It also has two convertible securities outstanding at the end of 2010

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Ex 17-9

        Walker Company has 15,000 shares of common stock outstanding during all of 2010. It
also has two convertible securities outstanding at the end of 2010. These are:
1. Convertible preferred stock: 1,000 shares of 9%, $100 par, preferred stock were issued in
2009 for $140 per share. Each share of preferred stock is convertible into 3.5 shares of common
stock. The current dividends have been paid. To date, no preferred stock has been converted.
2. Convertible bonds: Bonds with a face value of $100,000 and an interest rate of 10% were
issued at par on July 6, 2010. Each $1,000 bond is convertible into 35 shares of common stock.
To date, no bonds Have been converted.
The company earned net income of $54,000 during 2010. Its income tax rate is 30%.

E17-21

The stockholders’ equity section of Winslow Design Company’s December 31, 2009 balance
sheet appeared as follows:
Contributed capital
Preferred stock, $100 par (10,000 shares authorized, 1.250 shares issued) $125,000
Additional paid in capital on preferred stock                                 55,000
Common stock, $10 par (60,000 shares authorized, 15,000 shares issued)     150,000
Additional paid in capital on common stock                                  105,000
Total contributed capital                                                = $435,000
Retained Earnings                                                              78,000
Contributed capital and retained earnings                                    $513,000
Less: Treasurey stock (300 shares of common at $14 per share)                  (4,200)
Total Stockholders Equity                                                      $508,800
During 2010, the company entered into the following transactions affectiong stockholders equity:
1. Issued 250 shares of preferred stock at $164 per share.
2. Issued 3,000 shared of common stock at $17 per share.
3. Reacquired 200 shared of its own common shares as treasury stock for $15 per share.
4. Reissued 250 shares of treasury stock at $17 per share (FIFO basis).
5. Net income for 2010 was $46,500. Dividends of $25,000 were distributed.


PR17-5
       Newton Company is preparing its annual earing per share amounts to be disclosed on its
2010 income statement. It has collected the following information at the end of 2010.
1. Net income: $120,400. Included in the net income from continuing operation of $130,400 and
an extraordinary loss (net of income texes) of $10,000. Corporate income tax rate, 30%.
2. Common stock outstanding of January 1, 2010: 20,000 shares.
3. Common stock issuance during 2010: July 6, 4,000 shares: August 24, 3,000 shares.
4. Stock dividend: On October 19, 2010,the company declared a 10% stock dividend that
resulted in 2,700 additional outstanding shares of common stock.
5. Commmon stock price: 2010 average market price, $30 per share; 2010 ending market price
$27 per share.
6. 7% preferred stock outstanding on January 1, 2010: 1,000 shares. Terms: $100 par,
nonconvertible. Current dividends have been paid. No preferred stock issued during 2010.
7. 8% convertible preferred stock outstanding on January 1, 2010; 800 shares. The stock was
issued in 2009 at $130 paer share. Each $100 par preferred stock is currently convertible inot 1.7
shares of common stock. Current dividends have been paid. To date, no preferred stock has been
converted.
8. Bonds payable outstanding on January 1, 2010: $100,000 face value. These bonds were issue
several years ago at 97 and pay annual interest of 9.6%. The discount is being amortized in the
amount of $300 per year. Each $1,000 bond is currently convertible into 22 shared of common
stock. To date, no bonds have been converted.
9. Compensatory shares optikons outstanding: key executives may currently acquire 3,000 shares
of common stock at $20 per share. The options were granted in 20009. To date, non have been
exercised. The unrecognized compesation cost (net of tax) related to the options is $4 per share.

Plug in all numbers into the template provided for each problems.


E17-9
                                       Earnings              Shares            Earnings
     Explanation                     (Adjustments)       (Adjustments)      = Per Share
Basic earnings and shares              $45,000a             15,000b         = $3.00 Basic
Bond interest expense savings
     (1/2 year)d                          3,500c
Increment in common shares
     (1/2 year)                                                 1,750c
Tentative diluted EPS                   $48,500               16,750        = $2.90 DEPS1
Preferred dividend savingse               9,000c
Increment in common shares                                      3,500c
Diluted earnings and shares             $57,500               20,250        = $2.84 Diluted
a
    $45,000 = $54,000 net income - $9,000 preferred dividends
b
    15,000 = 15,000 x 12/12
c
    Impact on diluted earnings per share and ranking:
                         Impact                                   Ranking
                  $9,000     $9,000
    Preferred:                      $2.57                          2
               1,000 x 3.5    3,500
                  $10,000 x (1  0.3) x 1/2 year   $3,500
    Bonds:                                                $2.00    1
                       100 x 35 x 1/2 year         1,750

d
    Convertible bonds are included in diluted earnings per share because
    $2.00 < $3.00, so individually dilutive.
e
    Convertible preferred stock is included in diluted earnings per share because
    $2.57 < $2.90, so individually dilutive.

Walker would report basic earnings per share of $3.00 and diluted earnings per share of
$2.84 on its 2010 income statement.

E17-21)


1.                                                      WINSLOW DESIGN COMPANY
                                                   Statement of Changes in Stockholders' Equity
                                                        For Year Ended December 31, 2010

                                       Preferred Stock    Common Stock                   Additional Paid-In Capital
                                      Shares        Par   Shares     Par            Preferred    Common        Treasury
                                      Issued      Value Issued      Value            Stock          Stock        Stock
       Balances, 1/1/2010             1,250     $125,000 15,000   $150,000          $55,000     $105,000          $ 0
       Issued preferred stock           250        25,000                           16,000a
       Issued common stock                                 3,000    30,000                        21,000b
       Reacquired treasury stock
       Reissued treasury stock                                                                                    750c
       Net income
       Dividends                                                                    $71,000
       Balances, 12/31/2010           1,500     $150,000 18,000      $180,000                  $126,000          $750

       a
           ($164 - $100) x 250
       b
           ($17 - $10) x 3,000

       c($17 - $14) x 250

           Return on              Net income
2.                        
      stockholders' equity Average stockholders' equity
                                             $46,500           $46,500
                                =                                      8.2%
                                    ($623,550 *  $508,800)/2 $566,175

        *$150,000 + $180,000 + $71,000 + $126,000 + $750 + $99,500 - $3,700 = $623,550



PR17-5)

1. and 2.                                                                         Earnings
     Explanation                             Earnings              Shares        = Per Share
Basic earnings and shares                    $117,000a             25,300b       = $4.62
                                                                    Basicf
Increment in shares (options)                                          600c
Tentative DEPS1 amounts                      $117,000              25,900        = $4.52
                                                                    DEPS1
Bond interest expense savings                   6,930d
Increment in shares (bonds)                                          2,200e
Diluted earnings and shares                  $123,930              28,100        = $4.41g
                                                                    Diluted

*Related to income from continuing operations
a
$117,000 = $130,400 (income from continuing operations) - $7,000
(7% preferred dividends) - $6,400 (8% preferred dividends)
b
    Weighted average shares: 20,000 x 1.10 x 6/12 = 11,000
                                    24,000 x 1.10 x 2/12 = 4,400
                                    27,000 x 1.10 x 4/12 = 9,900
                                      Weighted average 25,300
c
    Increment due to share options:
Issued                         3,000
            3,000 x ($20  $4) 
Reacquired                       (2,400)
                   $30         

Increment in shares                   600
d
    Impact on diluted earnings per share and ranking:

                                                                       Impact     Ranking
           0.08 x $80,000 $6,400
Preferred:                                                              $4.71      2
              800 x 1.7      1,360
             [(0.096 x $100,000)  $300] x 0.7 $6,930
Bonds:                                                                  $3.15      1
                         100 x 22               2,200
e
    Dilutive effect:
Bonds:         $3.15 impact <$4.52 (DEPS1), therefore individually dilutive
    Preferred: $4.71 impact >$4.41, therefore antidilutive and excluded from EPS
f
Basic earnings per share related to extraordinary loss is $0.39
($10,000 extraordinary loss  25,300); rounded down to balance
g
    Diluted earnings per share related to extraordinary loss is $0.36 ($10,000
    extraordinary loss  28,100)


3.      Basic earnings per share (See Note 1)
         Income before extraordinary items                                             $4.62
         Extraordinary loss                                                 (0.39)
         Net income                                                        $4.23

        Diluted earnings per share (See Note 1)
         Income before extraordinary items                                             $4.41
         Extraordinary loss                                                 (0.36)
         Net income                                                        $4.05
        Notes to Financial Statements
        Note 1: Basic earnings per share are based on 25,300 average common shares
        outstanding; 7% and 8% preferred dividends totaling $13,400 have been deducted from
        net income to determine the basic earnings available to common stockholders. Diluted
        earnings per share include 600 shares from the assumed exercise of stock options and
        2,200 shares from the assumed conversion of bonds. Diluted earnings available to
        common stockholders assume no interest expense (net of tax) of $6,930 on the converted
        bonds.

				
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