EPS in the 2012 comparative financial statements

(amounts in thousands, except per share amount)

net Earnings
income Per Share
$400 $400

—————————————————————————— –––– = $1.00

200 x (2.00) 400
weighted-average shares stock dividend
as previously calculated adjustment

Exercise 19-12

(amounts in thousands, except per share amount)

net preferred Earnings
income dividends Per Share

$2,000 – $50 $1,950

————————————————— = ———— = $1.95

800 (1.25) 1,000
shares stock dividend
at Jan. 1 adjustment

Exercise 19-13

(amounts in thousands, except per share amount)

net preferred Net Loss
loss dividends Per Share
– $114 – $761 – $190

—————————————————————— = —— = ($.50)

373 + 12 (7/12) 380
shares new
at Jan. 1 shares

19.5% x $800*= $76

*8,000 shares x $100 par = $800,000

Exercise 19-14

(amounts in millions, except per share amount)

net preferred Earnings
income dividends Per Share
$150 – $27¹ $123

—————————————————————— = ——— = $.65

200 (1.05) – 24 (10/12) (1.05)+ 4 (3/12) 190
shares treasury new
at Jan. 1 shares shares
­___ stock dividend ___­

adjustment

19% x $300 = $27

Exercise 19-15

(amounts in millions, except per share amount)

Basic EPS

net preferred
income dividends

$150 – $27 $123

—————————————————————————— = —— = $.65

200 (1.05) – 24 (10/12) (1.05)+ 4 (3/12) 190
shares treasury new
at Jan. 1 shares shares
­___ stock dividend ___­

adjustment

Diluted EPS

net preferred
income dividends

$150 – $27 $123

—————————————————————————— = —— = $.63

200 (1.05) – 24 (10/12) (1.05)+ 4 (3/12) + (30 – 24*) 196
shares treasury new assumed exercise
at Jan. 1 shares shares of options
­___ stock dividend ___­

adjustment

*Purchase of treasury stock

30 million shares

x $56 (exercise price)

$1,680 million

ч $70 (average market price)

24 million shares

Exercise 19-16

(amounts in millions, except per share amount)

Basic EPS

net preferred
income dividends

$150 – $27 $123

—————————————————————————— = —— = $.62

200 (1.05) – 24 (10/12) (1.05)+ 4 (3/12) + 30(4/12) 200
shares treasury new actual exercise
at Jan. 1 shares shares of options
­___ stock dividend ___­

adjustment

Diluted EPS

net preferred
income dividends

$150 – $27 $123

———————————————————————————— = —— = $.60

200 (1.05) – 24(10/12) (1.05) + 4(3/12) + (30 – 24*)(8/12) + 30(4/12) 204

shares treasury new assumed exercise actual exercise
at Jan. 1 shares shares of options of options
­___ stock dividend ___­

adjustment

*Purchase of treasury stock

30 million shares
x $56 (exercise price)
$1,680 million
ч $70 (average market price)
24 million shares

Exercise 19-17

(amounts in millions, except per share amount)

Basic EPS

net preferred
income dividends

$150 – $27* $123

———————————————————————————— = — = $.65

200 (1.05) – 24 (10/12) (1.05)+ 4 (3/12) 190
shares treasury new
at Jan. 1 shares shares
­___ stock dividend ___­

adjustment

*9% x $100 x 3 million shares = $27 million preferred dividends

Diluted EPS

net preferred after-tax
income dividends interest savings

$150 – $27 + $5* – 40% ($5**) $126

———————————————————————————— = — = $.62

200 (1.05) – 24 (10/12) (1.05)+ 4 (3/12) + (30 – 24**) + 6 202
shares treasury new exercise conversion
at Jan. 1 shares shares of options of bonds
­___ stock dividend ___­

adjustment

**8% x $62.5 million = $5 million interest

**Purchase of treasury stock

30 million shares
x $56 (exercise price)
$1,680 million
ч $70 (average market price)
24 million shares

Exercise 19-18

(amounts in thousands, except per share amount)

Basic EPS

net
income
$720 $720

———————————————————— = —— = $8.47

80 + 15 (4/12) 85
shares new
at Jan. 1 shares

Diluted EPS

net
income
$720 $720

—————————————————————— = —— = $8.09

80 + 15 (4/12) + (24 – 20)* 89
shares new exercise
at Jan. 1 shares of options

*Purchase of treasury shares

24,000 shares

x $37.50 (exercise price)

$900,000

ч $45 (average market price)

20,000 shares

Exercise 19-19

(amounts in thousands, except per share amounts)

Basic EPS

net preferred
income dividends
$500 – 60* $440

——————————————————————— = ——— = $4.40

100 100
shares
at Jan. 1

Diluted EPS

net preferred preferred after-tax
income dividends dividends interest savings
$500 – 60* +60* + $100**– 40% ($100) $560

——————————————————————————— = —— = $3.46

100 +32 + 30 162
shares conversion conversion
at Jan. 1 of preferred of bonds
stock

*12,000 shares x $5

** $1,000,000 x 10%

Order of Entry:

Note that we included in our calculation, the convertible security with the lowest “incremental effect” ($60/32 = $1.87) before the one with the higher effect ($60/30 = $2.00).

After including the conversion of the preferred stock only, EPS is $500 / 132 = $3.79. The $2.00 incremental effect of the conversion of the bonds is less than that amount, so in this instance the order of entry was unimportant. But there are situations in which the incremental effect of the second convertible security is higher than the calculation prior to its inclusion. In those situations, including the second security is antidilutive. That’s why we should include securities in the calculation in reverse order, beginning with the lowest incremental effect (most dilutive).

Exercise 19-20

(amounts in thousands, except per share amounts)

Basic EPS

net Earnings
income Per Share
$120 $120

—————————— = ——— = $.15

800 800
shares

at Jan. 1

Diluted EPS

net Earnings
income Per Share
$120 $120

—————————— = ——— = $.14

800 + (54 – 18*) 836
shares shares

at Jan. 1 assumed vested

Proceeds:

$270,000 ($5 market price per share x 54,000 shares)

ч 3 years vesting period

$90,000 compensation expense per year

x 2

$180,000 expensed in 2010 and 2011

$90,000 unexpensed compensation at Dec. 31, 2011

*Assumed purchase of treasury shares

$90,000 proceeds

ч $5 (average market price)

18,000 shares

Note: The proceeds also must be increased (or decreased) by any tax benefits that would be added to (or deducted from) paid-in capital when the eventual tax deduction differs from the amount expensed, the “excess tax benefit.” Since that occurs when the stock price at vesting differs from the stock price at the grant date, the fact that the market price remained at $5 avoided that issue.

Exercise 19-21

Requirement 1

$5 fair value per share
x 18 million shares granted
= $90 million fair value of award

The $90 million total compensation is expensed equally over the three-year vesting period, reducing earnings by $30 million each year.

Compensation expense.......................................................................... 30
Paid-in capital–restricted stock....................................................... 30

Compensation expense.......................................................................... 30
Paid-in capital–restricted stock....................................................... 30

Requirement 2

The total compensation for the award is $90 million ($5 market price per share x 18 million shares). Because the stock award vests over three years, it is expensed as $30 million each year for three years. At the end of 2011, the second year, $60 million has been expensed and $30 million remains unexpensed, so $30 million would be the assumed proceeds in an EPS calculation. If the market price averages $5, the $30 million will buy back 6 million shares and we would add to the denominator of diluted EPS 12 million common shares:

No adjustment to the numerator

18 million – 6* million = 12 million

*Assumed purchase of treasury shares

$30 million

ч $5 (average market price)

6 million shares

Note: The proceeds also must be increased (or decreased) by any tax benefits that would be added to (or deducted from) paid-in capital when the eventual tax deduction differs from the amount expensed, the “excess tax benefit.” Since that occurs when the stock price at vesting differs from the stock price at the grant date, the fact that the market price remained at $5 avoided that issue.

Exercise 19-22

(amounts in millions, except per share amounts)

Basic EPS

net
income
$148 $148

—————————————————————————— = ——— = $3.89

35 + 4 (9/12) 38
shares new
at Jan. 1 shares

Diluted EPS

net
income
$148 $148

—————————————————————————— = ——— = $3.79

35 + 4 (9/12) + 1 39
shares new additional
at Jan. 1 shares shares

Because the conditions are met for issuing 1 million shares, those shares are assumed issued for diluted EPS. Conditions for the other 1 million shares are not yet met, so as they are ignored.

Exercise 19-23

(amounts in thousands, except per share amounts)

Basic EPS

net
income
$2,000 $2,000

—————————————————————————— = ——— = $2.96

600 + 100 (9/12) 675
shares new
at Jan. 1 shares

Diluted EPS

net
income
$2,000 $2,000

—————————————————————————— = ——— = $2.74

600 + 100 (9/12) + 4 x 10 + 15 730
shares new contingent contingent
at Jan. 1 shares shares* shares**

* Because the conditions currently are met (i.e., market price exceeds $48) for issuing 10,000 shares in each of the next 4 years, those shares are assumed issued for diluted EPS.

**The condition for the other 15,000 shares also is met (the controller is employed), so those shares are assumed issued for diluted EPS.

Exercise 19-24

List A List B

__e_ 1. Subtract preferred dividends. a. Options exercised.

__m_ 2. Time-weighted by 5/12. b. Simple capital structure.

__a_ 3. Time-weighted shares assumed issued c. Basic EPS.

plus time-weighted-actual shares. d. Convertible preferred stock.

__i_ 4. Midyear event treated as if e. Earnings available to common it occurred at the beginning of the shareholders.

reporting period. f. Antidilutive.

__l_ 5. Preferred dividends do not reduce g. Increased marketability.

earnings. h. Extraordinary items.

__b_ 6. Single EPS presentation. i. Stock dividend.

__g_ 7. Stock split. j. Add after-tax interest to

numerator.

__d_ 8. Potential common shares. k. Diluted EPS.

__f_ 9. Exercise price exceeds market price. l. Noncumulative, undeclared

__c_ 10. No dilution assumed. preferred dividends.

__j_ 11. Convertible bonds. m. Common shares retired in August.

_n_ 12. Contingently issuable shares. n. Include in diluted EPS when

_k_ 13. Maximum potential dilution. conditions for issuance are met.

_h_ 14. Shown between per share amounts

for net income and for income from

continuing operations.

Exercise 19-25

Requirement 1

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The appropriate accounting treatment for the situation is specified in FASB ASC 718–10–50: “Compensation–Stock Compensation–Overall–Disclosure.”

Requirement 2

Section 718–10–50–2c states that companies must disclose:

For the most recent year for which an income statement is provided, both of the following:

1. The number and weighted-average exercise prices (or conversion ratios) for each of the following groups of share options:

1. Those outstanding at the beginning of the year

2. Those outstanding at the end of the year

3. Those exercisable or convertible at the end of the year

4. Those that during the year were:

1. Granted

2. Exercised or converted

3. Forfeited

4. Expired

Exercise 19-26

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles. The specific citation for each of the following items is:

1. Stock options:

FASB ASC 718–10–30: “Compensation-Stock Compensation–Overall–Initial Measurement.”

2. The measurement date for share-based payments classified as liabilities:

FASB ASC 718–30–30–1: “Compensation–Awards Classified as Liabilities– Initial Measurement–Public Entity.”

Date: 2016-01-14; view: 1066