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cpa-08261 Earnings per share (unissued common stock)

earnings per share

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#1 buyr13

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Posted 16 November 2014 - 06:22 PM

A company had the following outstanding shares as of
Janu ary 1, year 2:
Preferred stock, $60 par, 4%,
cumulative
10,000 shares
Common stock, $3 par 50,000 shares
On April 1, year 2, the company sold 8,000 shares of
previously unissued common stock. No dividends were in
arrears on Janu ary 1, year 2, and no dividends were declared
or paid during year 2. Net income for year 2 totaled $236,000.
What amount is basic earnings per share for the year ended
December 31, year 2?
a. $3.66
b. $3.79
c. $4.07
d. $4.21

 

 

Answer: The requirement is to calculate earnings per share.
Answer ( B is correct because earnings per share (EPS) is
calculated as (net in come less preferred dividends) divided by
the weighted-average common shares outstanding. Net income
given is $236,000 and no dividends have been declared.
However, since the preferred shares are cumulative, the
dividend must be estimated and used in the calculation (10,000
shares × $60 per share × 4% = $24,000). Weighted-average
shares outstanding (WASO) equals:
1/1 50,000 × 3/12
=
12,500
4/1 58,000 × 9/12
=
43,500
WASO 56,000
EPS = ($236,000 – 24,000)/56,000 = $3.79

 

Why do we included the $8,000 if it was unissued. Doesn't unissued mean not outstanding therefore not counted towards weighted average common stock outstanding? Please help.



#2 CashPensionsAccruals

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Posted 14 December 2014 - 02:19 AM

Hello there,

 

the question specifically states that -

 

"On April 1, year 2, the company sold 8,000 shares of

previously unissued common stock."

 

This means that they issued (sold)  this stock now on April. Furthermore, if you look at the calculations they have therefore included that amount in the calculating the weighted average of

Common Stock outsanding rightly by pro-rating the shares accordingly.

 

I assume you understand the concepts, sometimes its just the verbiage that might throw you off.

 

Good Luck



#3 raduklaus

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Posted 17 December 2014 - 08:26 AM

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