In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received

In applying the treasury stock method to determine the dilutive effect of stock options and warrants, the proceeds assumed to be received upon exercise of the options and warrants

a. are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share.
b. are added, net of tax, to the numerator of the calculation for diluted earnings per share.
c. are disregarded in the computation of earnings per share if the exercise price of the options and warrants is less than the ending market price of common stock.
d. none of these.


Answer: are used to calculate the number of common shares repurchased at the average market price, when computing diluted earnings per share

Assume there are two dilutive convertible securities. The one that should be used first to recalculate earnings per share is the security with the

a. greater earnings adjustment.
b. greater earnings per share adjustment.
c. smaller earnings adjustment.
d. smaller earnings per share adjustment.


Answer: smaller earnings per share adjustment

In the diluted earnings per share computation, the treasury stock method is used for options and warrants to reflect assumed reacquisition of common stock at the average market price during the period. If the exercise price of the options or warrants exceeds the average market price, the computation would

a. fairly present diluted earnings per share on a prospective basis.
b. fairly present the maximum potential dilution of diluted earnings per share on a prospective basis.
c. reflect the excess of the number of shares assumed issued over the number of shares assumed reacquired as the potential dilution of earnings per share.
d. be antidilutive.


Answer: be antidilutive

A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock

A convertible bond issue should be included in the diluted earnings per share computation as if the bonds had been converted into common stock, if the effect of its inclusion is

Dilutive Antidilutive


a. Yes Yes
b. Yes No
c. No Yes
d. No No


Answer: yes no

When computing diluted earnings per share, convertible bonds are

a. ignored.
b. assumed converted whether they are dilutive or antidilutive.
c. assumed converted only if they are antidilutive.
d. assumed converted only if they are dilutive.


Answer: assumed converted only if they are dilutive

Dilutive convertible securities must be used in the computation of

a. basic earnings per share only.
b. diluted earnings per share only.
c. diluted and basic earnings per share.
d. none of these.


Answer: diluted earnings per share only