. $$\$ 3.26$$
C. $$\$ 4.08$$
D. $$\$ 4.25$$

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Problem 362

Which of the following is correct regarding a net loss for the period as it related to net income available to the common shareholders, the numerator of the EPS calculation?
I. In the event of a net loss for the period, declared dividends on noncumulative preferred stock are added to the net loss even if the dividend was not paid.
II. In the event of a net loss for the period, current year dividends on cumulative preferred stock are added to the net loss regardless of whether the dividends have been declared.
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 363

Everest Co., Ltd. had EPS of $$\$ 15.00$$ for Year 2 before considering the effects of any convertible securities, which included convertible preferred stock and stock options. No conversion or exercise of the convertible securities occurred during Year 2. However, possible conversion of the preferred stock would have the effect of reducing EPS by $$\$ 0.75$$. The effect of possible exercise and conversion of the common stock options would increase EPS by $$\$ 0.10$$. What amount should Everest report as diluted EPS for Year 2?
A. $$\$ 14.25$$
B. $$\$ 14.35$$
C. $$\$ 15.00$$
D. $$\$ 15.10$$

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Problem 364

Debt that was converted into common shares during the period would be included in the denominator to calculate weighted average common shares outstanding for the computation of:
I. basic EPS
II. diluted EPS
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 365

Lansing Corp. had 60,000 shares of common stock outstanding at January 1, Year 13. On July 1, Year 13, it issued 10,000 additional shares of common stock. What is the number of shares that Lansing Corp. should use to calculate Year 13 EPS?
A. 60,000
B. 70,000
C. 65,000
D. None of the above

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Problem 366

On December 1 of the current year, Hackett Corp. declared and issued a $3\%$ stock dividend on its 70,000 shares of outstanding common stock. There was no other common stock activity during the year. Net income for the current year was $$\$ 100,000$$. What number of shares should Hackett use in determining basic earnings per common share for the current year?
A. 70,000
B. 72,100
C. 70,175
D. None of the above

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Problem 367

The following information pertains to Conover Inc.'s outstanding shares for Year 13:
Preferred stock $$\$ 10$$ par $5 \%$ cumulative 1,000 shares outstanding 1/1/Year 13
$$
\begin{array}{lr}
\text { Common stock } \$ 1 \text { par value: } \\
\text { Shares outstanding } 1 / 1 / 13 & 10,000 \\
2: 1 \text { stock split } 3 / 1 / 13 & 10,000 \\
\text { Shares issued } 10 / 1 / 13 & 5,000
\end{array}
$$
What is the weighted average number of shares that Conover Inc. should use to calculate Year 13 EPS?
A. 25,000
B. 23,333
C. 21,250
D. 19,583

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Problem 368

Gordon Corp. had 360,000 shares of common stock issued and outstanding at December 31, Year 12, and 100,000 shares of nonconvertible preferred stock. On January 2, Year 13, Gordon Corp. issued 100,000 more shares of nonconvertible preferred stock. Gordon Corp. declared and paid $$\$ 45,000$$ cash dividends on the common stock and $$\$ 20,000$$ on the preferred stock during Year 13. Net income for the year ended December 31, Year 13, was $$\$ 290,000$$. What should be Gordon Corp.'s Year 13 earnings per common share?
A. $$\$ 0.75$$
B. $$\$ 0.81$$
C. $$\$ 0.63$$
D. $$\$ 0.59$$

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Problem 369

Use the following facts to answer Questions 369-371:
At December 31, Year 12, Chaucer Corp. had 100,000 common shares outstanding along with 10,000 shares of preferred stock. Each share of preferred stock is convertible into 2 shares of Chaucer common stock. During Year 12, Chaucer Corp. paid dividends of $$\$ 30,000$$ on its preferred stock. Chaucer also had $1,000,9 \%$ convertible bonds outstanding. Each bond is convertible into 30 shares of Chaucer common stock. Both the debt and the preferred stock would be potentially dilutive if converted. Net income for Year 12 is $$\$ 750,000$$. Assume that the income tax rate is $30 \%$.
The preferred dividend would be subtracted from Chaucer Corp.'s net income to calculate Year 12:
I. basic EPS
II. diluted EPS
A. I only
B. II only
C. Both I and II
D. Neither I nor II

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Problem 370

Use the following facts to answer Questions 369-371:
At December 31, Year 12, Chaucer Corp. had 100,000 common shares outstanding along with 10,000 shares of preferred stock. Each share of preferred stock is convertible into 2 shares of Chaucer common stock. During Year 12, Chaucer Corp. paid dividends of $$\$ 30,000$$ on its preferred stock. Chaucer also had $1,000,9 \%$ convertible bonds outstanding. Each bond is convertible into 30 shares of Chaucer common stock. Both the debt and the preferred stock would be potentially dilutive if converted. Net income for Year 12 is $$\$ 750,000$$. Assume that the income tax rate is $30 \%$.
Calculate Chaucer Corp.'s basic EPS for Year 12.
A. $$\$ 7.50$$
B. $$\$ 7.80$$
C. $$\$ 7.20$$
D. $$\$ 7.02$$

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Problem 371

Use the following facts to answer Questions 369-371:
At December 31, Year 12, Chaucer Corp. had 100,000 common shares outstanding along with 10,000 shares of preferred stock. Each share of preferred stock is convertible into 2 shares of Chaucer common stock. During Year 12, Chaucer Corp. paid dividends of $$\$ 30,000$$ on its preferred stock. Chaucer also had $1,000,9 \%$ convertible bonds outstanding. Each bond is convertible into 30 shares of Chaucer common stock. Both the debt and the preferred stock would be potentially dilutive if converted. Net income for Year 12 is $$\$ 750,000$$. Assume that the income tax rate is $30 \%$.
Calculate Chaucer Corp.'s diluted EPS for Year 12.
A. $$\$ 5.42$$
B. $$\$ 5.00$$
C. $$\$ 6.78$$
D. $$\$ 5.77$$

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