FAR MC – weighted average shares/stock splits

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    Topic
  • #195562
    cpa1988
    Participant

    I don’t get why year 1 uses 230,000 weighted shares outstanding and why year 2 uses 200,000. Can someone explain that??

    Strauch Co. has one class of common stock outstanding and no other securities that are potentially convertible into common stock. During Year 1, 100,000 shares of common stock were outstanding. In Year 2, two distributions of additional common shares occurred: On April 1, 20,000 shares of treasury stock were sold, and on July 1, a 2-for-1 stock split was issued. Net income was $410,000 in Year 2 and $350,000 in Year 1. What amounts should Strauch report as earnings per share in its Year 2 and Year 1 comparative income statements?

    a. $2.34, $1.75

    b. $2.34, $3.50

    c. $1.78, $3.50

    d. $1.78, $1.75

    Explanation

    Choice “d” is correct. $1.78 and $1.75 EPS Year 2 and Year 1.

    Year 1 410,000 / 230,000 = 1.78

    Year 2 350,000 / 200,000 = 1.75

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  • #682670
    12tang
    Participant

    Year 1 is using 200,000

    Year 2 is using 230,000

    Year 1 net income = 350,000

    Year 2 net income = 410,000

    (you had these backwards)

    Year 1 uses 200,000 because there were 100k outstanding in that year but in year two, the retrospective application makes it 200k.

    Year 2 uses 230,000. Starting with 100k then adding the 15k (20,000 * 9/12) for the treasury stock sold. 115 * 2 (2-for-1 stock split) = 230k shares for year 2.

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    #682671
    makiu
    Participant

    @cpa1988

    this problem requires comparative financial statements for Year 1 and Year 2, therefore when the stock splits is calculated you have to retroactive apply the splits to year 1, with that said, just apply the calculation as @12tang did it. Hope this answer your question..

    Makiu

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