Reading 32: Understanding the Income Statement - LOS i ～ Q

答案和详解如下：

21．In the computation of diluted earnings per share (EPS), common shares issued when convertible preferred stock is converted are added to the denominator of the equation, and the basic EPS numerator is adjusted by:

A)   adding back convertible preferred stock dividends.

B)   adding back non-convertible preferred stock dividends.

C)   adding back non-convertible bond interest.

D)   subtracting income from continuing operations.

The correct answer was A)

If convertible preferred stock is dilutive, the preferred dividends that would not have been paid if the preferred stock is converted must be added back to the numerator. Note that any nonconvertible preferred stock dividends are still subtracted from income from continuing operations in the numerator.

22．Zachary Company’s warrants issued in 2000 are Zachary’s only outstanding potentially dilutive security. In 2005, EPS and Dilutive EPS differed for the first time. A possible explanation for the change is the:

A)   year-end market price of Zachary increased.

B)   average market price of Zachary increased.

C)   average market price of Zachary decreased.

D)   year-end market price of Zachary decreased.

The correct answer was B)

An increase in average market price could cause Zachary’s warrants to go from antidilutive to dilutive. If the average price of the stock increases during the year, the warrants are likely to be exercised at some point during the year. None of the other choices would do this.

23．Selected information from Jupiter Corp.’s financial activities in the year 2005 is as follows:

§       Net income was 18,300,000.

§       115,000 shares of common stock were outstanding on January 1.

§       The average market price per share was $150 in 2005.

§       Dividends were paid in 2005.

§       200 warrants, which each allow the holder to purchase 100 shares of common stock at an exercise price of $100 per common share, were outstanding the entire year.

§       60,000 shares of common stock were issued on April 1.

§       45,000 shares of common stock were purchased by the company as treasury stock on October 1.

Jupiter Corp.’s diluted earnings per share (Diluted EPS) for 2005 was closest to:

A)   $123.02.

B)   $117.75.

C)   $159.13.

D)   $113.28.

The correct answer was B)

To compute Jupiter’s basic earnings per share (EPS) use the formula: ((net income – preferred dividends) / weighted average common shares outstanding). The weighted average common shares outstanding were (((115,000 * 12) + (60,000 * 9) – (45,000 * 3)) / 12 =) 148,750. Basic EPS was ($18,300,000 / 148,750 =) $123.02.

Using the treasury stock method, if the warrants were exercised cash inflow would be (200 * $100 * 100 =) $2,000,000. The number of Jupiter shares that can be purchased with the cash (cash inflow / average share price) is ($2,000,000 / $150 =) 13,333. The net number of shares that would have been created was (20,000 – 13,333 =) 6,667. Diluted EPS was ($18,300,000 / (148,750 + 6,667) =) $117.75. Since diluted EPS is less than basic EPS, the warrants are dilutive and we report diluted EPS as $117.75.

24．Selected information from Indigo Corp.’s financial activities in the year 4 included the following:

§       Net income was $5,600,000.

§       The tax rate was 40 percent.

§       500,000 shares of common stock were outstanding on January 1.

§       The average market price per share was $82 in year 4.

§       Dividends were paid in year 4.

§       6,000, 5 percent $1,000 par value convertible bonds, which are convertible at a ratio of 20 shares for each bond, were outstanding since January year 3.

§       200,000 shares of common stock were issued on July 1.

§       100,000 shares of common stock were purchased by the company as treasury stock on October 1.

Indigo Corp.’s diluted earnings per share (Diluted EPS) for year 4 was closest to:

A)   $9.74.

B)   $10.05.

C)   $8.49.

D)   $8.32.

The correct answer was D)

To compute Indigo’s basic earnings per share (EPS) ((net income – preferred dividends) / weighted average common shares outstanding), the weighted average common shares must be computed. ((500,000 * 12) + (200,000 * 6) – (100,000 * 3) / 12 =) 575,000. EPS was ($5,600,000 / 575,000 =) $9.74.

For Diluted EPS, assume the bonds were converted on January 1, and that interest payments were not made on the bonds. Increasing net income by the amount of bond interest net of tax effect is ($5,600,000 + ((6,000 * $1,000 * .05) (1 - .40)) =) $5,780,000. Diluted EPS was ($5,780,000 / (575,000 + 120,000) =) $8.32.

25．Orange Company’s net income for 2004 was $7,600,000 with 2,000,000 shares outstanding. The average share price in 2004 was $55. Orange had 10,000 shares of eight percent $1,000 par value convertible preferred stock outstanding since 2003. Each preferred share was convertible into 20 shares of common stock.

Orange Company’s diluted earnings per share (Diluted EPS) for 2004 is closest to:

A)   $3.45.

B)   $3.40.

C)   $3.80.

D)   $3.25.

The correct answer was B)

Orange’s basic EPS ((net income – preferred dividends) / weighted average common shares outstanding) is ((($7,600,000 – (10,000 * $1,000 * 0.08)) / 2,000,000 =) $3.40. To check for dilution, EPS is calculated under the assumption that the convertible preferred shares are converted into common shares at the beginning of the year. The preferred dividends paid are added back to the numerator of the Diluted EPS equation, and the additional common shares are added to the denominator of the equation. Orange’s if-converted EPS is ($7,600,000 / (2,000,000 + 200,000) =) $3.45. Because if-converted EPS is higher than basic EPS, the preferred stock is antidilutive and no adjustment is made to basic EPS.