Respond to the following. Submit journal entries in a table in MS Word and writt

Question

Respond to the following. Submit journal entries in a table in MS Word and written segments in the same Word document. Do not submit two separate documents, as only one document can be accepted. For written answers, please make sure your responses are well written, formatted per the CSU-Global Guide to Writing and APA Requirements and have proper citations, if applicable. As one of the auditors at Banquo & Associates, you have been assigned to check Duncan Corporation’s computation of earnings per share for the current year. The controller, Mac Beth, has supplied you with the following computations. Net income $3,374,960 Common shares issued and outstanding: Beginning of year 1,285,000 End of year 1,200,000 Average 1,242,500 Earnings per share: $3,374,960 = $2.72 per share 1,242,500 You have developed the following additional information. There are no other equity securities in addition to the common shares. There are no options or warrants outstanding to purchase common shares. There are no convertible debt securities. Activities in common shares during the year were as follows. Outstanding, Jan. 1 1,285,000 Treasury shares acquired, Oct. 1 250,000 Shares reissued, Dec. 1 165,000 Outstanding, Dec. 31 1,200,000 Questions: On the basis of the information above, do you agree with the controller’s computation of earnings per share for the year? If you disagree, prepare a revised computation of earnings per share. Assume the same facts as those presented above, except that options had been issued to purchase 140,000 shares of common stock at $10 per share. These options were outstanding at the beginning of the year, and none had been exercised or canceled during the year. The average market price of the common shares during the year was $25, and the ending market price was $35. What earnings per share amounts will be reported?

Explanation / Answer

Part 1)

To determine whether the controller's calculation is correct or not, we need to arrive at the weighted average number of outstanding shares which is calculated as follows:

The formula for calculating EPS is given below:

EPS = (Net Income - Preferred Dividend (if any))/Weighted Average Number of Shares = (3,374,960 - 0)/1,236,250 = $2.73 per share.

Even though, EPS under both the methods is almost same, the above approach should have been used to calculate EPS as per the relevant accounting standard.

The methodology used by Comptroller (average of opening and closing common stock outstanding) is not correct even though it is resulting in the same EPS as calculated above.

________

Part 2)

The EPS is calculated with the use of following table:

Date Number of Shares (A) Period for which Shares Remain Outstanding (B) Weighted Shares (A*B) 01 Jan 1,285,000 0.75 963,750 01 Oct 1,035,000 0.17 172,500 01 Dec 1,200,000 0.08 100,000 Total Weighted Average Outstanding Shares 1,236,250 Shares

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