Question

P17-5

Tseng Corporation Ltd. has the following capital structure at the following fiscal years ended December 31:

	2017	2016
Number of common shares	600,000	450,000
Number of non-convertible, non-cumulative preferred A shares	20,000	20,000
Amount of 4% convertible bonds	$1,000,000	$1,000,000

The following additional information is available.

• 1.On July 31, 2017, Tseng Corporation exchanged common shares for a large piece of equipment. This was the only transaction that resulted in issuance of common shares in 2017.

• 2.Income before discontinued operations for 2017 was $1.3 million, and a loss from discontinued operations of $200,000 was recorded, net of applicable tax recovery.

• 3.During 2017, dividends in the amount of $3.00 per share were paid on the preferred A shares.

• 4.Each $1,000 bond can be converted into 25 common shares.

• 5.There were unexercised stock options, outstanding since 2014, that allow holders to purchase 20,000 common shares at $3.00 per share.

• 6.Written warrants to purchase 10,000 common shares at $7.00 per share were outstanding at the end of 2016, and no warrants were exercised in 2017.

• 7.The average market value of the common shares in 2017 was $5.00.

• 8.Tseng's tax rate is 20%.

• 9.Tseng declared and paid a $5,000 dividend to common shareholders on June 1, 2017.

Instructions

(a)  

Determine the weighted average number of common shares that would be used in calculating earnings per share for the year ended December 31, 2017.

(b)  

Starting with the heading “Income before discontinued operations,” prepare the bottom portion of the income statement for the year ended December 31, 2017. Assume that Tseng Corporation discloses all applicable earnings per share data on the face of the income statement.

(AICPA adapted)

Answer 1

a. Computation of weighted average number of common shares that would be used in calculating earnings per share:
Total shares as on 2017 = 600,000shares
From this 600,000shares 450,000 are continued from 2016 and balance i.e., 600,00-450,000 = 150,000sharse are issued on July 31, 2017
Thus, weighted average shares = 450,000 + (150,000*5months from Aug to Dec / 12 months)
= 450,000 + (150,000*5/12) = 450,000 + 62,500 = 512,500 shares

b. Computation of income statement for the year ended December 31, 2017:

Details	Amount
Income before discontinued operations	$1,300,000
Less: a loss from discontinued operations	(200,000)
Net income	$1,100,000

Now, let us calculate the Basic EPS And Diluted EPS:
Basic EPS = Net income/ weighted average shares
= Income from continuous operation - dividend paid on preferred shares / 512,500 shares
= 1,300,000 - (20,000*$3) / 512,500 = $2.42

Diluted EPS = Net income/ weighted average shares + options if any outstanding + bonds converted
= Income from continuous operation + after tax interest on bonds - dividend paid on preferred shares / 512,500 + (20,000shares -(20,000*$3/market value $5)) + ($1,000,000/$1000)*25
= 1,300,000 + (1,000,000*4%*(1-20% tax) - (20,000*$3) / 512,500 + 8,000 + 25,000
= 1,272,000 / 545,500 = $2.33
Calculating Net income per share:

Details	Basic EPS	Diluted EPS
Income from continuous operations	$2.42	$2.33
Less: a loss from discontinued operations	(200,000/512,500) = (0.39)	(200,000/545,500) = (0.36)
Net income	$2.03	$1.97