Becker uses alternatively the two method they explain on F7-25 for calculating WACSO, which they should come up to be the same answer at the end. However with this question I can't figure out the first method to arrive to the total 56,00 shares of WACSO.
A company had the following outstanding shares as of January 1, Year 2:
Preferred stock, $60 par, 4%, cumulative
10,000 shares
Common stock, $3 par
50,000 shares
On April 1, Year 2, the company sold 8,000 shares of previously unissued common stock. No dividends were in arrears on January 1, Year 2, and no dividends were declared or paid during year 2. Net income for Year 2 totaled $236,000. What amount is basic earnings per share for the year ended December 31, Year 2?
a.$4.07
b.$3.79 CORRECT
c.$3.66
d.$4.21
Explanation
Choice “b” is correct. Basic earnings per share is calculated using the following formula:
Income available to common shareholders
Weighted average number of common shares outstanding
Step 1: The first step is to compute the income available to common shareholders. This amount is net income of $236,000 less dividends accumulated in the period on cumulative preferred stock, regardless of whether or not the dividends have been paid. For this company, income available to common shareholders is $236,000 less $24,000 (4% × $60 × 10,000) = $212,000.
Step 2: The second step is to compute the weighted average number of common shares outstanding. This would be calculated as follows:
Shares outstanding at the beginning of the period = 50,000 shares
Shares sold on April 1, Year 2 on a weighted basis (8,000 × 9/12) = 6,000 shares
Weighted average number of common shares outstanding for the entire period = 56,000 shares
This is using the alternate method explained on Becker's F7-25. How would it then be using the first method?
Step 3: Step 3 is the calculation of the basic earnings per share, which is $212,000 / 56,000 shares = $3.79.
Choices “c”, “a”, and “d” are incorrect based on the above explanation.
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