C10-3 - stock agreements) if those securities trade in...

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C103 Earnings Per Share To: Chief Accountant From: Accounting Staff Numbers for 2004 are required for Major Corporation. You are required to report both basic and diluted earnings per share numbers for 2004. The company’s calculation of $2.36 basic earnings per share computed, as follows: Major’s separate operating income $170,000 Dividend income from investment in Minor’s preferred shares (20,000 shares x .30 x $2.00 dividend per share) 12,000 Income from investment in Minor’s common shares: Minor’s net income $130,000 Less: Preferred dividends (20,000 shares x $2.00) (40,000 ) Income available to common shareholders $ 90,000 Shares outstanding ÷ 50,000 Earnings per share $ 1.80 Shares held by Major (50,000 x .60) x 30,000 Equity method income 54,000 Major’s net income $236,000 Shares outstanding ÷100,000 Basic earnings per share $ 2.36 Earnings per share must be reported by all entities that have issued common stock or potential common stock (that is, securities such as options, warrants, convertible securities, or contingent
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Unformatted text preview: stock agreements) if those securities trade in public markets. [ FASB 128 , Par. 6] Diluted earnings per share must be reported when a company has options, warrants, or convertible securities outstanding that would cause a reduction in reported earnings per share if exercised or converted. In computing its diluted earnings per share for 2004, Major must take into account the dilutive effects of the preferred shares of Minor that are outstanding, resulting in reported earnings per share of $2.22, rather than $2.36: Majors separate operating income $170,000 Income from investment in Minors common shares: Minors net income $130,000 Shares and equivalent shares outstanding [50,000 + (20,000 x 5)] 150,000 Earnings per share $ .87 Shares and equivalent shares held by Major (50, 000 x .60) + [(20,000 x 5) x .30] x 60,000 Income accruing to Major 52,200 Majors net income $222,200 Shares outstanding 100,000 Diluted earnings per share $ 2.22 Primary citation: FASB 128...
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