Question 1

Dalton Corp. reports net income of $1,200,000 for Year 1. It has 400,000 weighted average common shares outstanding. Additionally:
- 50,000 stock options outstanding with exercise price of $20/share
- Average market price per share during Year 1: $25/share
- 10,000 shares of 5% convertible preferred stock ($100 par), each convertible into 4 common shares
- Preferred dividends declared: $50,000

What is Dalton Corp.'s diluted EPS for Year 1?

Accepted Answer

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.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Incorrectly applying treasury stock method, forgetting to add back preferred dividends, or including anti-dilutive instruments

How to approach this question

Full Answer

Common mistakes

Practice the full CPA FAR Practice Exam 2

More questions from this exam