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Module05Solutions

# Module05Solutions - Module 5 M5-19(15 minutes a Basic...

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©Cambridge Business Publishers, 2008 Solutions Manual, Module 5 5-1 Module 5 M5-19 (15 minutes) a. Basic earnings per share is computed as net income less any preferred dividends, divided by the weighted average number of common shares outstanding for the period. The diluted earnings per share calculation includes the effect of dilutive securities (such as convertible debt securities or employee stock options) in the denominator and adjusts for any effects of conversion or exercise in the numerator. Consequently, diluted earnings per share is always less than or equal to basic earnings per share. b. Shares (denominator): For the shares computation, Lucent has 4,426 million weighted average common shares outstanding, and “potentially” 5,218 million shares outstanding for the diluted EPS computation. The additional 792 million weighted average dilutive common shares (5,218 – 4,426) relate to employee stock options, stock warrants (similar to options), and convertible securities (such as convertible debt and convertible preferred stock) that potentially could be converted into common shares. Income (numerator): For the income computation, Lucent’s net income is \$1,185 for the basic EPS computation. Lucent’s income is \$86 higher, or \$1,271, for the diluted EPS computation. Basic EPS = \$1,185 / 4,426 shares = \$0.27 Diluted EPS = \$1,271 / 5,218 shares = \$0.24 c. Diluted EPS assumes that all convertible securities are converted at the beginning of the year (or when issued if issued during the year). If the debt was converted into common stock, Lucent would not have recorded interest expense relating to the convertible securities. Thus, pretax income and tax expense would both have been higher. The \$86 million, is the after-tax income interest expense, which is added to Lucent’s reported profit in the EPS computation.

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©Cambridge Business Publishers, 2008 Financial Accounting for MBAs, 3rd Edition 5-2 E5-24 (20 minutes) a. (\$ millions) Percentage-of-Completion Method Completed Contract Year Costs incurred Percent of total expected costs Revenue recognized (percentage of costs incurred × total contract amount) Income (revenue – costs incurred) Revenue recognized Income 2006 \$100 25% \$125 \$ 25 \$ 0 \$ 0 2007 300 75% 375 75 500 100 \$400 \$500 \$100 \$500 \$100 b. The percentage-of-completion method normally provides a reasonable estimate of the revenues, expenses, and income earned for each period.
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Module05Solutions - Module 5 M5-19(15 minutes a Basic...

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