Deck 17: Earnings Per Share

Question 1

Assume a corporation has two potentially dilutive convertible securities outstanding.The one that should be used first to calculate diluted earnings per share is the security with the

A)greater earnings adjustment.
B)greater earnings per share adjustment.
C)smaller earnings adjustment.
D)smaller earnings per share adjustment.

Answer 1

D

Question 2

EPS is important to common shareholders for all of the following reasons, EXCEPT

A)it indicates the amount of income that is earned by each common share.
B)common shareholders have a residual interest in the company.
C)it is an indicator of cumulative dividend payments.
D)it is an indicator of the amount of income earned by each share.

Answer 2

C

Question 3

Diluted EPS is only required when

A)a company has discontinued operations.
B)there is a complex capital structure.
C)basic EPS can't be calculated.
D)a company uses ASPE.

Answer 3

B

Question 4

When a corporation agrees to issue common shares if some specific future event occurs, such shares are known as

A)potential treasury shares.
B)potential common shares.
C)contingently issuable shares.
D)convertible common shares.

Question 5

In calculating diluted earnings per share, dividends on non-convertible cumulative preferred shares should be

A)ignored.
B)deducted from net income whether declared or not.
C)deducted from net income only if declared.
D)added back to net income whether declared or not.

Question 6

Which of the following statements is INCORRECT?

A)Options that are out of the money are ignored in earnings per share calculations.
B)The treasury stock method is used for written call options.
C)Corporations that have only antidilutive securities are not permitted to increase their earnings per share and are required to report only basic earnings per share.
D)Contingently issuable shares are never included in diluted earnings per share calculations.

Question 7

In calculating diluted earnings per share, the equivalent number of convertible preferred shares is added as an adjustment to the denominator.If the preferred shares are cumulative, which amount should then be added as an adjustment to the numerator?

A)annual preferred dividend
B)annual preferred dividend times (one minus the income tax rate)
C)annual preferred dividend times the income tax rate
D)annual preferred dividend divided by the income tax rate

Question 8

What effect will the acquisition of treasury shares have on shareholders' equity and basic earnings per share, respectively?

Question 9

Dilutive convertible securities must be used in the calculation of

A)basic earnings per share only.
B)diluted earnings per share only.
C)diluted and basic earnings per share.
D)silly question: such securities are never included.

Question 10

In calculating basic earnings per share, if the preferred shares are cumulative, the amount that should be deducted as an adjustment to the numerator is the

A)annual preferred dividend.
B)preferred dividends in arrears.
C)annual preferred dividend times (one minus the income tax rate).
D)preferred dividends in arrears times (one minus the income tax rate).

Question 11

When calculating diluted earnings per share, convertible bonds are

A)ignored.
B)assumed converted whether they are dilutive or antidilutive.
C)assumed converted only if they are antidilutive.
D)assumed converted only if they are dilutive.

Question 12

In calculating diluted earnings per share, the treasury stock method is used for written call options and equivalents to reflect assumed reacquisition of common shares at the average market price during the period.If the exercise price of the options or warrants exceeds the average market price, the calculation would

A)fairly present diluted earnings per share on a prospective basis.
B)fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
C)reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
D)be antidilutive.

Question 13

When applying the treasury stock method, the price of the common shares used for the assumed repurchase is the

A)market price at the end of the year.
B)average market price during the year.
C)market price at the beginning of the year.
D)market price at the time the options or warrants were granted.

Question 14

In calculating the weighted average of common shares outstanding, when a stock dividend or stock split occurs, the additional shares are

A)ignored.
B)weighted by the number of months outstanding.
C)considered outstanding at the beginning of the year.
D)considered outstanding at the beginning of the earliest year reported.

Question 15

With respect to the calculation of earnings per share, which of the following would suggest a simple capital structure?

A)common shares and convertible bonds
B)earnings derived from one primary line of business
C)common shares and non-convertible preferred shares
D)common shares and convertible preferred shares

Question 16

EPS is normally

A)on the income statement of privately held and publicly traded corporations.
B)in the notes to the financial statements.
C)not a requirement under ASPE.
D)provided at the discretion of management.

Question 17

Antidilutive securities

A)should be included in the calculation of diluted earnings per share but not basic earnings per share.
B)are those whose inclusion in earnings per share calculations would cause basic earnings per share to exceed diluted earnings per share.
C)include call options and warrants whose exercise price is less than the average market price of common shares.
D)should be ignored in all earnings per share calculations.

Question 18

Standard setters require the EPS calculation be included

A)only when there is a complex capital structure.
B)under both IFRS and ASPE.
C)when is an indicator of cumulative dividend payments.
D)for all publicly traded companies.

Question 19

Under IFRS, common shares are also called

A)ordinary shares.
B)potential shares.
C)treasury shares.
D)non-dilutive shares.

Question 20

In applying the treasury stock method to determine the dilutive effect of options and warrants, the proceeds assumed to be received upon exercise of the options and warrants

A)are used to calculate the number of common shares repurchased at the average market price, when calculating diluted earnings per share.
B)are added, net of tax, to the numerator of the calculation for diluted earnings per share.
C)are disregarded in the calculation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common shares.
D)are not included in the calculation.

Question 21

The reverse treasury stock method is used for

A)written call options.
B)written put options.
C)convertible preferred shares.
D)convertible bonds.

Question 22

At December 31, 2016, Marion Inc.had 6,000,000 common shares outstanding.An additional 1,000,000 common shares were issued on April 1, 2017, and 500,000 more on July 1, 2017.On October 1, 2017, Marion issued 25,000, $1,000 par value, 8% convertible bonds.Each bond is convertible into 20 common shares.No bonds were converted in 2017.What is the number of shares to be used in calculating 2017 basic earnings per share and diluted earnings per share, respectively?

A)7,000,000 and 7,000,000
B)7,000,000 and 7,125,000
C)7,000,000 and 7,500,000
D)7,500,000 and 8,500,000

Question 23

At December 31, 2017, Barium Corp.had 500,000 common shares outstanding, 400,000 of which were issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2017.Net income for calendar 2017, was $255,000.There are no preferred shares issued.Basic earnings per share for 2017 would be

A)$0.51.
B)$0.57.
C)$0.60.
D)$0.64.

Question 24

During 2017, Malamute Ltd.had 200,000 common shares, 30,000 non-cumulative convertible preferred shares, and $1,500,000 10% convertible bonds outstanding.The preferred shares are convertible into 40,000 common shares.During 2017, Malamute paid dividends of $1.20 per share to the common shares and $2.00 per share to the preferred shares.Each $1,000 bond is convertible into 45 common shares.The net income for 2017 was $900,000 and the income tax rate was 30%.Basic earnings per share for 2017 is

A)$3.75.
B)$4.20.
C)$4.35.
D)$4.50.

Question 25

At December 31, 2016, Felix Ltd.had 500,000 common shares outstanding (no preferred shares issued).On October 1, 2017, an additional 100,000 common shares were issued.In addition, Felix had $5,000,000, 6% convertible bonds outstanding at December 31, 2016, which are convertible into 225,000 common shares; however, no bonds were converted during 2017.Net income for calendar 2017 was $1,500,000.Assuming the income tax rate was 30%, the diluted earnings per share for 2017 would be

A)$3.26.
B)$2.40.
C)$2.28.
D)$2.00.

Question 26

Information concerning the capital structure of Shepherd Corporation follows During 2017, Shepherd paid dividends of $1.00 per common share and $2.50 per preferred share.The preferred shares are non-cumulative, and convertible into 20,000 common shares.The 9% convertible bonds are convertible into 50,000 common shares.Net income for calendar 2017 was $500,000.Assume the income tax rate is 30%.Basic earnings per share for 2017 is

A)$3.33.
B)$3.65.
C)$4.75.
D)$5.00.

Question 27

At December 31, 2016, St.John's Limited had 4,000,000 common shares outstanding (no preferred shares issued).An additional 250,000 common shares were issued on July 1, 2017, and 500,000 more on October 1, 2017.As well, on April 1, 2017, St.John's issued 10,000, $1,000 face value, 8% convertible bonds.Each bond is convertible into 40 common shares.No bonds were converted in 2017.What is the number of shares to be used in calculating basic earnings per share and diluted earnings per share, respectively, for 2017?

A)4,250,000 and 4,550,000
B)4,250,000 and 4,250,000
C)4,250,000 and 4,650,000
D)4,750,000 and 5,050,000

Question 28

At January 1, 2017, Ariel Corp.had 300,000 common shares outstanding (no preferred shares issued).On July 1, 2017, the corporation issued 450,000 shares, and reported net income of $630,000 for calendar 2017.Basic earnings per share for 2017 would be

A)$2.10.
B)$1.40.
C)$1.20.
D)$0.84.

Question 29

Major challenges for standard setters calculating EPS includes all of the following, EXCEPT

A)complex financial instruments.
B)redeveloping standards under ASPE.
C)treatment of conversion features.
D)dilutive securities.

Question 30

At January 1, 2017, Calypso Ltd had 600,000 common shares outstanding (no preferred shares issued).During 2017, Calypso issued 84,000 shares on May 1, purchased 42,000 treasury shares on September 1, and issued 36,000 more shares on November 1.The weighted average of common shares outstanding for 2017 is

A)634,000.
B)648,000.
C)662,000.
D)676,000.

Question 31

At December 31, 2016, Riel Corp.had 300,000 common shares outstanding.No additional common shares were issued during 2017.On January 1, 2017, Riel issued 400,000 non-cumulative, non-convertible preferred shares.During 2017, Riel paid cash dividends of $180,000 to the common shares and $150,000 to the preferred shares.Net income for calendar 2017, was $480,000.Their income tax rate is 40%.Basic earnings per share for 2014 is

A)$0.46.
B)$1.00.
C)$1.10.
D)$1.60.

Question 32

All of the following regarding company valuation are true EXCEPT for

A)EPS is the preferred method recommended by standard setters.
B)sustainable cash flow or earnings can be used.
C)EPS can be used because it is considered reliable and all inclusive.
D)using EPS provides a very rough calculation only.

Question 33

The main difference between IFRS and ASPE as it relates to EPS calculations is

A)there is no difference.
B)diluted EPS applies only to IFRS, both use basic EPS.
C)only companies with complex financial structures must calculate EPS under IFRS.
D)there are no prescribed standards under ASPE.

Question 34

At December 31, 2016 and 2017, Danish Corp.had 100,000 common shares and 10,000, $5, no par value cumulative preferred shares outstanding.No dividends were declared in 2016 or 2017.Net income for 2017 was $400,000.For 2017, basic earnings per share would be

A)$4.00.
B)$3.50.
C)$3.00.
D)$2.00.

Question 35

On January 2, 2017, Delila Inc.issued at par $10,000 6% bonds convertible into 1,000 of their common shares.No bonds were converted during 2017.Throughout 2017, Delila had 1,000 common shares outstanding (no preferred shares issued).Delila's 2017 net income was $6,000, and their income tax rate is 30%.No potentially dilutive securities other than the convertible bonds were outstanding during 2017.Delila diluted earnings per share for 2017 would be

A)$3.00.
B)$3.21.
C)$3.30.
D)$6.42.

Question 36

Standard setters are very specific regarding the calculation of EPS for all of the following reasons EXCEPT

A)predictor of future company value.
B)it can be used to assess management stewardship.
C)the income tax consequences of increased share value.
D)because of the dilutive nature of complex financial instruments.

Question 37

Which of the following statements is correct?

A)Options that are in the money are ignored in earnings per share calculations.
B)Options that are out of the money are ignored in earnings per share calculations.
C)Contingently issuable shares are never included in diluted earnings per share calculations.
D)The treasury stock method is used for written put options.

Question 38

The if-converted method of calculating earnings per share data assumes conversion of convertible securities as of the

A)beginning of the earliest period reported (or at time of issuance, if later).
B)beginning of the earliest period reported (regardless of time of issuance).
C)middle of the earliest period reported (regardless of time of issuance).
D)ending of the earliest period reported (regardless of time of issuance).

Question 39

At December 31, 2016, Parrot Corp.had 1,000,000 common shares outstanding (no preferred shares issued).An additional 100,000 shares were issued on April 1, 2017, and 240,000 more on September 1.On October 1, Parrot issued $3,000,000 (par value)9% convertible bonds.Each $1,000 bond is convertible into 40 common shares.No bonds have been converted yet.The number of shares to be used in calculating basic earnings per share and diluted earnings per share for 2017 is

A)1,155,000 and 1,155,000.
B)1,155,000 and 1,185,000.
C)1,155,000 and 1,275,000.
D)1,540,000 and 1,660,000.

Question 40

At December 31, 2016, Tantalum Corp.had 300,000 common shares outstanding.No common shares were issued during 2017; however, on January 1, 2017, Terrier issued 200,000 non-cumulative, non-convertible preferred shares.During 2017, Terrier paid cash dividends of $100,000 to the common shareholders and $80,000 to the preferred shareholders.Net income for calendar 2017 was $300,000.Basic earnings per share for 2017 would be

A)$0.67.
B)$0.73.
C)$1.00.
D)$1.67.

Question 41

At December 31, 2016, Jack Russell Ltd.had 900,000 common shares outstanding (no preferred shares issued).On September 1, 2017, an additional 300,000 common shares were issued.In addition, Jack Russell had $10,000,000 (par value)6% convertible bonds outstanding at December 31, 2016, which are convertible into 600,000 common shares.No bonds were converted in 2017.Net income for calendar 2017 was $3,750,000.Assuming the income tax rate is 30%, the diluted earnings per share for 2017 is

A)$2.35.
B)$2.61.
C)$2.72.
D)$3.75.

Question 42

At December 31, 2017, Spearmint Inc.had 300,000 common shares outstanding (no preferred shares issued).In addition, the corporation had granted 90,000 stock options to certain executives, and which gave them the right to purchase Spearmint's shares at the option price of $37 per share.None of these options have yet been exercised.The average market price of Spaniel's common shares during 2017 was $50.What is the number of shares that should be used in calculating diluted earnings per share for 2017?

A)300,000
B)323,400
C)331,622
D)366,600

Question 43

Warrants exercisable at $20 each to obtain 50,000 common shares were outstanding during a period when the average market price of the common shares was $25.Application of the treasury stock method in calculating diluted earnings per share will increase the weighted average number of outstanding shares by

A)50,000.
B)40,000.
C)12,500.
D)10,000.

Question 44

On December 31, 2016, RojoLtd.had 2,000,000 common shares outstanding.On January 1, 2017, Rojo issued 500,000 non-cumulative preferred shares, which were convertible into 1,000,000 common shares.During 2017, Rojo paid cash dividends of $900,000 to the common shares and $300,000 to the preferred shares.Net income for calendar 2017, was $6,000,000.Assuming an income tax rate of 30%, the diluted earnings per share for 2017 is

A)$1.80.
B)$2.00.
C)$2.80.
D)$3.00.

Question 45

At December 31, 2016, Skye Inc.had 500,000 common shares outstanding (no preferred shares issued).On July 1, 2017, an additional 50,000 common shares were issued.Skye also had unexercised call options to purchase 40,000 common shares at $15 per share outstanding throughout 2017.The average market price of Skye's common shares was $20 during 2017.The number of shares that should be used in calculating diluted earnings per share for 2017 is

A)525,000.
B)535,000.
C)560,000.
D)565,000.

Question 46

On January 2, 2017, Helisinki Ltd.issued at par $300,000, 9% convertible bonds.Each $1,000 bond is convertible into 30 shares.No bonds were converted during 2017.There were 50,000 common shares outstanding during 2017 (no preferred shares issued).Helsinki's 2017 net income was $160,000 and their income tax rate was 30%.Helsinki's diluted earnings per share for 2017 would be

A)$2.71.
B)$3.03.
C)$3.20.
D)$3.58.

Question 47

During 2017, Madrid Ltd.had 200,000 common shares, 30,000 non-cumulative convertible preferred shares, and $1,500,000 10% convertible bonds outstanding.The preferred shares are convertible into 40,000 common shares.During 2017, Madrid paid dividends of $1.20 per share to the common shares and $2.00 per share to the preferred shares.Each $1,000 bond is convertible into 45 common shares.The net income for 2017 was $900,000 and the income tax rate was 30%.Diluted earnings per share for 2017 is

A)$2.98.
B)$3.38.
C)$3.27.
D)$3.41.

Question 48

Throughout 2017, Moon Ltd.had 1,200,000 common shares outstanding.As well, the corporation paid $300,000 in preferred dividends and reported net income of $5,100,000 for 2017.In connection with the acquisition of a subsidiary company in June 2016, Moon is required to issue 50,000 additional common shares on July 1, 2018, to the former owners of the subsidiary.Moon's diluted earnings per share for 2017 should be

A)$4.25.
B)$4.08.
C)$4.00.
D)$3.84.

Question 49

Information concerning the capital structure of Shelmardine Corporation follows During 2017, Shelmardine paid dividends of $1.00 per common share and $2.50 per preferred share.The preferred shares are non-cumulative, and convertible into 20,000 common shares.The 9% convertible bonds are convertible into 50,000 common shares.Net income for calendar 2017 was $500,000.Assume the income tax rate is 30%.
What is the diluted earnings per share for 2017?

A)$4.00
B)$3.68
C)$3.54
D)$2.94

Question 50

At December 31, 2016, Labrador Ltd.had 800,000 common shares outstanding.In addition, the corporation had 300,000 non-cumulative preferred shares outstanding, which were convertible into 500,000 common shares.During 2017, Labrador paid cash dividends of $300,000 to the common shares and $200,000 to the preferred shares.Net income for 2017 was $1,200,000 and the income tax rate was 40%.Diluted earnings per share for 2017 is

A)$2.40.
B)$1.50.
C)$0.92.
D)$0.55.