[jicheng]

CPA – 01107

Elizabeth Corporation acquired Allen Corporation at the end of Year 1. Under terms of the acquisition agreement, Elizabeth agreed to provide former Allen shareholders 1,000 additional shares of Elizabeth stock for each new retail outlet opened during Year 2. Two new outlets were opened during Year 2:

– One on 5/1 Year 2

– One on 9/1, Year 2

What number of shares related to the openings of the new retail outlets should enter into the calculation of Elizabeth’s basic EPS as of 12/31 Year 2?

a. 2,000

b. 1,250

c. 1,000

d. 0

The answer is 1000 using the weighted average method. However, I refer to the book on F7-30 that :

If the necessary condition have been satisfied by the end of the period, those shares are included in the basic EPS as if of the beginning of the period in which the conditions are met. The answer should be 2000 then

Any comments? Thank you in advance.

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[Anonymous]

The F7-30 passage you quoted is for issuable shares contingent on the attainment of a certain level of earnings.

Contingent shares should be included in basic EPS at the date all conditions for issuance are met (if dilutive).

In the example:

1) conditions met for 1000 shares to be issued at 5/1
2) conditions met for another 1000 shares to be issued at 9/1

Thus…

1000 shares for 4 months 5/1 – 9/1 = 333.33
2000 shares for 4 months 9/1 – 12/31 = 666.66

Total number of weighted shares outstanding = 1000

[jicheng]

Thank you. very helpful

[Author]

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