Chapter 16, Problem 17E

1.

To determine

Calculate the earnings per share amount that will be disclosed in 2016 annual report.

Explanation of Solution

Earnings per share (EPS):

The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

$\begin{array}{c}\text{Basic earnings per share =}\frac{\text{Net income }}{\text{Number of shares outstanding in common stock(1)}}\\ =\frac{\$5,125}{10,250}\\ =\$0.50\end{array}$

Working notes:

(1) Calculate the number of shares outstanding in common stock.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{ in common stock}\end{array}\}=\left(\begin{array}{l}\text{Number of shares }\\ \text{issued in common}\\ \text{ stock }\times \text{Time period}\end{array}\right)+\left(\begin{array}{l}\text{Number of additional stock}\\ \times \text{ Time period}\end{array}\right)\\ \text{=}\left(9,000\times \frac{7}{12}\right)+\left(12,000\times \frac{5}{12}\right)\\ =\$5,250+\$5,000\\ =\$10,250\end{array}$

2.

To determine

Calculate the 2016 and 2017 basic earnings per share amount that will be disclosed in 2017 annual report.

Explanation of Solution

Earnings per share (EPS):

The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

$\begin{array}{c}\text{Basic earnings per share 2016 =}\frac{\text{Net income }}{\text{Number of shares outstanding in common stock(2)}}\\ =\frac{\$5,125}{20,500}\\ =\$0.25\end{array}$

$\begin{array}{c}\text{Basic earnings per share 2017=}\frac{\text{Net income }}{\text{Number of shares outstanding in common stock(3)}}\\ =\frac{\$16,400}{27,333}\\ =\$0.60\end{array}$

Working notes:

(2) calculate the number of shares outstanding in common stock for the year 2016.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{ in common stock for 2016}\end{array}\}=\left(\begin{array}{l}\text{Number of shares }\\ \text{issued in common stock }\times \\ \text{Stock split }\times \text{Time period}\end{array}\right)+\left(\begin{array}{l}\text{Number of additional stock}\\ \times \text{Stock split }\times \text{Time period}\end{array}\right)\\ \text{=}\left(9,000\times 2\times \frac{7}{12}\right)+\left(12,000\times 2\times \frac{5}{12}\right)\\ =\$10,500+\$10,000\\ =\$20,500\end{array}$

(3) calculate the number of shares outstanding in common stock for the year 2017.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{ in common stock}\\ \text{ for 2017}\end{array}\}=\left(\begin{array}{l}\text{Number of shares }\\ \text{outstandingin the year-end}\\ \times \text{Stock split }\times \text{Time period}\end{array}\right)+\left(\begin{array}{l}\text{Number of shares }\\ \text{outstanding in the year-end}+\\ \text{Number of additional stock}\\ \times \text{Stock split }\times \text{Time period}\end{array}\right)\\ \text{=}\left(12,000\times 2\times \frac{2}{12}\right)+\left(14,000\times 2\times \frac{10}{12}\right)\\ =\$4,000+\$23,333\\ =\$27,333\end{array}$

3.

To determine

Calculate the 2016, 2017 and 2018 basic earnings per share amount that will be disclosed in 2018 annual report.

Explanation of Solution

Earnings per share (EPS):

The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

$\begin{array}{c}\text{Basic earnings per share 2016 =}\frac{\text{Net income }}{\text{Number of shares outstanding in common stock(4)}}\\ =\frac{\$5,125}{20,500}\\ =\$0.25\end{array}$

$\begin{array}{c}\text{Basic earnings per share 2017=}\frac{\text{Net income }}{\text{Number of shares outstanding in common stock(5)}}\\ =\frac{\$16,400}{27,333}\\ =\$0.60\end{array}$

$\begin{array}{c}\text{Basic earnings per share 2018=}\frac{\text{Net income }}{\text{Number of shares outstanding in common stock(6)}}\\ =\frac{\$16,400}{27,333}\\ =\$0.60\end{array}$

Working notes:

(4) calculate the number of shares outstanding in common stock for the year 2016.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{ in common stock for 2016}\end{array}\}=\left(\begin{array}{l}\text{Number of shares }\\ \text{issued in common stock }\times \\ \text{Stock split}\times 1+\text{Stock }\\ \text{dividend }\times \text{Time period}\end{array}\right)+\left(\begin{array}{l}\text{Number of additional stock}\\ \times \text{Stock split}\times 1+\text{Stock }\\ \text{dividend}\times \text{Time period}\end{array}\right)\\ \text{=}\left(9,000\times 2\times 1+20\%\times \frac{7}{12}\right)+\left(12,000\times 2\times 1+20\%\times \frac{5}{12}\right)\\ =\$12,600+\$12,000\\ =\$24,600\end{array}$

(5) calculate the number of shares outstanding in common stock for the year 2017.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{ in common stock for 2017}\end{array}\}=\left(\begin{array}{l}\text{Number of shares }\\ \text{issued in common stock }\times \\ \text{Stock split}\times 1+\text{Stock }\\ \text{dividend }\times \text{Time period}\end{array}\right)+\left(\begin{array}{l}\text{Number of additional stock}\\ \times \text{Stock split}\times 1+\text{Stock }\\ \text{dividend}\times \text{Time period}\end{array}\right)\\ \text{=}\left(12,000\times 2\times 1+20\%\times \frac{2}{12}\right)+\left(14,000\times 2\times 1+20\%\times \frac{10}{12}\right)\\ =\$4,800+\$28,000\\ =\$32,800\end{array}$

(6) calculate the number of shares outstanding in common stock for the year 2018.

$\begin{array}{c}\begin{array}{l}\text{Number of shares outstanding}\\ \text{ in common stock for 2018}\end{array}\}=\left(\begin{array}{l}\text{Number of shares issued in common stock }\\ \times 1+\text{Stockdividend }\times \text{Time period}\end{array}\right)\\ \text{=}\left(28,000\times 1.20\times \frac{12}{12}\right)\\ =\$33,600\end{array}$