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    Practice exam questions: Earnings per share, basic and diluted

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    11. In calculating diluted earnings per share, which should be included:
    a. The weighted average number of preferred shares outstanding.
    b. Undeclared dividends on nonconvertible noncumulative preferred shares.
    c. The amount of cash dividends declared on common shares.
    d. Common shares resulting from the assumed conversion of bonds

    12. Sunset Inc. issued a 10% common stock dividend on May 1st. The common shares at the beginning of the year were 200,000. They also issued another 40,000 shares on Nov 1st. What is the weighted average common shares if these were the only changes in the shares during the year (rounded)?
    a. 226,665
    b. 220,000
    c. 243,333
    d. 260,000

    13. When computing earnings per share on common stock, dividends on cumulative, nonconvertible preferred stock should be
    a. deducted from net income only if the dividends were declared
    b. deducted from net income regardless of whether the dividends were declared
    c. deducted from net income only if stock price is above par value
    d. Deducted from diluted earnings per share but not basic earnings per share

    14. What is the correct treatment of a stock dividend issued in mid-year when computing the weighted-average number of common shares outstanding for earnings per share purposes?
    a. The stock dividend should be weighted by the length of time that the additional number of shares are outstanding during the period.
    b. The stock dividend should be included in the weighted-average number of common shares outstanding only if the additional shares result in a decrease of earnings per share.
    c. The stock dividend should be weighted as if the additional shares were issued at the beginning of the year.
    d. The stock dividend should be ignored since no additional capital was received.

    15. When computing diluted earnings per share, stock options are
    a. Included in the computation only if they are dilutive
    b. Included in the computation only if they are antidilutive
    c. Included in the computation only if they were exercised
    d. Included in the computation of basic EPS only

    16. On December 31, 2014, Stanley, Inc. had 600,000 shares of common stock issued and outstanding. Stanley issued a 10 percent stock dividend on July 1, 2015. On October 1, 2015, Stanley reacquired 48,000 shares of its common stock and recorded the purchase using the cost method of accounting for treasury stock. What number of shares should be used in computing basic earnings per share for the year ended December 31, 2015?
    a. 612,000
    b. 618,000
    c. 648,000
    d. 660,000

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    https://brainmass.com/business/financial-accounting-bookkeeping/615983

    SOLUTION This solution is FREE courtesy of BrainMass!

    11. In calculating diluted earnings per share, which should be included:
    a. The weighted average number of preferred shares outstanding.
    b. Undeclared dividends on nonconvertible noncumulative preferred shares.
    c. The amount of cash dividends declared on common shares.
    d. Common shares resulting from the assumed conversion of bonds.

    Common shares from converting bonds would be in the denominator of DEPS. The weighted average of COMMON shares (but not preferred) would be included. Undeclared dividends are included ONLY for cumulative preferred (otherwise have to be declared). Dividends on common are never included.

    12. Sunset Inc. issued a 10% common stock dividend on May 1st. The common shares at the beginning of the year were 200,000. They also issued another 40,000 shares on Nov 1st. What is the weighted average common shares if these were the only changes in the shares during the year (rounded)?
    a. 226,665
    b. 220,000
    c. 243,333
    d. 260,000

    Stock dividends and stock splits are retroactive.
    200,000 + 20,000 [the 10% extra shares, retroactive to start of year] x 10/12 = 183,333
    Plus 260,000 x 2/12 = 43,333

    13. When computing earnings per share on common stock, dividends on cumulative, nonconvertible preferred stock should be
    a. deducted from net income only if the dividends were declared
    b. deducted from net income regardless of whether the dividends were declared
    c. deducted from net income only if stock price is above par value
    d. Deducted from diluted earnings per share but not basic earnings per share

    B. See comment above about undeclared dividends on cumulative preferred stock.

    14. What is the correct treatment of a stock dividend issued in mid-year when computing the weighted-average number of common shares outstanding for earnings per share purposes?
    a. The stock dividend should be weighted by the length of time that the additional number of shares are outstanding during the period.
    b. The stock dividend should be included in the weighted-average number of common shares outstanding only if the additional shares result in a decrease of earnings per share.
    c. The stock dividend should be weighted as if the additional shares were issued at the beginning of the year.
    d. The stock dividend should be ignored since no additional capital was received.

    C. See example in the computation above. Treated as if stock dividend (or stock split) happened at start of year.

    15. When computing diluted earnings per share, stock options are
    a. Included in the computation only if they are dilutive
    b. Included in the computation only if they are antidilutive
    c. Included in the computation only if they were exercised
    d. Included in the computation of basic EPS only

    A. Included if dilutive (make EPS the same or lower than basic EPS).

    16. On December 31, 2014, Stanley, Inc. had 600,000 shares of common stock issued and outstanding. Stanley issued a 10 percent stock dividend on July 1, 2015. On October 1, 2015, Stanley reacquired 48,000 shares of its common stock and recorded the purchase using the cost method of accounting for treasury stock. What number of shares should be used in computing basic earnings per share for the year ended December 31, 2015?
    a. 612,000
    b. 618,000
    c. 648,000
    d. 660,000
    600,000 x 1.10 [to include for 10% dividend which is treated as if it occurred on Jan 1] = 660,000 x 9/12 = 495,000
    612,000 x 3/12 = 153,000

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    © BrainMass Inc. brainmass.com December 24, 2021, 11:54 pm ad1c9bdddf>
    https://brainmass.com/business/financial-accounting-bookkeeping/615983

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