Exam 16: Retained Earnings and Earnings Per Share

When a company is determining its dividend policy, the company must adhere to legal requirements. The legal requirements are determined by

When a property dividend is declared, fair value is determined on the ex-dividend date.

Under IFRS, a company's stockholders' equity consists of which two sections?

During 2016, Sanders, Inc. had the following convertible securities outstanding: A. $220,000 of 10%, $100 par, convertible preferred stock. Each share is convertible into 5 shares of common stock. B. $200,000 of 9.5% convertible bonds. Each $1,000 bond is convertible into 45 shares of common stock. C. $100,000 of 8% convertible bonds. Each $1,000 bond is convertible into 32 shares of common stock. D. $150,000 of 11%, $100 par, convertible preferred stock. Each share is convertible into 5 shares of common stock. Sanders, Inc. has an income tax rate of 40%. Required: a. Prepare a schedule that lists the impact of the assumed conversion of each convertible security on diluted earnings per share. b. Prepare a ranking of the order in which the securities would be included in the diluted earnings per share calculations.

When calculating earnings per share, dividends declared on noncumulative preferred stock, but not paid, should be

The most common "potential common shares" that may be included in computing DEPS are share options, warrants, and convertible preferred stock and bonds.

When computing diluted earnings per share, a company may use the if-converted method and the treasury stock method. Required: Describe when and why a company would use each method.

Murphy Co. had 60,000 common shares outstanding on January 1, 2016. The company sold an additional 4,500 shares on March 1, issued a 3-for-1 stock split on September 1, and reacquired 3,600 shares on December 1. The company also declared, but has not paid, a dividend on its 10,000 shares of 5%, $10 par, noncumulative preferred stock. The net loss for the year was $33,190. Required: Compute Murphy Co.'s basic earnings per share for 2016.

Green Thumb, Inc. had 18,000 shares of common stock outstanding on January 1. An additional 6,000 shares were issued on May 1. The company also had 1,000 shares of 5.5%, $100 par, convertible preferred stock outstanding during the year. Each share is convertible into 8 shares of common stock. Net income for the year was $82,500. Required: Compute the appropriate earnings per share amounts) that would appear on the Green Thumb's income statement.

If a corporation appropriates retained earnings for treasury stock transactions, the appropriation will affect total amounts for retained earnings and stockholders' equity as

Interest expense on convertible bonds that are dilutive is included in the numerator of the diluted earnings per share calculation at an amount equal to interest expense times

What is a restriction of retained earnings and why would it be necessary?

Which of the following items would not be included in a basic earnings per share calculation?

During an audit of Madison Company's December 31, 2017 records it was discovered that the company did not accurately accrue for $12,500 of depreciation expense. As well as the accrual for interest expense was missed in the amount $4,500. These errors occurred in 2016 and have a material impact on Madison's financial records. Madison's net income for the year was $123,000. The company is subject to a 35% tax rate. The company had a retained earnings balance of $557,500 on January 1, 2017, no dividends were paid. Required: 1) Prepare the necessary journal entries to correct the accounting records of Madison Company's books. 2) Prepare the statement of retained earnings for 2017. Headings are not necessary)

A simple capital structure consists of

What three items rarely affect retained earnings?

When the basic and diluted earnings per share amounts are disclosed on the income statement, additional disclosures are made in the footnotes. Required: Describe the information contained in the footnotes disclosure concerning the basic and diluted earnings per share.

What are the steps necessary to compute diluted earnings per share?

On January 1, 2016, Jerry Co. had 25,000 shares of common stock outstanding. On April 1, 2016 it had a 10% stock dividend. On October 1, 2017 it had a 4:1 stock split. Required: a. Determine the weighted average common stock outstanding used in the basic earnings per share computation at 12/31/2016. b. Determine the weighted average common stock outstanding used in the basic earnings per share computation at 12/31/2017. c. Jerry will be issuing comparative financial statements for 2016 and 2017. What number of shares should be used in the earnings per share computation for 2016 and 2017? Why?

The board of directors of the Theater Visions Corporation is trying to establish the dividends policy for 2016 for the company. The board has asked you, the vice president of finance, to attend the meeting in order to get your input. You were asked to discuss and evaluate stock dividends from the perspective of 1) the stockholders, and 2) the issuing corporation's viewpoint. Required: a. Discuss the disadvantages associated with stock dividends from the stockholder's perspective. a. From a stockholder's perspective, there are various disadvantages associated with stock dividends. First, the stockholder does not receive any of the corporation's assets. Another disadvantage is that the stockholder's percentage of ownership does not change as a result of the dividend. In addition, theoretically, the total market value of the stockholder's investment will not increase because the increased number of shares will be offset by the decrease in the market price per share. Another shortcoming is that the earnings per share will decrease because of the increase in the number of shares. Finally, future dividends may be limited due to the decrease in retained earnings from the b. Discuss the advantages associated with a stock dividend from the issuing corporation's viewpoint. c. For financial accounting purposes, explain how the cost of a stock dividend is measured at the date of declaration.