As auditor for Chrisley and Dale Associates, you have been assigned to check McKesson Corporation’s computation of earnings per share for the current year. The financial controller has supplied you with the following computations. Net Income $6,800,000 Ordinary shares issued and outstanding: Beginning of year 650,000 End of year 4,000,000 Average 2,325,000 Earnings per share calculation: $6,800,000 = $2.92 2,325,000 You have gathered the following information: On January 1, 2020, McKesson Corp. issued 650,000 shares. Additional issues of shares for the year were as follows: April 1 150,000 shares. May 1 A 20% share dividend August 1 700,000 shares. September 1 340,000 shares. November 1 A 2 for 1 share split All 4,000,000 shares were outstanding at December 31, 2020. On January 1, 10% convertible debentures, $60,000,000 face value, were issued at par. Each $1,000 debenture is convertible into 40 ordinary shares. The interest expense for the current year related to the liability component of the convertible debentures is $6,500,000. 200,000 preference shares outstanding, $70 par, 8% cumulative, not convertible. Options were granted to purchase 400,000 ordinary shares at $18 each. The company’s average market price of ordinary shares was $24. 10 year $3,000,000 face value, 8% bonds issued at par on July 1. Each $500 bond is convertible into 30 ordinary shares. The interest expense on the liability component of convertible bonds for the year was $360,000 McKesson’s net income in 2020 was $6,800,000 and its tax rate was 30%. Instructions (a) On the basis of the information above, do you agree with the controller’s computation of earnings per share? If you disagree, prepare a revised computation of the earnings per share for 2020. (b) Calculate the diluted earnings per share for 2020. (c) Explain and justify the accounting treatment for share dividends and share splits. (d) The executive officers of Welsh Inc. have a performance based compensation plan. The performance criterion of this plan is linked to growth in earnings per share. When annual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; if growth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, the executives receive no additional compensation. In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimates of bad debt expense and warranty expense. She calculates EPS growth of 10%. A member of the executive mentioned to her that the estimate of bad debt expense might be decreased, increasing EPS growth to 15%. Shelly is not sure she should include this because she believes that the current bad debt expense is sound. She does recognize though, that a great deal of subjectivity was involved in its computation. Instructions i. What, if any, is the ethical dilemma facing Shelly Prince? ii. Should Shelly’s knowledge of the compensation plan influence her estimate? iii. How should Shelly respond to the executive’s request?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
As auditor for Chrisley and Dale Associates, you have been assigned to check McKesson
Corporation’s computation of earnings per share for the current year. The financial
controller has supplied you with the following computations.
Net Income $6,800,000
Ordinary shares issued and outstanding:
Beginning of year 650,000
End of year 4,000,000
Average 2,325,000
Earnings per share calculation:
$6,800,000 = $2.92
2,325,000
You have gathered the following information:
On January 1, 2020, McKesson Corp. issued 650,000 shares. Additional issues of
shares for the year were as follows:
April 1 150,000 shares.
May 1 A 20% share dividend
August 1 700,000 shares.
September 1 340,000 shares.
November 1 A 2 for 1 share split
All 4,000,000 shares were outstanding at December 31, 2020.
On January 1, 10% convertible debentures, $60,000,000 face value, were issued
at par. Each $1,000 debenture is convertible into 40 ordinary shares. The interest
expense for the current year related to the liability component of the convertible
debentures is $6,500,000.
200,000
Options were granted to purchase 400,000 ordinary shares at $18 each. The
company’s average market price of ordinary shares was $24.
10 year $3,000,000 face
is convertible into 30 ordinary shares. The interest expense on the liability
component of convertible bonds for the year was $360,000
McKesson’s net income in 2020 was $6,800,000 and its tax rate was 30%.
Instructions
(a) On the basis of the information above, do you agree with the controller’s computation
of earnings per share?
If you disagree, prepare a revised computation of the earnings per share for 2020.
(b) Calculate the diluted earnings per share for 2020.
(c) Explain and justify the accounting treatment for share dividends and share splits.
(d) The executive officers of Welsh Inc. have a performance based compensation plan.
The performance criterion of this plan is linked to growth in earnings per share. When
annual EPS growth is 10%, the executives of Welsh will earn 100% of the shares; if
growth is 15%, they earn 125%. If EPS growth, however, is lower than 8%, the
executives receive no additional compensation.
In 2020, Shelly Prince, the financial controller of Welsh, reviews year end estimates
of
member of the executive mentioned to her that the estimate of bad debt expense
might be decreased, increasing EPS growth to 15%. Shelly is not sure she should
include this because she believes that the current bad debt expense is sound. She does
recognize though, that a great deal of subjectivity was involved in its computation.
Instructions
i. What, if any, is the ethical dilemma facing Shelly Prince?
ii. Should Shelly’s knowledge of the compensation plan influence her estimate?
iii. How should Shelly respond to the executive’s request?
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