Why does the WASCO of BASIC EPS have the the Conversion of preferred share?
The Convrsion of preferred share is for the denominator of Diluted EPS as
far as I know. Right?
34.
Chape Co. had the following information related to common and preferred
shares during the year:
Common shares outstanding, 1/1, 700,000
Common shares repurchased, 3/31, 20,000
Conversion of preferred shares, 6/30, 40,000
Common shares repurchased, 12/1, 36,000
Chape reported net income of $2,000,000 at December 31. What amount of
shares should Chape use as the denominator in the computation of basic
earnings per share?
a. 684,000
b. 700,000
c. 702,000
d. 740,000
Solution:
Choice "c" is correct. When computing the weighted average number of common
shares outstanding (WACSO), shares issues, repurchased or converted must be
time-weighted for the number of months outstanding:
• The 20,000 common shares repurchased (treasury stock) on 3/31 were
only
outstanding for 9 months.
• The conversion of 40,000 preferred shares on 6/30 were only
outstanding for
6 months.
• The 36,000 common shares repurchased (treasury stock) on 12/1 were
only
outstanding for 1 month.
1/1 700,000 x 12/12 = 700,000
3/31 20,000 x 9/12 = (15,000)
6/30 40,000 x 6/12 = 20,000
12/1 36,000 x 1/12 = (3,000)
WACSO = 700,000 – 15,000 + 20,000 – 3,000 = 702,000 shares
