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Stock Splits


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#1 bella.dreamer

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Posted 12 November 2013 - 01:16 AM

FAR-Becker and this is an online question. Why in year 1 do we use 200,000 shares? Wouldn't that be 350,000/100,000 shares?

The stock split and new stocks were issued in year 2. The correct answer is b. 

 

FYI 410,000 is income in year 2 and 350,000 is year 1 income. 

 

Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year 1, 100,000 shares of common stock were outstanding. In Year 2, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 2 and $350,000 in Year 1. What amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?

    Year 2 Year 1

a.$1.78    $3.50

b.$1.78    $1.75

c.$2.34     $1.75

d.$2.34    $3.50

 

 

Explanation

Choice "b" is correct. $1.78 and $1.75 EPS Year 2 and Year 1.

Year 2      Year 1
 
Net income 410,000 350,000
 
Weighted Avg. Shares ÷ 230,000 ÷ 200,000
 
EPS 1.78 1.75

 



#2 jnchn7

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Posted 21 November 2013 - 02:56 AM

Prior year EPS data needs to be adjusted for stock splits occurring in subsequent years.



#3 bella.dreamer

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Posted 23 November 2013 - 04:42 AM

But the stock split and additional stocks were issued in year two. In year one we only had 100,000 shares.



#4 Pls238

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Posted 21 December 2013 - 02:13 AM

When you're issuing comparative financial statements, you need to retrospectively adjust stock splits and stock dividends for year one. I this question, there was 100,000 shares issued but there was a stock split in year 2, so you have to go back and adjust that years outstanding shares to reflect the stock split [100,000 shares x 2-1 stock split = 200,000]. That's where they are using 200,000 instead of 100,000.

Essentially, when you have a stock split or stock dividend, you need to act treat it like it happened at the beginning of this year AND all years presented.

Hope that helps :) I was just working on this problem today.

#5 hassi

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Posted 24 December 2013 - 11:19 AM

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#6 bella.dreamer

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Posted 18 January 2014 - 10:59 PM

Thank you memebers.