[Anonymous]

Becker Question –

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?

Year 2 Year 1

a. $2.34 $1.75

b. $1.78 $1.75

c. $2.34 $3.50

d. $1.78 $3.50

The correct answer is b. My question is calculating the EPS for Year 2 using the alternative method. My calculations are

Year 1: Shares Outstanding- 100,000

Year 2: 2-for-1 stock split- 100,000

Year 2: sale of treasure stock- 20,000 (9/12) = 15,000

Total number of shares: 100,000 + 100,000 + 15,000 = 215,000.

However, the correct total number of shares is 230,000. Year 2 EPS: $410,000/ 230,000 = $1.78 So what am I doing wrong? I know how to calculate this using the regular method, but the alternative way is much faster 🙂

[nbad311]

I like to do my # of shares in totally separate pieces. So this is what I did here:

Shares at beginning of year: 100,000 x 12/12 (those shares were outstanding all year) = 100,000

April: 20, 000 shares come online × 9/12 months outstanding= 15, 000

Before the stock split you have 115, 000 shares.

Stock split happens at mid year: 115, 000×2=230, 000 × 6/12 months outstanding= 115, 000

115000 + 115000 = 230, 000

I think where you may have gone wrong is you need to do the 15000 shares step befpre the spilt, so that those extra shares get factored into the split . I am literally doing BEPs problems at starbucks right now 🙂

REG - 65, 70, 80!
BEC - 35, 62, 79!
AUD - 73, 75!
FAR - 65, 73, 70, 75! DONE.

[Anonymous]

Thank you so much Nbad311! The part that tripped me up is that we treat stock-splits as if it happened in the beginning of the year. If you look at the example in Becker on F7-25, the stock split happened before the additional shares were sold. In this MCQ, the stock split happened after the treasury stocks were sold. Anyway, thanks again!

P.S.: Given that we pay so much to register for the CPA, NASBA should at least offer us free cappuccinos 🙂

[Author]

Replies