Question

Exercise 16-15

Sarasota Inc. uses a calendar year for financial reporting. The company is authorized to issue 9,640,000 shares of $10 par common stock. At no time has Sarasota issued any potentially dilutive securities. Listed below is a summary of Sarasota’s common stock activities.

1.Number of common shares issued and outstanding at December 31, 2015

2,140,000

2.Shares issued as a result of a 10% stock dividend on September 30, 2016

214,000

3.Shares issued for cash on March 31, 2017

2,160,000

Number of common shares issued and outstanding at December 31, 2017

4,514,000

4.A 2-for-1 stock split of Sarasota’s common stock took place on March 31, 2018

Compute the weighted-average number of common shares used in computing earnings per common share for 2016 on the 2017 comparative income statement.

Compute the weighted-average number of common shares used in computing earnings per common share for 2017 on the 2017 comparative income statement.

Compute the weighted-average number of common shares to be used in computing earnings per common share for 2017 on the 2018 comparative income statement.

Compute the weighted-average number of common shares to be used in computing earnings per common share for 2018 on the 2018 comparative income statement.

Answer 1

Solution A:

Weighted average number of common shares to be used in computing earnings per common share for 2016 on the 2017 comparative income statement =

Outstanding shares at beginning of 2016 restated with stock dividend regardless of where in the year the stock dividends occurs

= 2140000*110% = 2354000 shares

Solution B:

Weighted average number of common shares to be used in computing earnings per common share for 2017 on the 2017 comparative income statement:

Outstanding shares at beginning of 2017 + Weighted average nos of shares issued during the year

= 2354000 + 2160000*9/12 = 3974000 shares

Solution C:

Weighted average number of common shares to be used in computing earnings per common share for 2017 on the 2018 comparative income statement.

= 2017 weighted average nos of share outstanding * retrospective adjustment of stock split

= 3974000 * 2 = 7948000 shares

Solution D:

Weighted average number of common shares to be used in computing earnings per common share for 2018 on the 2018 comparative income statement:

Nos of outstanding shares at beginning of 2018 * retrospective adjustment of stock split

= 4514000*2 = 9028000 shares