ExpertHard1 markMultiple Choice
CPA · Question 07 · Area I: Financial Reporting
Dalton Corp. reports net income of $1,200,000 for Year 1. It has 400,000 weighted average common shares outstanding. Additionally:<br/>- 50,000 stock options outstanding with exercise price of $20/share<br/>- Average market price per share during Year 1: $25/share<br/>- 10,000 shares of 5% convertible preferred stock ($100 par), each convertible into 4 common shares<br/>- Preferred dividends declared: $50,000<br/><br/>What is Dalton Corp.'s diluted EPS for Year 1?
Dalton Corp. reports net income of $1,200,000 for Year 1. It has 400,000 weighted average common shares outstanding. Additionally:<br/>- 50,000 stock options outstanding with exercise price of $20/share<br/>- Average market price per share during Year 1: $25/share<br/>- 10,000 shares of 5% convertible preferred stock ($100 par), each convertible into 4 common shares<br/>- Preferred dividends declared: $50,000<br/><br/>What is Dalton Corp.'s diluted EPS for Year 1?
Answer options:
A.
$2.59
B.
$2.67
C.
$2.72
D.
$2.78
How to approach this question
Apply treasury stock method for options: incremental shares = shares issued minus shares that could be repurchased at average market price. Apply if-converted method for convertible preferred: add conversion shares to denominator and add back preferred dividends to numerator. Check that each instrument is dilutive before including.
Full Answer
D.$2.78✓ Correct
ASC 260-10-45 requires diluted EPS to include all potentially dilutive securities. Options use treasury stock method: assume exercise and repurchase at average market price. Convertible preferred uses if-converted method: assume conversion and add back dividends. Both instruments are dilutive (their per-share impact is less than basic EPS).
Common mistakes
Incorrectly applying treasury stock method, forgetting to add back preferred dividends, or including anti-dilutive instruments
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