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Ute Co. had the following capital structure during year 1 and year 2:

Preferred stock, $10 par, 4% cumulative, 25,000 shares issued and outstanding$250,000

Common stock, $5 par, 200,000 shares issued and outstanding1,000,000

Ute reported net income of $500,000 for the year ended December 31, year 2. Ute paid no preferred dividends during year 1 and paid $16,000 in preferred dividends during year 2. In its December 31, year 2 income statement, what amount should Ute report as basic earnings per share?

  1. $2.42
  2. $2.45
  3. $2.48
  4. $2.50


The formula for basic earnings per share (BEPS) is

$500,000 net income − 10,000 preferred dividends= $2.45

200,000 common shares outstanding

In calculating the numerator, the claims of preferred shareholders against year 2 earnings should be deducted to arrive at the year 2 earnings attributable to common shareholders. This amount is $10,000 ($250,000 × 4%). During year 1, the BEPS numerator would have been reduced by $10,000 even though no preferred dividends were declared, because the cumulative feature means that $10,000 of year 1 earnings are reserved for, and will ultimately be paid to, preferred stockholders. In year 2, the year 1 dividends in arrears are paid, as well as $6,000 of the $10,000 year 2 preferred dividend. Even though only $6,000 is paid, the entire $10,000 is subtracted for reasons explained above.



The following information is relevant to the computation of Chan Co.’s earnings per share to be disclosed on Chan’s income statement for the year ending December 31:


 •Net income for year 5 is $600,000.

 •$5,000,000 face value 10-year convertible bonds outstanding on January 1. The bonds were issued four years ago at a discount which is being amortized in the amount of $20,000 per year. The stated rate of interest on the bonds is 9%, and the bonds were issued to yield 10%.  Each $1,000 bond is convertible into 20 shares of Chan’s common stock.

 •Chan’s corporate income tax rate is 25%.

Chan has no preferred stock outstanding, and no other convertible securities.  What amount should be used as the numerator in the fraction used to compute Chan’s diluted earnings per share assuming that the bonds are dilutive securities?

  1. $ 130,000
  2. $ 247,500
  3. $ 952,500
  4. $1,070,000


This answer is correct. Because the bonds are convertible, the diluted earnings per share calculation requires interest expense (net of the tax effect) to be added back to net income.  Interest expense on the bond is equal to $470,000 [($5,000,000 × 9%) + $20,000]. The tax effect is $117,500 ($470,000 × 25%).  Therefore, the numerator is equal to $952,500 ($600,000 + $470,000 − $117,500).



In financial reporting for segments of a business enterprise, segment data may be aggregated

  1. Before performing the 10% tests if a majority of the aggregation criteria are met.
  2. If the segments do not meet the 10% tests but meet some of the aggregation criteria.
  3. Before performing the 10% tests if all of the aggregation criteria are met.
  4. If any one of the aggregation criteria is met.


Per ASC Topic 280, two or more operating segments may be aggregated into a single operating segment if all of the aggregation criteria are met, or if after performing the 10% test a majority of the aggregation criteria are met.



Cox Corporation had 1,200,000 shares of common stock outstanding on January 1 and December 31, year 2. In connection with the acquisition of a subsidiary company in June year 1, Cox is required to issue 50,000 additional shares of its common stock on July 1, year 3, to the former owners of the subsidiary. Cox paid $200,000 in preferred stock dividends in year 2, and reported net income of $3,400,000 for the year. Cox's diluted earnings per share for year 2 should be

  1. $2.83
  2. $2.72
  3. $2.67
  4. $2.56

All potential common shares that reduce current EPS must be included in the computation. The formula for diluted EPS is

Net income available to common shareholders

Weighted-average common shares outstanding

The net income available to common shareholders is $3,200,000. This is the net income of $3,400,000 less the preferred stock dividend of $200,000. The weighted-average common shares outstanding is 1,250,000. This is computed as the actual common shares outstanding for the full year of 1,200,000 plus the contingent common shares of 50,000 that were outstanding for the full year because the contingency was incurred in year 1. Thus,

Diluted EPS =  $3,200,000  =       $2.56




The term chief operating decision maker

  1. Refers to a manager with a specific title.
  2. Refers to a function.
  3. Must be disclosed by title in the financial reporting for segments.
  4. Must be described in the disclosures for the financial reporting for segments.


ASC Topic 280 does not require disclosures about the term chief operating decision maker, and specifically states that this term identifies a function, not necessarily a manager with a specific title.



Earnings per share data must be reported on the face of the income statement for

     Income from
     continuing operations                    Discontinued operations 

  1.      Yes                                                   Yes
  2.      Yes                                                    No
  3.       No                                                    No
  4.       No                                                   Yes


Earnings per share data shall be shown on the face of the income statement.

Earnings per share amounts must be presented for

(1) income from continuing operations, and

(2) net income.

Earnings per share data on discontinued operations must be shown either on the face of the

(1) income statement or

(2) in the footnotes.



Enterprise-wide disclosures include disclosures about

           Geographic areas            Allocated costs

  1.            Yes                                    Yes
  2.            Yes                                     No
  3.             No                                    Yes
  4.             No                                     No


Enterprise-wide disclosures about

  1. products and services,
  2. geographic areas, and
  3. major customers

are required for all enterprises.



Mann, Inc. had 300,000 shares of common stock issued and outstanding at December 31, year 1. On July 1, year 2, an additional 50,000 shares of common stock were issued for cash. Mann also had unexercised stock options to purchase 40,000 shares of common stock at $15 per share outstanding at the beginning and end of year 2. The average market price of Mann's common stock was $20 during year 2. What is the number of shares that should be used in computing diluted earnings per share for the year ended December 31, year 2?

  1. 325,000
  2. 335,000
  3. 360,000
  4. 365,000


The first step is to compute the weighted-average number of common shares outstanding. 300,000 shares were outstanding the entire year, and 50,000 more shares were outstanding for six months, resulting in a weighted-average of 325,000 [300,000 + (50,000 × 6/12)]. Second, the stock options increase the number of shares used in the computation only if they are dilutive. The stock options are dilutive because the exercise price is less than the market value. Thus, the denominator effect of the options must be computed. This is done using the treasury stock method, as illustrated below.

Assumed proceeds (40,000 × $15)         $ 600,000

Shares issued                                                 40,000

Shares reacquired ($600,000 ÷ $20)          (30,000)

Shares issued, not reacquired                       10,000

Therefore, the number of shares used for computing diluted earnings per share is 335,000 (325,000 + 10,000).



Information concerning the capital structure of the Petrock Corporation is as follows:

December 31,

                                                        Year 1                                        Year 2

Common stock (CS)                90,000 shares                          90,000 shares

Convertible preferred stock    10,000 shares                          10,000 shares

During year 2, Petrock paid dividends of $1.00 per share on its common stock and $2.40 per share on its preferred stock. The preferred stock is convertible into 20,000 shares of common stock. The net income for the year ended December 31, year 2, was $285,000. Assume that the income tax rate was 30%. What should be the diluted earnings per share for the year ended December 31, year 2, rounded to the nearest penny?

  1. $2.53
  2. $2.59
  3. $2.90
  4. $2.61


Diluted EPS includes the effect of any dilutive security.  The convertible preferred stock must be tested for dilution. To calculate the basic EPS, in the numerator, reported income of $285,000 would be reduced by the $24,000 of preferred dividends which gives $261,000 available for common stockholders.  In the denominator 90,000 shares is the weighted-average of shares outstanding during the year. The conversion of the preferred stock will have an income effect of $24,000 (there is no tax effect) to the numerator and increase the denominator by 20,000 shares. DEPS is calculated as follows:

($261,000 + $24,000) / (90,000 shs + 20,000 shs) = $2.59



The following information pertains to Been Corp. and its operating segments for the year ended December 31, year 1:

Total revenues                                                                $80,000,000

Sales to external customers (included in total)            $30,000,000

External revenue reported by reportable operating segments must be at least

  1. $22,500,000
  2. $60,000,000
  3. $30,000,000
  4. $37,500,000


Per ASC Topic 280, there must be enough segments reported so that at least 75% of unaffiliated revenues is shown by reportable segments (75% test). Sales to external customers total $30,000,000, so external revenues reported by reportable operating segments must be at least $22,500,000 ($30,000,000 × 75%).



An enterprise must disclose all of the following about each reportable segment if the amounts are used by the chief operating decision maker, except

  1. Intersegment revenues.
  2. Cost of goods sold.
  3. Unusual items.
  4. Income tax expense.


Per ASC Topic 280, the enterprise shall disclose the following about each reportable segment if the specified amounts are reviewed by the chief operating decision maker:

1.Revenues from external customers

2.Intersegment revenues

3.Interest revenue and expense (reported separately unless majority of segment’s revenues are from interest and management relies primarily on net interest revenue to assess performance)

4.Depreciation, depletion, and amortization expense

5.Unusual or infrequently occurring items

6.Equity in the net income of investees accounted for by the equity method

7.Income tax expense or benefit

8.Significant noncash item

Cost of goods sold is not specifically included as a required disclosure.



Antidilutive securities would generally be used in the calculation of

    Basic earnings                         Diluted earnings
    per share                                  per share


  1. Yes                                             Yes
  2. No                                               Yes
  3. No                                               No
  4. Yes                                              No


This answer is correct because basic earnings per share should be based on the weighted-average outstanding shares. Diluted EPS should not include any security whose conversion, exercise, or contingent issuance would increase diluted EPS. By definition, antidilutive common stock equivalents would increase diluted EPS if they were included in its calculation.



A company is required to file quarterly financial statements with the United States Securities and Exchange Commission on Form 10-Q. The company operates in an industry that is not subject to seasonal fluctuations that could have a significant impact on its financial condition. In addition to the most recent quarter-end, for which of the following periods is the company required to present balance sheets on Form 10-Q?

  1. The end of the corresponding fiscal quarter of the preceding fiscal year.
  2. The end of the preceding fiscal year and the end of the corresponding fiscal quarter of the preceding fiscal years.
  3. The end of the preceding fiscal year.
  4. The end of the preceding fiscal year and the end of the prior two fiscal years.


The SEC requires that a Form 10-Q contain an interim balance sheet as of

  1. the end of the most recent fiscal quarter and a balance sheet as of
  2. the end of the preceding fiscal year.

An interim balance sheet for the fiscal quarter of the preceding year does not need to be provided unless it is necessary for understanding the impact of seasonal fluctuations.



During the first quarter of year 2, Tech Co. had income before taxes of $200,000, and its effective income tax rate was 15%. Tech's year 1 effective annual income tax rate was 30%, but Tech expects its year 2 effective annual income tax rate to be 25%. In its first quarter interim income statement, what amount of income tax expense should Tech report?

  1. $0
  2. $30,000
  3. $50,000
  4. $60,000


The tax provision for an interim period is the tax for the year to date (estimated effective rate for the year times year-to-date income) less the total tax provisions reported for previous interim periods. In this case, the requirement is to calculate the tax provision for the first quarter interim income statement. The tax expense is $50,000 ($200,000 × 25%).



Riley Corp., a publicly owned corporation, assesses performance and makes operating decisions using the following information for its reportable segments:


Total revenues$925,000

Total profit83,000

Included in the total profit and loss is interest expense of $10,000.  In addition, Riley has $1,500 of interest income for its reportable segments that is not included in the reports used internally.  For purposes of segment reporting, Riley should report segment profit of

  1. $93,000
  2. $84,500
  3. $73,000
  4. $83,000


Per ASC Topic 280, an enterprise shall report a measure of profit or loss based on the measure reported to the chief operating decision maker for purposes of making decisions. Therefore, this answer is correct. The information used by management includes intersegment profits and should be included.