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I don’t get the period outstanding here. I thought that for shares sold and reacquired, you account for how long between the time they are sold or acquired until the end of the year. I have done other problems where that is the calculation. For example, for the 4/1 issuance of 30,000 shares, I thought it would be 30,000*(9/12). I do not get what is happening here.
Balm Co. had 100,000 shares of common stock outstanding as of January 1. The following events occurred during the year:
4/1 Issued 30,000 shares of common stock.
6/1 Issued 36,000 shares of common stock.
7/1 Declared a 5% stock dividend.
9/1 Purchased as treasury stock 35,000 shares of its common stock. Balm used the cost method to account for the treasury stock.
What is Balm’s weighted average of common stock outstanding at December 31?
a. 150,675
b. 162,342
c. 131,000
d. 139,008
Explanation
Choice “d” is correct. See chart below for calculation. Stock dividends are assumed to be issued at the beginning of the year. The 139,300 is calculated as follows: 166,000 shares × 1.05 = 174,300 outstanding when the treasury shares are acquired. Then, 174,300 minus 35,000 treasury shares = 139,300.
Total Shares × Period Outstanding × Adjustment for dividend = Weighted Avg.
100,000 3/12(Jan-Mar) 1.05 26,250
130,000 2/12(Apr-May) 1.05 22,750
166,000 3/12(June-Aug) 1.05 43,575
139,300 4/12(Sept-Dec) 46,433
Weighted Average = 139,008
Choice “c” is incorrect. The 5% stock dividend must be treated as though it occurred at the beginning of the year. The shares outstanding before the stock dividend must be restated for the portion of the year before the stock dividend.
Choice “a” is incorrect. The purchase of treasury stock reduces the amount of shares outstanding.
Choice “b” is incorrect. The purchase of treasury stock is a reduction, not an addition to the amount of shares outstanding.
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