m131bmidterm2practiceexamWITHSOLUTIONS

# Intermediate Accounting

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M131B – INTERMEDIATE ACCOUNTING PRACTICE EXAM CHAPTERS 16 (EPS), 17 AND 18 CHAPTER 16 (EPS) 1. On January 1, 2008, Dingler Corporation had 125,000 shares of its \$2 par value common stock outstanding. On March 1, Dingler sold an additional 250,000 shares on the open market at \$20 per share. Dingler issued a 20% stock dividend on May 1. On August 1, Dingler purchased 140,000 shares and immediately retired the stock. On November 1, 200,000 shares were sold for \$25 per share. What is the weighted-average number of shares outstanding for 2008? a. 510,000 b. 375,000 c. 358,333 d. 258,333 b [(125,000  ×  2  ×  1.20) + (375,000  ×  2  ×  1.20) + (450,000  ×  3) + (310,000  ×  3) + (510,000  ×  2)]  ÷  12 = 375,000. 2. Hoffman Corporation had net income for the year of \$480,000 and a weighted average number of common shares outstanding during the period of 200,000 shares. The company has a convertible bond issue outstanding. The bonds were issued four years ago at par (\$2,000,000), carry a 7% interest rate, and are convertible into 40,000 shares of common stock. The company has a 40% tax rate. Diluted earnings per share are

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c [\$480,000 + (\$2,000,000  ×  .07  ×  .60)]  ÷  (200,000 + 40,000) = \$2.35. Use the following information for questions 3 and 4 Gilley Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and \$1,000,000 of 10% convertible bonds outstanding during 2007. The preferred stock is convertible into 40,000 shares of common stock. During 2007, Gilley paid dividends of \$.90 per share on the common stock and \$3.00 per share on the preferred stock. Each \$1,000 bond is convertible into 45 shares of common stock. The net income for 2007 was \$600,000 and the income tax rate was 30%. 3. Basic earnings per share for 2007 is (rounded to the nearest penny) \$600,000 – (20,000  ×  \$3) d ——————————— = \$2.70. 200,000 4. Diluted earnings per share for 2007 is (rounded to the nearest penny) \$600,000 + (\$1,000,000  ×  .10  ×  .7) c ———————————————— = \$2.35. 200,000 + 45,000 + 40,000

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