Stock Split And Stock Dividend: Common Stock

Stock Split And Stock Dividendthe Common Stock O

Question 1 Question 1 (Stock Split and Stock Dividend) The common stock of Warner Inc. is currently selling at $110 per share. The directors wish to reduce the share price and increase share volume prior to a new issue. The per share par value is $10; book value is $70 per share. Five million shares are issued and outstanding. a. How much is the debit to retained earnings if the board votes a 2-for-1 stock split? $ b. Prepare the necessary journal entries if the board votes a 100% stock dividend. Question 2 Ch. 16 EPS with Convertible Bonds, various Situations 16-22B c Assume the same facts as assumed for part (a), except that 100 of the 500 bonds were (EPS with Convertible Bonds, Various Situations) At the beginning of 2009, Florida actually converted on July 1, 2009. Rock Industries had 25,000 shares of common stock issued and outstanding and 500 $1,000, 6% bonds, each convertible into 10 shares of common stock. During 2009, Florida Revenues $156,500 click to see cells Rock had revenues of $156,500 and expenses other than interest and taxes of $104,000. Expense Assume that the tax rate is 40%. None of the bonds was converted or redeemed. Other than Interest $104,000 Bond Interest $15,000 (LO 7) Instructions Bond Interest $12,,000 income before income taxes $25,500 a Compute diluted earnings per share for 2009. Income taxes 10,200 Nwet income $15,300 Revenues $ 156,500.00 Expenses Other than interest $ 104,000.00 Diluted earnings per share 1.05 Bond Interest $ 30,000.00 $ 134,000.00 Earnings $ 31,500.00 Income before income taxes $ 22,500.00 Shares outstanding $ 30,000.00 Income taxes $ 9,000.00 Net Income 13,500 Diluted earnings per sahre 1.05 Earnings $ 31,500.00 Shares outstanding $ 30,000.00 b Assume the same facts as those assumed for part (a), except that the 500 bonds were issued on September 1, 2009 (rather than in a prior year), and none have been converted or redeemed. Revenues $ 156,500.00 Expenses Other than interest $104,000 Bond Interest $ 10,000.00 $114,000.00 Income before income taxes $ 42,500.00 Income taxes $ 17,000.00 Net Income 25,500 Diluted earnings per sahre $1.18 Earnings $ 31,500.00 Shares outstanding $ 26,666.67 javascript:parent.xlinkobject('kieso4948c16-mar-0007','xlinks_db.xml'); 3 (EPS: Simple Capital Structure) On January 1, 2010, Bailey Industries had stock outstanding as follows. 6% Cumulative preferred stock $100 par value issued and outstanding 10,000 shares $1,000,000 Common stock, $10 par value, issued and outstanding 200,000 shares 2,000,000 To acquire the net assets of three smaller companies, Bailey authorized the issuance of an additional 170,000 common shares. The acquisitions took place as follows. Date of Acquisition Shares Issued Company A April 1, ,000 Company B July 1, ,000 Company C October 1, ,000 On May 14, 2010, Bailey realized a $90,000 (before taxes) insurance gain on the expropriation of investments originally purchased in 2000. On December 31, 2010, Bailey recorded net income of $300,000 before tax and exclusive of the gain. Assuming a 40% tax rate, compute the earnings per share data that should appear on the financial statements of Bailey Industries as of December 31, 2010. Assume that the expropriation is extraordinary. (Round answer to 2 decimal places, e.g. 0.25.)

Paper For Above instruction

The provided assignment involves a comprehensive analysis of stock splits, stock dividends, and earnings per share (EPS) calculations in various scenarios including convertible bonds and acquisitions. This paper aims to methodically address each component with detailed calculations, journal entries, and conceptual explanations, drawing on foundational principles of financial accounting and corporate finance.

Firstly, the impact of stock splits and stock dividends on a company's equity is examined through Warner Inc.'s case. A 2-for-1 stock split reduces the stock price, while a 100% stock dividend requires a journal entry to transfer the value from retained earnings to common stock and additional paid-in capital, illustrating how these distributions affect the company's financial statements.

Secondly, the computation of diluted earnings per share (EPS) considering convertible bonds is explored through Rock Industries' scenario. The analysis includes calculating the potential additional shares from bond conversion, adjusting net income for interest and tax effects, and applying the EPS formula. Different timing of bond issuance (mid-year versus beginning of the year) affects the outstanding shares and EPS calculation.

Finally, the case of Bailey Industries' acquisitions and extraordinary gains demonstrates how to calculate EPS with adjustments for net income from operations, extraordinary items, and the effects of potential preferred stock dividends. The approach involves weighting shares outstanding for acquisitions, adjusting net income for tax effects, and recognizing the dilutive effect of securities like convertible bonds or preferred stock.

Introduction

Financial reporting requires accurate representation of a company's performance and financial position. Stock splits, dividends, EPS, and detailed analyses of convertible securities are integral to understanding corporate profitability and shareholder value. This paper synthesizes these concepts through illustrative examples, emphasizing clarity and precision in accounting treatments.

Stock Splits and Stock Dividends

A stock split occurs when a company increases its number of shares outstanding by issuing additional shares to existing shareholders, proportionally reducing the share price without changing the company's total market value. For Warner Inc., a 2-for-1 split doubles the number of shares to 10 million, decreases the per-share price to approximately $55, and reduces the total equity attributable to common stock without affecting the company's book value—though it impacts the par value and the ledger accounts accordingly. The debit to retained earnings for a stock dividend reflects the distribution's fair value, which is the number of shares issued times the stock's market price.

In the case of a 100% stock dividend, the journal entry involves transferring an amount from retained earnings to common stock and additional paid-in capital, based on the market value of the shares issued. This distribution increases the number of shares outstanding but leaves total equity unchanged.

EPS and Convertible Bonds

Earnings per share (EPS) measures the profitability attributable to each share of common stock. Diluted EPS accounts for potential dilution from convertible securities like bonds. The calculation involves adjusting net income for interest expense net of taxes on bonds that can be converted and adding the share equivalents from conversion possibilities. The timing of bond issuance influences the outstanding shares and must be considered in the weighted average calculation.

In Rock Industries' scenario, the conversion of bonds into common stock after mid-year necessitates adjusting the weighted average number of shares and applying the dilutive EPS formula, considering interest savings and tax effects.

Acquisitions and Extraordinary Items

When a company acquires other entities, the impact on EPS involves adjusting the weighted average shares for the new shares issued and considering the effects of gains or losses related to non-recurring events, such as expropriations. The extraordinary gain requires special treatment, including its pre-tax amount, tax effect, and the impact on net income. The computation of EPS must reflect these adjustments to provide an accurate measure of ongoing profitability per share.

Conclusion

This analysis provides a detailed exploration of key accounting and financial concepts related to stock restructuring, convertible securities, and acquisition impacts on EPS. Accurate calculations and journal entries are essential for transparent financial statements and informed investor decision-making. The scenarios discussed highlight the importance of understanding timing, tax effects, and potential dilution in financial analysis.

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