Question

The Reserve Company had 606 million shares of common stock outstanding at January 1, 2016. The following activities affected common shares during the year: There are no potential common shares outstanding. 2016 Feb. 27 Purchased 18 million shares of treasury stock. Oct. 30 Sold the treasury shares purchased on February 27. Nov. 29 Issued 72 million new shares. Dec. 31 Net income for 2016 is $1,200 million. 2017 Jan. 14 Declared and issued a 2 for 1 stock split. Dec. 31 Net income for 2017 is $1,200 million. Required: 1. Determine the 2016 EPS. 2. Determine the 2017 EPS. 3. At what amount will the 2016 EPS be presented in the 2017 comparative financial statements

Answer 1

1. $2.00

2. $0.88

3. $1.00

Step-by-step explanation:

1. Calculation to determine the 2016 EPS

First step is to calculate the Total Movement of shares and WACSO

Date Movement of shares Ratio WACSO(no. of shares * Ratio)

1-Jan-16 $606 million*12/12 =$606 million

28-Feb-16 (18 million)*10/12=(15 million)

31-Oct-16 18 million*2/12=3 million

30-Nov-16 72 million*1/12=6 million

Total 678 million 600 million

Now let calculate 2016 EPS

Net income $1,200 million

÷Divided by WACSO 600 million

=EPS $2.00

($1,200 million/600 million)

Therefore 2016 EPS will be $2.00

2. Calculation to determine 2017 Earnings per share

First step is to calculate the No. of shares outstanding after stock split

No. of shares outstanding as of 2017 678 million

*Stock split 2

=No. of shares outstanding after stock split 1,356 million

(678 million*2)

Now let calculate 2017 EPS

Net income $1,200 million

÷Divided by WACSO 1,356 million

=EPS 0.88

($1,200 million/1,356 million)

Therefore 2017 EPS will be $0.88

3. Calculation to determine At what amount will the 2016 EPS be presented in the 2017

First step is calculate No. of shares outstanding after stock split

Wacso based on item no. 1 600 million

*Stock split 2

=No. of shares outstanding after stock split 1200 million

(600 million*2)

Now let calculate the 2016 EPS be presented in the 2017

Net income 1200 million

÷Divided by WACSO 1200 million

=EPS 1.00

(1200 million/1200 million)

Therefore At what amount will the 2016 EPS be presented in the 2017 will be $1.00