Question

On December 31, Year 2, Case, Inc., had 300,000 shares of common stock issued and outstanding. Case issued a 10% stock dividend on July 1, Year 3. On October 1, Year 3, Case purchased 24,000 shares of its common stock for its treasury and recorded the purchase by the cost method. What number of shares should be used in computing basic earnings per share for the year ended December 31, Year 3?

Answer 1

Answer: the correct answer is 324,000.

Explanation:

The requirement is to determine the number of shares to be used in computing year 2 basic earnings per share (EPS).  For EPS purposes, shares of stock issued as a result of stock dividends or splits should be considered outstanding for the entire period in which they were issued.  Therefore, both the original 300,000 shares and the additional 30,000 shares (10% × 300,000) are treated as outstanding for the entire year.  The 10/1/Y2 purchase of 24,000 treasury shares results in a weighted-average deduction of 6,000 shares (3/12 × 24,000) because the shares were not outstanding for only 3 months during year 2.  Therefore, the number of shares for EPS computations is 324,000.