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Wiley GAAP 2008 by Colorado Steven M. Bragg Englewood, Ralph Nach American Express Tax and Business Inc., Barry J. Epstein

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Appendix Comprehensive Example

The examples within the text used a simplified approach for determining whether or not options, warrants, convertible preferred stock, or convertible bonds have a dilutive effect on DEPS. If the DEPS number computed was lower than basic EPS, the security was considered dilutive. This approach is adequate when the company has only one potentially dilutive security. If the firm has more than one potentially dilutive security, a more complex ranking procedure must be employed (FAS 128).

For example, assume the following facts concerning the capital structure of a company:

  1. Income from continuing operations and net income are both $50,000. Income from continuing operations is not displayed on the firm's income statement.

  2. The weighted‐average number of common shares outstanding is 10,000 shares.

  3. The income tax rate is a flat 40%.

  4. Options to purchase 1,000 shares of common stock at $8 per share were outstanding all year.

  5. Options to purchase 2,000 shares of common stock at $13 per share were outstanding all year.

  6. The average market price of common stock during the year was $10.

  7. 7% convertible bonds, 200 bonds, each convertible into 40 common shares, were outstanding the entire year. The bonds were issued at par value ($1,000 per bond) and no bonds were converted during the year.

  8. 4% convertible, cumulative preferred stock, par value of $100 per share, 1,000 shares issued and outstanding the entire year. Each preferred share is convertible into one common share. ...

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