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CHAPTER16

DilutiveSecuritiesandEarningsPer Share
SOLUTIONSTO BRIEFEXERCISES
BRIEFEXERCISE16-1
Cash................................................................... 3,960,000
Discounton BondsPayable.................................................
BondsPayable...........................................................

40,000
4,000,000

BRIEFEXERCISE16-2
BondsPayable...................................................................
Discounton BondsPayable.........................................
CommonStock(2,000X 50 X $10).................................
Paid-in Capital in Excessof Par....................................

2,000,000
30,000
1,000,000
970,000

BRIEFEXERCISE16-3
PreferredStock(1,000X $50)...............................................
Paid-in Capital in Excessof ParPreferred
Stock($60 $50) X 1,000..................................................
CommonStock(2,000X $10)........................................
Paid-in Capital in Excessof Par
CommonStock
($60X 1,000) (2,000X $10).....................................

50,000
10,000
20,000

40,000

BRIEFEXERCISE16-4
Cash.................................................................... 2,020,000
Discounton BondsPayable
($2,000,000 $1,940,784)..................................................
BondsPayable...........................................................
Paid-in CapitalStockWarrants...................................

59,216

FMVof bonds(2,000X $1,000X .98)......................................


FMVof warrants(2,000X $40)..............................................
Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

2,000,000
79,216
$1,960,000
80,000
16-1

AggregateFMV...................................................................

$2,040,000

Allocatedto bonds($1,960/$2,040X $2,020,000).....................


Allocatedto warrants($80/$2,040X $2,020,000)......................

$1,940,784
79,216
$2,020,000

BRIEFEXERCISE16-5
Cash................................................................ 2,020,000
Discounton BondsPayable
[$2,000,000X (1 .98)]..................................................
BondsPayable........................................................
Paid-in CapitalStockWarrants................................

40,000
2,000,000
60,000*

*$2,000,000X (1.01 .98)

BRIEFEXERCISE16-6
1/1/10

No entry

12/31/10CompensationExpense........................................
Paid-in CapitalStock
Options............................................

75,000

12/31/11CompensationExpense........................................
Paid-in CapitalStock
Options............................................

75,000

75,000

75,000

BRIEFEXERCISE16-7
1/1/10

UnearnedCompensation...............................
CommonStock(2,000X $5)...................
Paid in Capitalin Excessof Par
[($65 $5) X 2,000].............................

130,000

12/31/10CompensationExpense........................................
UnearnedCompensation.......................

65,000

12/31/11CompensationExpense........................................
UnearnedCompensation.......................

65,000

16-2

10,000
120,000

65,000

65,000

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

BRIEFEXERCISE16-8
1/1/10

UnearnedCompensation......................................
CommonStock................................................
Paid-in Capital in Excessof Par..........................

75,000

12/31/10CompensationExpense................................................
UnearnedCompensation($75,000 3)................

25,000

10,000
65,000

25,000

BRIEFEXERCISE16-9
$1,000,000 (100,000X $2)
250,000shares

= $3.20per share

BRIEFEXERCISE16-10
Dates
Outstanding

Shares
Outstanding

Fraction
of Year

1/15/1
5/17/1
7/110/1
10/112/31

120,000
180,000
170,000
180,000

4/12
2/12
3/12
3/12

Weighted
Shares
40,000
30,000
42,500
45,000
157,500

BRIEFEXERCISE16-11
(a)

(300,000X 4/12) + (330,000X 8/12) = 320,000

(b) 330,000 (The 30,000 shares issued in the stock dividend are assumedoutstanding from the
beginningof the year.)

BRIEFEXERCISE16-12
Net income........................................................................................
Adjustmentfor interest,net of tax [$80,000X (1 .40)]............................
Adjustednet income...........................................................................
Weightedaveragenumberof sharesadjustedfor
dilutivesecurities(100,000+ 16,000).................................................
DilutedEPS.......................................................................................
Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

$300,000
48,000
$348,000
116,000
$3.00
16-3

BRIEFEXERCISE16-13
Net income.......................................................................................
Weightedaveragenumberof sharesadjusted
for dilutivesecurities(50,000+ 10,000).............................................
DilutedEPS......................................................................................

$270,000
60,000
$4.50

BRIEFEXERCISE16-14
Proceedsfromassumedexerciseof 45,000
options(45,000X $10)....................................................................
Sharesissueduponexercise..............................................................
Treasurysharespurchasable($450,000 $15)......................................
Incrementalshares............................................................................
DilutedEPS =

$300,000
200,000+ 15,000

$450,000
45,000
30,000
15,000
$1.40

BRIEFEXERCISE16-15
Earningsper share
Incomebeforeextraordinaryloss($600,000/100,000)......................
Extraordinaryloss($120,000/100,000)..........................................
Net income($480,000/100,000).....................................................

$ 6.00
(1.20)
$ 4.80

*BRIEFEXERCISE16-16
2010:

(5,000X $4) X 50%= $10,000

2011:

(5,000X $9) $10,000= $35,000

16-4

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

SOLUTIONSTO EXERCISES
EXERCISE16-1 (1520minutes)
1.

2.

Cash($10,000,000X .99)........................................
Discounton BondsPayable...................................
BondsPayable..............................................

9,900,000
100,000

UnamortizedBondIssueCosts..............................
Cash............................................................

70,000

Cash...................................................................
Discounton BondsPayable...................................
BondsPayable..............................................
Paid-in CapitalStockWarrants......................

9,800,000
600,000

Valueof bonds
pluswarrants
($10,000,000X .98)
Valueof warrants
(100,000X $4)
Valueof bonds
3.

10,000,000
70,000

10,000,000
400,000

$9,800,000
400,000
$9,400,000

DebtConversionExpense.....................................
BondsPayable.....................................................
Discounton BondsPayable............................
CommonStock.............................................
Paid-in Capital in Excessof Par.......................
Cash............................................................

75,000
10,000,000
55,000
1,000,000
8,945,000*
75,000

*[($10,000,000 $55,000) $1,000,000]


EXERCISE16-2 (1520minutes)
(a)

InterestPayable($150,000X 2/6)............................
InterestExpense($150,000X 4/6) + $2,032.................
Discounton BondsPayable............................
Cash($3,000,000X 10% 2)............................

50,000
102,032
2,032
150,000

Calculations:
Par value
Issuanceprice
Total discount

$3,000,000
2,940,000
$ 60,000

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

16-5

EXERCISE16-2 (Continued)
Monthsremaining
Discountper month
($60,000 118)
Discountamortized
(4 X $508)

118
$508
$2,032

(b) BondsPayable...........................................................
Discounton BondsPayable...................................
CommonStock(30,000X $20)................................
Paid-in Capital in Excessof Par..............................

1,000,000
18,305
600,000
381,695*

*($1,000,000 $18,305) $600,000


Calculations:
Discountrelatedto 1/3 of
the bonds($60,000X 1/3)
Less: Discountamortized
[($60,000 118) X 10 X 1/3]
Unamortizedbonddiscount

$20,000
1,695
$18,305

EXERCISE16-3 (1015minutes)
Conversionrecordedat bookvalueof the bonds:
BondsPayable...................................................................
Premiumon BondsPayable.................................................
PreferredStock(400 X 20 X $50)...................................
Paid-in Capital in Excessof ParPreferredStock.......................................................

400,000
6,000
400,000
6,000

EXERCISE16-4 (1520minutes)
(a)

16-6

Cash.......................................................... 10,600,000
BondsPayable...................................................
Premiumon BondsPayable.................................
(To recordissuanceof $10,000,000
of 8% convertibledebenturesfor
$10,600,000.Thebondsmature
in twentyyears,andeach$1,000
bondis convertibleinto five shares
of $30 par valuecommonstock)

10,000,000
600,000

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

EXERCISE16-4 (Continued)
(b) BondsPayable.....................................................
Premiumon BondsPayable
(Schedule1) ....................................................
CommonStock,$15 par
(Schedule2) .............................................
Paid-in Capital in Excessof Par......................
(To recordconversionof 20%
of the outstanding8% convertible
debenturesafter givingeffect
to the 2-for-1 stocksplit)

2,000,000
108,000
300,000
1,808,000

Schedule1
Computationof UnamortizedPremiumon BondsConverted
Premiumon bondspayableon January1, 2010..........................
Amortizationfor 2010($600,000 20)........................................
Amortizationfor 2011($600,000 20)........................................
Premiumon bondspayableon January1, 2012..........................
Bondsconverted....................................................................
Unamortizedpremiumon bondsconverted................................

$600,000
$30,000
30,000

60,000
540,000
20%
$108,000

Schedule2
Computationof CommonStockResultingfromConversion
Numberof sharesconvertibleon January1, 2010: Numberof bonds($10,000,000 $1,000)
.................................................................................. 10,000
Numberof sharesfor eachbond..........................................
X
5
50,000
Stocksplit on January1, 2011.................................................
X
2
Numberof sharesconvertibleafter the stocksplit.....................
100,000
% of bondsconverted............................................................
X 20%
Numberof sharesissued........................................................
20,000
Par value/pershare................................................................
$15
Total par value......................................................................
$300,000

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

16-7

EXERCISE16-5 (1020minutes)
InterestExpense....................................................................
Discounton BondsPayable
[$10,240 64 = $160;$160X 4].....................................
Cash(10%X $600,000X 1/2)............................................
(Assumedthat the interestaccrualwas
reversedas of January1, 2011;if the interest
accrualwasnot reversed,interestexpense
wouldbe $20,640andinterestpayablewould
be debitedfor $10,000)

30,640

BondsPayable......................................................................
Discounton BondsPayable($10,240 $640).....................
CommonStock($25 X 6 X 600)........................................
Paid-in Capital in Excessof Par.......................................

600,000

640
30,000

9,600
90,000
500,400*

*($600,000 $9,600) $90,000

EXERCISE16-6 (2535minutes)
(a)

(b)

December31, 2010
BondInterestExpense...................................................
Premiumon BondsPayable
($60,000X 1/20).........................................................
Cash($3,000,000X 8% X 6/12).................................
January1, 2011
BondsPayable..............................................................
Premiumon BondsPayable............................................
CommonStock
[8 X $100X ($600,000/$1,000)]..............................
Paid-in Capital in Excessof Par...............................
Total premium
($3,000,000X .02)
Premiumamortized
($60,000X 2/10)
Balance
Bondsconverted
($600,000 $3,000,000)
Relatedpremium
($48,000X 20%)

16-8

117,000
3,000
120,000

600,000
9,600
480,000
129,600

$60,000
12,000
$48,000
20%
9,600

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

(c)

March31, 2011
BondInterestExpense...................................................
Premiumon BondsPayable
($9,600 8 years)X 3/12.............................................
BondInterestPayable
($600,000X 8% X 3/12)........................................

11,700
300
12,000

March31, 2011
BondsPayable..............................................................
Premiumon BondsPayable............................................
CommonStock......................................................
Paid-in Capital in Excessof Par...............................
Premiumas of January1, 2011
for $600,000of bonds
$9,600 8 yearsremaining
X 3/12
Premiumas of March31, 2011
for $600,000of bonds
(d)

600,000
9,300
480,000
129,300

$9,600
(300)
$9,300

June30, 2011
BondInterestExpense...................................................
Premiumon BondsPayable............................................
BondInterestPayable
($600,000X 8% X 1/4)***...............................................
Cash....................................................................

70,200
1,800
12,000
84,000*

[Premiumto be amortized:
($60,000X 60%)X 1/20 = $1,800,or
$28,800** 16 (remaininginterestand
amortizationperiods)= $1,800]
*Totalto be paid:($1,800,000X 8% 2) + $12,000= $84,000
**Originalpremium
2009amortization
2010amortization
Jan. 1, 2011write-off
Mar. 31, 2011amortization
Mar. 31, 2011write-off

$60,000
(6,000)
(6,000)
(9,600)
(300)
(9,300)
$28,800

***Assumes interest accrued on March 31. If


Expensefor $82,200.

not, debit Bond Interest

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

16-9

EXERCISE16-7 (1015minutes)
(a)

Basicformulas:
Valueof bondswithoutwarrants
Valueof bondswithoutwarrants+
Valueof warrants
Valueof warrants
Valueof bondswithoutwarrants+
Valueof warrants

X Issueprice= Valueassignedto bonds

X Issueprice= Valueassignedto warrants

$136,000
$136,000+ $24,000

X $150,000= $127,500 Valueassignedto bonds

$24,000
$136,000+ $24,000

X $150,000=

$22,500
Valueassignedto warrants
$150,000 Total

Cash................................................................. 150,000Discounton BondsPayable


($175,000 $127,500).............................................................
47,500
BondsPayable......................................................
175,000
Paid-in CapitalStockWarrants..............................
22,500
(b) Whenthe warrantsare non-detachable,separaterecognitionis not givento the warrants.The
accounting treatment parallels that given convertible debt because the debt and equity
elementcannotbe separated.
Theentryif warrantswerenon-detachableis:
Cash................................................................. 150,000
Discounton BondsPayable............................................
BondsPayable......................................................

16-10

25,000
175,000

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

EXERCISE16-8 (1015minutes)
JACOBCOMPANY
JournalEntry
September1, 2010
Cash($3,120,000+ $60,000 $30,000)................................
UnamortizedBondIssueCosts.........................................
BondsPayable(3,000X $1,000).................................
Premiumon BondsPayableSchedule1...................
Paid-in CapitalStockWarrants
Schedule1..........................................................
BondInterestExpenseSchedule2..........................
(To recordthe issuanceof the bonds)

3,150,000
30,000
3,000,000
102,000
18,000
60,000

Schedule1
Premiumon BondsPayableand Valueof StockWarrants
Salesprice(3,000X $1,040)................................................................
Facevalueof bonds..........................................................................
Deductvalueassignedto stockwarrants
(3,000X 2 = 6,000;6,000X $3)...........................................................
Premiumon bondspayable................................................................

$3,120,000
3,000,000
120,000
18,000
$ 102,000

Schedule2
AccruedBondInterestto Date of Sale
Facevalueof bonds..........................................................................
Interestrate.....................................................................................
Annualinterest.................................................................................

$3,000,000
8%
$ 240,000

Accruedinterestfor 3 months ($240,000X 3/12).................................

60,000

EXERCISE16-9 (1520minutes)
(a) Cash($3,000,000X 1.02)....................................
Discounton BondsPayable
[(1 .98) X $3,000,000]....................................
BondsPayable............................................
Paid-in CapitalStockWarrants...................

3,060,000
60,000
3,000,000
120,000*

*$3,060,000 ($3,000,000X .98)

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16-11

(b) Marketvalueof bondswithoutwarrants


($3,000,000X .98)......................................................
Marketvalueof warrants(3,000X $20)..............................
Total marketvalue.........................................................
$2,940,000

$2,940,000
60,000
$3,000,000

X $3,060,000= $2,998,800 Valueassignedto bonds

$3,000,000
$60,000
$3,000,000

X $3,060,000=

$ 61,200
$3,060,000

Valueassignedto warrants
Total

Cash............................................................................
Discounton BondsPayable............................................
BondsPayable.........................................................
Paid-in CapitalStockWarrants.................................

3,060,000
1,200
3,000,000
61,200

EXERCISE16-10 (1525minutes)1/2/10.................................... No entry(total compensationcost


is $600,000)12/31/10............................. CompensationExpense
300,000
Paid-in CapitalStockOptions............................
300,000
[To recordcompensationexpense
for 2010(1/2 X $600,000)]12/31/11CompensationExpense
300,000
Paid-in CapitalStockOptions............................
300,000
[To recordcompensationexpense
for 2011(1/2 X $600,000)]
1/3/12

16-12

Cash(30,000X $40)............................................
Paid-in CapitalStockOptions
($600,000X 30,000/40,000).................................
CommonStock(30,000X $10)......................
Paid-in Capital in Excessof Par....................
(To recordissuanceof 30,000
sharesof $10 par valuestock
uponexerciseof optionsat
optionpriceof $40)

1,200,000
450,000
300,000
1,350,000

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

(Note to instructor:The market price of the stock has no relevance in the prior entry and the
followingone.)
5/1/12

Cash(10,000X $40)...................................................
Paid-in CapitalStockOptions
($600,000X 10,000/40,000)......................................
CommonStock.................................................
Paid-in Capital in Excessof Par..........................
(To recordissuanceof 10,000
sharesof $10 par valuestock
uponexerciseof optionsat
optionpriceof $40)

400,000
150,000
100,000
450,000

EXERCISE16-12 (1525minutes)
1/1/09

No entry(total compensationcost is $450,000)

12/31/09

CompensationExpense......................................
Paid-in CapitalStockOptions
($450,000X 1/2).....................................

225,000

CompensationExpense......................................
Paid-in CapitalStockOptions.....................

225,000

Cash(9,000X $20)..............................................
Paid-in CapitalStockOptions............................
CommonStock(9,000X $5).........................
Paid-in Capital in Excessof Par....................

180,000
405,000*

12/31/10
5/1/11

225,000
225,000

45,000
540,000

*($450,000X 9,000/10,000)
1/1/13

Paid-in CapitalStockOptions............................
Paid-in Capital fromExpiredStock
Options($450,000 $405,000)...................

45,000
45,000

EXERCISE16-15 (1525minutes)(a)................................ 2,640,000shares


Jan. 1, 2010Sept.30, 2010(2,400,000X 9/12)..................................
Retroactiveadjustmentfor stockdividend.......................................
Jan. 1, 2010Sept.30, 2010, as adjusted..............................
Oct. 1, 2010Dec.31, 2010(2,640,000X 3/12).......................

1,800,000
X 1.10
1,980,000
660,000
2,640,000
Anotherway to viewthis transactionis that the 2,400,000sharesat the beginningof the year
must be restated for the stock dividend regardless of where in the year the stock dividend
occurs.

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

16-13

(b) 4,140,000shares........................................................................... Jan. 1, 2011Mar. 31,


2011(2,640,000X 3/12)..........................................................................
660,000
Apr. 1, 2011Dec.31, 2011(4,640,000X 9/12)........................
3,480,000
4,140,000
(c) 8,280,000shares........................................................................... 2011 weighted-average
numberof shares................................................................................. previouslycomputed
4,140,000
Retroactiveadjustmentfor stocksplit.................................
X
2
8,280,000
(d) 9,280,000shares
Jan. 1, 2012Mar.31, 2012(4,640,000X 3/12).............................
1,160,000
Retroactiveadjustmentfor stocksplit......................................
X
2
Jan. 1, 2012Mar.31, 2012,as adjusted.....................................
2,320,000
Apr. 1, 2012Dec.31, 2012(9,280,000X 9/12).............................
6,960,000
9,280,000
Anotherway to viewthis transactionis that the 4,640,000sharesat the beginningof the year
mustbe restatedfor the stocksplit regardlessof wherein the year the stocksplit occurs.

16-14

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

EXERCISE16-16 (1015minutes)
(a)
Dates
Outstanding

Event
Beginningbalance
Issuedshares
Stockdividend
Reacquiredshares
Stocksplit
Reissuedshares

Jan. 1Feb.1
Feb. 1Mar.1
Mar. 1May1
May1June1
June1Oct.1
Oct. 1Dec.31

Shares
Outstanding

Restatement

480,000
600,000
720,000
620,000
1,860,000
1,920,000

1.2 X 3.0
1.2 X 3.0
3.0
3.0

Fraction
of Year

Weighted
Shares

1/12
1/12
2/12
1/12
4/12
3/12

Weighted-averagenumberof sharesoutstanding

(b)

EarningsPer Share=

$3,256,000(Net Income)
1,939,000(Weighted-AverageShares)

= $1.68

(c)

EarningsPer Share=

$3,256,000 $900,000
1,939,000

= $1.22

(d) Incomefromcontinuingoperationsa.......................
discontinuedoperationsb..............................................
extraordinaryitem........................................................
.44................................................... Net income
income.......................................................................
extraordinarygain........................................................
Addloss fromdiscontinuedoperations.................
Incomefromcontinuingoperations.......................
a

$2,824,000
1,939,000

$(432,000)
1,939,000
c

$864,000
1,939,000

144,000
180,000
360,000
155,000
620,000
480,000
1,939,000

$1.46Lossfrom
(.22) Incomebefore
1.24Extraordinarygainc
a
$1.68
Net
$3,256,000
Deduct
(864,000)
432,000
$2,824,000

= $1.46

= $(.22)

= $.44

EXERCISE16-26 (2025minutes)
(a)
Sharesassumedissuedon exercise...................................................
Proceeds(1,000X $8 = $8,000)Less: Treasurysharespurchased($8,000/$20)
400
Incrementalshares..................................................................
$40,000
DilutedEPS=
= $3.77(rounded)
10,000+ 600

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

Diluted
1,000
600

16-15

(b)
Sharesassumedissuedon exercise...................................................
Proceeds= $8,000..........Less: Treasurysharespurchased($8,000/$20)

Diluted
1,000

400
600
X 3/12

Incrementalshares...........................................................................
DilutedEPS=

$40,000
10,000+ 150

150

= $3.94(rounded)

EXERCISE16-28 (1520minutes)
(a)

Diluted
Thewarrantsare dilutivebecausethe optionprice
($10) is less thanthe averagemarketprice($15).
Incrementalshares=

$15 $10
$15

X 30,000=

10,000

OR
Proceedsfromassumedexercise:
(30,000warrantsX $10 exerciseprice)......................................
Treasurysharespurchasablewith proceeds:
($300,000 $15 averagemarketprice)......................................
Incrementalsharesissued:
(30,000sharesissuedless 20,000purchased)...........................

$300,000
20,000

10,000

(b) BasicEPS= $2.60


($260,000 100,000shares)
(c)

16-16

DilutedEPS= $2.36
($260,000 110,000shares)

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

SOLUTIONSTO PROBLEMS
PROBLEM16-5

The computationof FitzgeraldPharmaceuticalIndustries basic earningsper share and the diluted


earningsper sharefor the fiscal year endedJune30, 2010, are shownbelow.
(a)

Basicearningsper share

Net income Preferreddividends


Averagecommonsharesoutstanding
$1,500,000 $75,0001
1,000,000
$1,425,000
1,000,000

= $1.425or $1.43per share

Preferreddividend= .06 X $1,250,000


= $75,000

(b)

Dilutedearningsper share

Net income Preferreddividends+ Interest


(net of tax)
=
Averagecommonshares+ Potentiallydilutive
commonshares
=

$1,500,000 $75,000+ $240,0002


1,000,000+ 250,0003 + 50,0004
$1,665,000
1,300,000

= $1.2808or $1.28per share

Useif convertedmethodfor 8% bonds


Adjustmentfor interestexpense(net of tax)
($5,000,000X .08 X .6)......................................................

$240,000

Sharesassumedto be issuedif converted

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

16-17

$5,000,000 $1,000/bondX 50 shares.....................................

250,000

PROBLEM16-5 (Continued)
4

Usetreasurystockmethodto determineincremental
sharesoutstanding
Proceedsfromexerciseof options
(200,000X $15)..................................................................
Sharesissueduponexerciseof options.................................
Sharespurchasablewith proceeds
(Proceeds Averagemarketprice)
($3,000,000 $20).............................................................
Incrementalsharesoutstanding.....................................

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$3,000,000
200,000

150,000
50,000

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

PROBLEM16-8

(a)

BasicEPS

$1,200,000 ($4,000,000X .06)


600,000*

= $1.60per share
*$6,000,000 $10

(b)

DilutedEPS

(Net income Preferreddividends)+ Interest


savings(net of tax)
=
Averagecommonshares+ Potentially
dilutivecommonshares
$1,200,000 $240,000a + $96,000b
600,000+ 15,000c + 60,000d

$1,056,000
675,000

= $1.56per share
a

Preferred stock is not assumed converted since conversion would be antidilutive. That is,
conversionof the preferredstockincreasesthe numerator$240,000($4,000,000X .06) andthe
denominator120,000shares[(4,000,000 100) X 3]

$2,000,000X .08 X (1 .40)


c

Marketprice Optionprice
Marketprice

$25 $20
$25

X Numberof options= incrementalshares

X 75,000= 15,000

($2,000,000 $1,000)X 30 shares/bond

Copyright 2010 John Wiley & Sons, Inc.Kieso, Intermediate Accounting, 13/e, Solutions Manual(For Instructor Use Only)

16-19