Intermediate Accounting 2 Essay Exam

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Essay 10: Earnings per Share Dividends or dividend requirements can either positively or negatively affect the computation of basic EPS. Basic EPS is calculated by subtracting preferred dividends from net income and dividing the result by the weighted-average of shares outstanding.(5) If preferred dividends are a larger amount it will result in a smaller EPS and vice versa. The treasury stock method of computing dilutive EPS assumes that the options or warrants are exercised at the beginning of the year (or the date of issue if later), and that the company uses the proceeds to purchase common stock for the treasury. If the exercise price is lower than the market price proceeds are insufficient to buy back all the shares causing the company to add the incremental shares remaining to the weighted-average number of shares outstanding to compute diluted EPS.(5) The treasury stock method must be used to compute dilutive EPS under GAAP. Convertible bonds are determined to be dilutive or anti-dilutive based on how their exercise affects EPS.(2) Dilutive convertible bonds will decrease EPS and anti-dilutive convertible bonds will increase EPS. A capital structure is complex if it includes securities that could have a dilutive effect on earnings per common share.(5) When a complex capital structure exists the company generally reports both basic and diluted EPS.
Essay 2: Leases
For the first transaction the leased computer should be shown in Superior Electronic’s (the lessee) financial statements. In consulting with the textbook in Chapter 21 it is stated that if the present value of the minimum lease payments is equal to or exceeds 90 percent of the fair value of the asset the lessee should capitalize the asset. The transaction states that the present value of the lease payments exceeds 90 percent of the fair value of the asset. The computer could fail to be shown in…...

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