Chapter 19, Problem 19.8P

(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:

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

Net loss per share: The computation of EPS requires net income. But if a company reports net loss instead of net income, the loss which is generated by each common share, is referred to as net loss per share.

To determine: The net loss per share of Incorporation A for the year ended December 31, 2016

Explanation of Solution

Determine net loss per share of Incorporation A for the year ended December 31, 2016.

Step 1: Compute the amount of preferred dividends.

$\begin{array}{c}\text{Preferred dividends}=\left\{\begin{array}{l}\text{Preferred stock }\times \\ \text{Par value per preferred share }\times \\ \text{Preferred dividend percentage}\end{array}\right\}\\ =20,000\text{,000 shares×\$100×8\%}\\ \text{=\$160,000,000}\end{array}$ (1)

Note: Although the preferred dividend is not declared, the preferred dividends are deducted in the computation of EPS because the preferred shares are cumulative.

Step 2: Compute weighted average of purchase of treasury stock on April 30, 2016.

$\begin{array}{c}\begin{array}{l}\text{Weighted average }\\ \text{of shares}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares reacquired as }\\ \text{treasury stock }\times \text{ Time period}\end{array}\right\}\\ \text{= 30,000,000 shares × }\frac{8}{\text{12}}\\ \text{= 20,000,000 shares}\end{array}$ (2)

Step 3: Compute stock dividend shares on shares held on June 12, 2016.

$\begin{array}{c}\begin{array}{l}\text{Stock dividend }\\ \text{shares}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Number of shares held on December 31, 2015× }\\ \text{Stock dividend percentage}\end{array}\right\}\\ \text{= 600,000,000 shares × 5\%}\\ \text{= 30,000,000 shares}\end{array}$ (3)

Step 4: Compute stock dividend shares on weighted average treasury shares on April 30, 2016.

$\begin{array}{c}\begin{array}{l}\text{Stock dividend }\\ \text{shares}\end{array}\}\text{ = }\left\{\begin{array}{l}\text{Weighted avergae number of treasury shares× }\\ \text{Stock dividend percentage}\end{array}\right\}\\ \text{= 20,000,000 shares × 5\%}\\ \text{= 1,000,000 shares}\end{array}$ (4)

Note: Refer to Equation (2) for value and computation of number of treasury shares.

Step 5: Compute weighted average of treasury stock which were bought on April 30, 2016 and sold on August 31, 2016 (4 months).

$\begin{array}{c}\text{Weighted average of shares = Number of treasury stock }\times \text{ Time period}\\ \text{= 12,000,000 shares × }\frac{4}{\text{12}}\\ \text{= 4,000,000 shares}\end{array}$ (5)

Step 6: Compute the total weighted average number of common shares.

Details	Number of Shares
Weighted average number of shares held on January 1, 2016	600,000,000
Weighted average number of treasury stock bought on April 30, 2016	(20,000,000)
Weighted average number of stock dividend shares distributed for shares held on January 1, 2016	30,000,000
Weighted average number of stock dividend shares distributed for treasury shares bought on April 30, 2016	(1,000,000)
Weighted average number of treasury stock sold on August 31, 2016	4,000,000
Total weighted average number of shares	613,000,000 shares

Table (1)

Note: Refer to Equations (2) through (5) for value and computation of weighted average number of mentioned shares.

Step 7: Compute net loss per share of Incorporation A for the year ended December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Net loss }\\ \text{per share}\end{array}\}\text{ = }\frac{\text{Net loss–Preferred dividends}}{\text{Weighted average number of common shares outstanding}}\\ \text{= }\frac{\text{\$}\left(\text{140,000,000}\right)\text{ – \$160,000,000}}{\text{613,000,000 shares}}\\ \text{= \$}\left(\text{0}\text{.49}\right)\text{ per share}\end{array}$

Note: Refer to Equation (1) for value and computation of preferred dividend amount, and Table (1) for value and computation of total weighted average number of shares.

(2)

To determine

The per share amount of income or loss from continuing operations of Incorporation A for the year ended December 31, 2016

Explanation of Solution

Determine per share amount of income or loss from continuing operations of Incorporation A for the year ended December 31, 2016.

Step 1: Compute the amount of loss from continuing operations.

$\begin{array}{c}\text{Net loss = }\left\{\begin{array}{l}\text{Income }\left(\text{loss}\right)\text{from continuing operations – }\\ \text{Income }\left(\text{loss}\right)\text{from discontinued operations}\end{array}\right\}\\ \text{\$}\left(\text{140,000,000}\right)\text{=}\left\{\begin{array}{l}\text{Income }\left(\text{loss}\right)\text{from continuing operations–}\\ \text{\$}\left(\text{400,000,000}\right)\end{array}\right\}\\ \begin{array}{l}\text{Income}\left(\text{loss}\right)\text{ from }\\ \text{continuing operations}\end{array}\}\text{= \$400,000,000–\$}\left(\text{140,000,000}\right)\\ \text{= \$260,000,000}\end{array}$ (6)

Step 2: Compute per share amount of income (loss) from continuing operations of Incorporation A for the year ended December 31, 2016.

$\begin{array}{c}\begin{array}{l}\text{Per share amount of income }\\ \text{from continuing operations}\end{array}\}\text{ = }\frac{\left\{\begin{array}{l}\text{Income from continuing operations–}\\ \text{Preferred dividends}\end{array}\right\}}{\left(\begin{array}{l}\text{Weighted average number of }\\ \text{common shares outstanding}\end{array}\right)}\\ \text{= }\frac{\text{\$260,000,000 – \$160,000,000}}{\text{613,000,000 shares}}\\ \text{= \$0}\text{.16 per share}\end{array}$

Note: Refer to Equation (1) for value and computation of preferred dividend amount, Equation (6) for income from continuing operations, and Table (1) for value and computation of total weighted average number of shares.

(3)

To determine

To prepare: A presentation to report EPS on the comparative income statements of Incorporation A, for the years ended December 31, 2015 and 2016

Explanation of Solution

Presentation of EPS:

Incorporation A
Comparative Income Statements
For the Years Ended 2015 and 2016
Particulars	2016	2015
Earnings per share:
Income from continuing operations	$0.16	0.71
Loss from discontinued operations	(0.65)	0
Net income (loss)	$(0.49)	$0.71

Table (2)

Working Notes:

Calculate per share amount of loss from discontinued operations in 2016.

$\begin{array}{c}\text{Earnings per share}=\frac{\text{Loss from discontinued operations}}{\text{Number}\text{of}\text{weighted average shares}}\\ =\frac{\$\left(400,000,000\right)}{613,000,000}\\ =\text{\$}\left(\text{0}\text{.65}\right)\text{ per share}\end{array}$

Compute earnings per share for 2015.

$\begin{array}{c}\text{EPS = }\frac{\text{Net income–Preferred dividends}}{\text{Weighted average number of common shares outstanding}}\\ \text{= }\frac{\text{\$450,000,000 – \$0}}{\left(\text{600,000,000+30,000,000}\right)\text{ shares}}\\ \text{= 0}\text{.71 per share}\end{array}$

Note: Refer to Equation (3) for value and computation of stock dividend shares.