(EPS Concepts and Effect of Transactions on EPS) Fernandez Corporation, a new audit client of yours, has not reported earnings per share data in its annual reports to stockholders in the past. The treasurer, Angelo Balthazar, requested that you furnish information about the reporting of earnings per share data in the current year’s annual report in accordance with generally accepted accounting principles.

Instructions

(a) Define the term “earnings per share” as it applies to a corporation with a capitalization structure composed of only one class of common stock. Explain how earnings per share should be computed and how the information should be disclosed in the corporation’s financial statements.

(b) Discuss the treatment, if any, that should be given to each of the following items in computing earnings per share of common stock for financial statement reporting.

(1) Outstanding preferred stock issued at a premium with a par value liquidation right.

(2) The exercise at a price below market value but above book value of a common stock option issued during the current fiscal year to officers of the corporation.

(3) The replacement of a machine immediately prior to the close of the current fiscal year at a cost 20% above the original cost of the replaced machine. The new machine will perform the same function as the old machine that was sold for its book value.

(4) The declaration of current dividends on cumulative preferred stock.

(5) The acquisition of some of the corporation’s outstanding common stock during the current fiscal year. The stock was classified as treasury stock.

(6) A 2-for-1 stock split of common stock during the current fiscal year.

(7) A provision created out of retained earnings for a contingent liability from a possible lawsuit.