Easton Company had the following flock transactions during 2014: Has 120.000 sha

Question

Easton Company had the following flock transactions during 2014: Has 120.000 sham outstanding Issued 20.000. $5 par value common shares for $15 per share Issued 10.000.6%. $10 par value convertible preferred shares for $150.000. Each share is convertible to 2 shares of common stock. Issued 60,000 common shares for $18 per share Purchased 20.000 shares of its common stock to hold in treasury for $12 per share. Issued a 10% stock dividend Sold 5.000 of the treasury shares for $15 per share If Easton has net income of S500.000. calculate the basic EPS for 2014. Calculate the diluted EPS for 2014. Prepare the journal entry for the purchase of common shares on Aug 31. Prepare the journal entry for the reissuance of treasury shares on Dec 1. Explain why are dividends not included on the income statement?

Explanation / Answer

1.

EPS= (Net income-Preferred dividend)/Outstanding number of common shares

Preferred dividend=Par value of preferred capital *Interest rate=100000*6 /100=$6000

Company declared a stock dividend on 31 Oct=10% stock dividend= Each shareholder will get one more share for every 10 shares

Outstanding number of shares on 31 Oct=120000+20000+60000-20000=180000 shares

Outstanding number of common shares as on 31 Dec=120000+20000+60000-20000+180000+5000=365000

EPS= (500000-6000)/365000=$1.35 per share

2.

Diluted EPS=(Net income-Preferred dividend)/Outstanding number of common shares +Diluted shares

Diluted share=Additional common shares which will be outstanding if all conversion option on all convertible securities issued is exercised.

In the given problem,each preference share is convertible to 2 common shares

Hence ,total common shares resulting from conversion of preferred capital=10000*2=20000 shares

There are no other convertible securities.

Diluted equity=20000 shares

Diluted EPS=(500000-6000)/365000+20000=$1.28 per share

3. Journal entry to purchase the stock on Aug 31

31 Aug

Treasury stock A/C 240000

To Cash A/C           240000

(For 20,000 shares purchased @12)

4. Journal entry to reissue treasury stock or 5000 shares for $15 per share

01 Dec

Cash A/C    Dr                                   75000

To Additional paid in capital A/C 15000

To Treasury stock A/C                     60000

(For treasury stock purchased at 12 sold for 15,5000 shares *3=15000)

5. Dividends are not shown in income statement because dividends are neither expense nor income.

Hence .dividend declared and paid or not shown in the income statement. Dividend is deducted from profit to arrive at earnings available for equity shareholders.

Dividend is reported as cash outflow in the financing section of the cash flow statement.It is also reported as an adjustment against the retained earnings in the statement of retained earnings.

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