Case 6-5

Earnings per Share Progresso Corporation, one of your new audit clients, has not reported EPS data in its annual reports to stockholders in the past. The president requested that you furnish information about the reporting of EPS data in the current years annual report in accordance with GAAP . Required: a. Dene the term earnings per share as it applies to a corporation with a capitalization structure composed of only one class of common stock. Then explain how EPS should be computed and how the information should be disclosed in the corporations nancial statements. b. Explain the meanings of the terms senior securities and residual securities (terms often used in discussing EPS), and give examples of the types of items that each term includes. c. Discuss the treatment, if any, that should be given to each of the following items in computing EPS for nancial statement reporting: i. The declaration of current dividends on cumulative preferred stock ii. The acquisition of some of the corporations outstanding common stock during the current scal year (the stock was classied as treasury stock) iii. A two-for-one stock split of common stock during the current scal year

iv. A provision created out of retained earnings for a contingent liability from a possible lawsuit

v. Outstanding preferred stock issued at a premium with a par value liquidation right

vi. The exercise at a price below market value but above book value of a common stock option issued during the current year to ofcers of the corporation vii. The replacement of a machine immediately before the close of the current year at a cost 20 percent above the original cost of the replaced machine (the new machine will perform the same function as the old machine, which was sold for its book value)