ACCT 414 - FALL 2009
PROJECT 6 - EARNINGS PER SHARE RESEARCH
For each situation described below, compute basic and diluted earnings per share. You will need
to research the answers in FASB Accounting Standards Codification (Topic 260). The first two
questions are fairly basic and will probably not require you to use the ASC since the situations
were covered during class and in the textbook. Be sure to look for “illustrations” and
“examples” – they can be very helpful in understanding the narrative guidance. These will
generally be found under “implementation guidance, subsection 55.
Attach well-organized, neat schedules of your computations including assumptions made and
references to the pronouncements to justify your position. Be sure to provide FARS citations for
the last three items.
You may work alone or in groups of 2 or 3 students. Due at beginning of class Nov. 17, 2009.
Facts that pertain to all items:
FamSew Corportion net income for 2009
$ 8,541,357
Tax rate 40%
Common stock $10 par value, 10,000,000 shares authorized,
800,000 shares issued, and 750,000 shares outstanding on 1/1/09.
Issued 100,000 additional shares on 3/1/09
There was a 100% stock dividend on 8/1/09
Treasury stock
Shares in treasury on 1/1/09 (at $2,400,000 total cost)
Additional treasury shares acquired 4/30/09 for $55 ea
50,000 shares
20,000 shares
Preferred stock $100 par value, cumulative, convertible into 20 shares of
common stock, $8 annual dividend
Shares outstanding at 1/1/09
90,000 shares
Stock prices (common)
January 1, 2009
December 31, 2009
Average for 2009
Average for July 1 through December 31, 2009
$52.25
59.18
55.59
56.50
Unless otherwise noted, FamSew Corporation uses the effective interest method to amortize
bond premiums and discounts. The company uses the cost method to accounting for
treasury stock.
*All stock prices and conversion ratios have been properly and retroactively adjusted for stock
splits and stock dividends.
1.
Determine the weighted average shares of common stock outstanding during 2009.
Compute earnings per share assuming that the preferred stock is the only potentially
dilutive security.
2.
Same as #1 except that FamSew Corporation has convertible bonds oustanding with a
face value of $20,000,000. The bonds pay 7% interest semiannually on January 1 and
July 1. The bonds were sold to yield 8%. The carrying value of the bonds on 12/31/08
was $18,888,161. Since there was a stock dividend, each $1,000 bond can be converted
into 200 shares of common stock.
3.
Same as #2 except that the FamSew Corporation has contingently issuable shares related
to a recent business combination. Under the contract, the company is required to issue
20,000 additional shares of common stock each time a new retail outlet is opened during
2009 and 2010. During the year, 3 new retail outlets were opened on July 1, August 31,
and Nov. 1, 2009. The contingent shares of common stock were issued on the opening
day. Note: Because of the stock dividend, there were 40,000 shares issued with respect
to each of the store openings after the date of the stock dividend.
4.
Same as #2 except that the company has outstanding contracts which require that it
repurchase its own stock (written put options) at $60 per share. These put options were
issued in conjunction with a business acquisition in 2007. In total, 500,000 shares of
FamSew Corporation common stock would have to be purchased should the put options
be exercised by the holders. The options can be exercised between July 1, 2008 and July
1, 2010. (Hint: you could also look for reverse treasury stock method.)
5.
Same as #2 except that the FamSew Corporation has 400,000 warrants outstanding all
year. The warrants cannot be exercised until the year 2015 and they expire at the end of
2017. Each warrant entitles its holder to purchase 5 shares of stock for $45.00 per share.
6.
Same as #1 with several exceptions as noted. First, the preferred stock is fully
participating but not convertible. In other words, the preferred stock is entitled to its
cumulative annual dividend of $8 per share before any dividend is paid on the common.
After the common stock is paid an equivalent dividend of $.08 per share, any additional
dividends are split between preferred and common in a 40:60 per share ratio. That is,
after the preferred and common stocks have been paid dividends of $8 and $.08,
respectively, the preferred shares participate in any additional dividend at a rate of 4/6 of
the additional amount paid to common on a per share basis. Second, assume that the
common stockholders received a total dividend of $1.28 on September 30, 2009 when
1,660,000 common shares and 90,000 shares of preferred shares were outstanding. Third,
assume that this is the only dividend received by the preferred shareholders during the
year and that there were no dividends in arrears on the preferred stock. (Hint: search for
“two-class method.”)
Check figures:
Diluted EPS for #1 = $2.48
Weighted average shares of common stock (for basic EPS) for #3 = 1,680,000