Chapter 19, Problem 19.15BYP

(1)

To determine

Earnings per share (EPS): The amount of earnings made available to each common share is referred to as earnings per share. Dilutive securities like convertible bonds, convertible preferred stock, and stock options, reduce the EPS by increasing the common shares.

Use the following formula to determine EPS:

$\begin{array}{c}\begin{array}{l}\text{Earnings }\\ \text{per share}\end{array}\}\text{ = }\frac{\text{Earnings available to common shareholders}}{\text{Weighted average number of common shares outstanding}}\\ \text{= }\frac{\text{Net income –Preferred dividends}}{\text{Weighted average number of common shares outstanding}}\end{array}$

To indicate: The other adjustments required for computation of diluted EPS

Explanation of Solution

The following are the other adjustments required for computation of diluted EPS:

• Dilutive securities like restricted stock awards, restricted stock units, conversion, and contingent shares increase the potential number of shares.
• If the stock options would be considered while computing diluted EPS, if the share price on that date is less than average market price. This is because exercisable options are assumed to be exercised, and eventually increase the number of shares.
• Additional number of shares would be issued under certain contingent conditions, or occurrence of some situation in future. So, the fulfilled contingent agreement would increase the number of weighted average number of shares while computing diluted EPS.
• While computing diluted EPS, it is assumed that the convertible bonds are converted into common shares. This increases the number of common shares in the denominator, and increases the numerator, earnings available to common shareholders, as after-tax interest which had been avoided due to conversion of bonds, increases net income. This conversion dilutes the EPS.

(2)

To determine

To indicate: The reason for not including antidilutive securities in the computation of diluted EPS

Explanation of Solution

The amount of earnings made available to each common share is referred to as earnings per share (EPS). In the computation of basic EPS, dilutive securities like are convertible bonds, convertible preferred stock, and stock options are not included. But in the computation of diluted EPS, dilutive securities are included, if the effect of the securities is not antidilutive. If the conversion of dilutive securities would not reduce the diluted EPS in comparison to basic EPS, the effect of conversion of securities into common shares is antidilutive. Such securities which have nil effect on dilution of EPS are referred to as antidilutive.

(3)

To determine

To prepare: The presentation of basic and diluted EPS for 2013, 2012, and 2011 as reported by Corporation K in its 2013 annual report

Explanation of Solution

Corporation K would present the basic and diluted earnings per share, in its 2013 annual report, as shown below:

Earnings per share	2013	2012	2011
Basic:
Earnings per share from continuing operations	$2.12	$2.04	$1.90
Earnings per share from discontinued operations	-	(0.01)	(0.05)
Earnings per share from disposal of discontinued operations	0.02	0.05	-
Basic earnings per share	$2.24	$2.08	$1.95
Diluted:
Earnings per share from continuing operations	$2.09	$2.03	$1.88
Earnings per share from discontinued operations	(0.01)	(0.01)	0.05
Earnings per share from disposal of discontinued operations	0.02	0.05	-
Diluted earnings per share	$2.10	$2.07	$1.93

Table (1)

Working Notes:

Compute basic earnings per share from continuing operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from continuing operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$56,699,000}}{\text{26,744,000}}\\ \text{= \$2}\text{.12}\end{array}$

Compute basic earnings per share from disposal of discontinued operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Gain on disposal of discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$420,000}}{\text{26,744,000}}\\ \text{= \$0}\text{.02}\end{array}$

Compute total basic earnings per share in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$57,100,000}}{\text{26,744,000}}\\ \text{= \$2}\text{.14}\end{array}$

Compute diluted earnings per share from continuing operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from continuing operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$56,699,000}}{\text{27,143,000}}\\ \text{= \$2}\text{.09}\end{array}$

Compute diluted earnings per share from discontinued operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$19,000}}{\text{27,143,000}}\\ \text{= \$0}\text{.01}\end{array}$

Compute diluted earnings per share from disposal of discontinued operations in 2013.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Gain on disposal of discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$420,000}}{\text{27,143,000}}\\ \text{= \$0}\text{.02}\end{array}$

Compute total diluted earnings per share in 2013.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$57,100,000}}{\text{27,143,000}}\\ \text{= \$2}\text{.10}\end{array}$

Compute basic earnings per share from continuing operations in 2012.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from continuing operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$53,928,000}}{\text{26,425,000}}\\ \text{= \$2}\text{.04}\end{array}$

Compute basic earnings per share from discontinued operations in 2012.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$226,000}}{\text{26,425,000}}\\ \text{= \$0}\text{.01}\end{array}$

Compute basic earnings per share from disposal of discontinued operations in 2012.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Gain on disposal of discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$1,323,000}}{\text{26,425,000}}\\ \text{= \$0}\text{.05}\end{array}$

Compute total basic earnings per share in 2012.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$55,025,000}}{\text{26,425,000}}\\ \text{= \$2}\text{.08}\end{array}$

Compute diluted earnings per share from continuing operations in 2012.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from continuing operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$53,928,000}}{\text{26,622,000}}\\ \text{= \$2}\text{.03}\end{array}$

Compute diluted earnings per share from discontinued operations in 2012.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$226,000}}{\text{26,425,000}}\\ \text{= \$0}\text{.01}\end{array}$

Compute diluted earnings per share from disposal of discontinued operations in 2012.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Gain on disposal of discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$1,323,000}}{\text{26,622,000}}\\ \text{= \$0}\text{.05}\end{array}$

Compute total diluted earnings per share in 2012.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$55,025,000}}{\text{26,622,000}}\\ \text{= \$2}\text{.07}\end{array}$

Compute basic earnings per share from continuing operations in 2011.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from continuing operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$49,928,000}}{\text{26,246,000}}\\ \text{= \$1}\text{.90}\end{array}$

Compute basic earnings per share from discontinued operations in 2011.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$1,214,000}}{\text{26,246,000}}\\ \text{= \$0}\text{.05}\end{array}$

Compute total basic earnings per share in 2011.

$\begin{array}{c}\begin{array}{l}\text{Basic earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$51,142,000}}{\text{26,246,000}}\\ \text{= \$1}\text{.95}\end{array}$

Compute diluted earnings per share from continuing operations in 2011.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from continuing operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$49,928,000}}{\text{26,500,000}}\\ \text{= \$1}\text{.88}\end{array}$

Compute diluted earnings per share from discontinued operations in 2011.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings per }\\ \text{share from continuing }\\ \text{operations}\end{array}\}\text{ = }\frac{\text{Earnings from discontinued operations}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$1,214,000}}{\text{26,500,000}}\\ \text{= \$0}\text{.05}\end{array}$

Compute total diluted earnings per share in 2011.

$\begin{array}{c}\begin{array}{l}\text{Diluted earnings }\\ \text{per share }\end{array}\}\text{ = }\frac{\text{Net earnings}}{\text{Weighted average number of shares outstanding}}\\ \text{=}\frac{\text{\$51,142,000}}{\text{26,500,000}}\\ \text{= \$1}\text{.93}\end{array}$