ExpertHard1 markMultiple Choice
CPA · Question 38 · Area I: Financial Reporting
Redwood Corp. has the following data for calculating basic and diluted EPS:<br/>- Net income: $600,000<br/>- Weighted average common shares: 150,000<br/>- 8% convertible preferred stock: $500,000 par value, convertible into 25,000 common shares<br/>- Preferred dividends declared: $40,000<br/><br/>What is Redwood's basic EPS?
Redwood Corp. has the following data for calculating basic and diluted EPS:<br/>- Net income: $600,000<br/>- Weighted average common shares: 150,000<br/>- 8% convertible preferred stock: $500,000 par value, convertible into 25,000 common shares<br/>- Preferred dividends declared: $40,000<br/><br/>What is Redwood's basic EPS?
Answer options:
A.
$4.00
B.
$3.73
C.
$3.20
D.
$3.43
How to approach this question
Calculate basic EPS as (Net income - Preferred dividends) divided by weighted average common shares outstanding. Do not include convertible securities in basic EPS calculation.
Full Answer
B.$3.73✓ Correct
$3.73
Under ASC 260, basic EPS = (Net income available to common shareholders) ÷ Weighted average common shares. Net income available to common = $600,000 - $40,000 preferred dividends = $560,000. Basic EPS = $560,000 ÷ 150,000 = $3.73. Convertible securities are not included in basic EPS.
Common mistakes
Not subtracting preferred dividends from net income, including convertible securities in basic EPS calculation, or mathematical errors
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