Financial Investments

ACT360 Module 2          Critical Thinking

Financial Investments (50 Points)

Complete the following two questions. Submit journal entries in an Excel file and written segments in an MS Word document. For written answers, please make sure your responses are well-written, formatted per CSU-Global guidelines for APA Style, and have proper citation(s), if needed.

As auditor for Banquo & Associates, you have been assigned to check Duncan Corporation’s computation of earnings per share for the current year. The controller, Mac Beth, has supplied you with the following computations.

Net income	$3,374,960
Common shares issued and outstanding:
Beginning of year	1,285,000
End of year	1,200,000
Average	1,242,500
Earnings per share:
$3,374,960	= $2.72 per share
1,242,500

You have developed the following additional information.

1.    There are no other equity securities in addition to the common shares.

2.    There are no options or warrants outstanding to purchase common shares.

3.    There are no convertible debt securities.

4.    Activity in common shares during the year was as follows.

Outstanding, Jan. 1	1,285,000
Treasury shares acquired, Oct. 1	1,035,000
Shares reissued, Dec. 1	1,165,000
Outstanding, Dec. 31	1,200,000

Questions:

1.    On the basis of the information above, do you agree with the controller’s computation of earnings per share for the year? If you disagree, prepare a revised computation of earnings per share

2.    Assume the same facts as those presented above, except that options had been issued to purchase 140,000 shares of common stock at $10 per share. These options were outstanding at the beginning of the year, and none had been exercised or canceled during the year. The average market price of the common shares during the year was $25, and the ending market price was $35.  What earnings per share amounts will be reported?

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