A finished ACC-371 Topic 7 diluted eps computation example, ranking three unconverted instruments by per-share effect, including two and excluding the antidilutive preferred to reach $2.39. Searches like "acc 371 topic 7 assignment example", "acc371 topic 7 sample" and "acc-371 topic 7 example" land here.
What a finished ACC-371 Topic 7 diluted eps computation looks like
Every figure in the computation is illustrative and traceable. Basic earnings per share comes first: net income of $1,200,000 less $200,000 of preferred dividends, over a weighted average of 400,000 shares, since 80,000 shares issued on July 1 count for half the year, gives $2.50. Each potential source of dilution is then measured on its own. The 50,000 options, exercisable at $20 against an average market price of $25, add 10,000 incremental shares under the treasury stock method and nothing to the numerator. The $2,000,000 of 5 percent convertible bonds add back $75,000 of after-tax interest for 40,000 shares, $1.875 per incremental share. The convertible preferred adds back $200,000 for 60,000 shares, $3.33 each. Taken in order, options and bonds bring the figure to $2.39, and the preferred, which would lift it back to $2.50, is left out.
How an ACC-371 Topic 7 example is structured
The computation runs basic first, then each instrument alone, then the instruments together in a defined order. Its opening part states net income, the preferred dividend and the share history for the year, and builds the weighted average from dated share events. The basic figure follows, with the preferred dividend deducted because the preferred is cumulative and the dividend belongs to the year whether or not it was declared. Third, the incremental numerator and denominator are computed for each potential common share: options by the treasury stock method, bonds and preferred by the if-converted method, each with its per-share effect. The fourth part ranks the three from most to least dilutive. The fifth part adds them one at a time, testing after each addition whether the next one lowers the running figure. A short disclosure note lists the excluded preferred and says why it is antidilutive.
Weighted shares built from dated events
The July issuance counts for six months, with that arithmetic shown, since an average taken from year-end shares would overstate the denominator.
Options measured by the treasury stock method
Assumed exercise proceeds of $1,000,000 buy back 40,000 shares at the average price, leaving 10,000 incremental shares with no effect on earnings.
Bond interest added back after tax
If-converted treatment removes the $100,000 of interest net of the tax it saved, so $75,000 rejoins earnings alongside the 40,000 new shares.
Instruments ranked before they are combined
Options, at zero per incremental share, enter first and the bonds second, because the order decides whether a later instrument dilutes the running figure.
The preferred excluded as antidilutive
At $3.33 per incremental share, the preferred would raise diluted earnings per share above $2.39, so it is left out and named in the disclosure.
Where marks go in ACC-371 Topic 7
Answers on diluted earnings per share tend to go wrong in a predictable order. The denominator comes first: year-end shares used in place of a weighted average, or the July issuance counted for the full year, and every later figure inherits the error. Preferred dividends left out of basic, or deducted only when declared on cumulative stock, overstate the income available to common holders. Adding back the full $100,000 of bond interest, with no tax effect removed, inflates the numerator by the saving the interest produced. An unconverted instrument is where the measure does its work, so a paper that includes the preferred because it could convert, without testing whether it dilutes, reports a figure the guidance rejects. Combining all three instruments in one step, with no ranking, lets an antidilutive security pull the figure up and costs credit.
Get an ACC-371 Topic 7 example written to your instructions
Send the ACC-371 Topic 7 instructions, your rubric and the capital structure or share data your section assigned. We write a custom example to them, with the weighted average built from dated events, each unconverted instrument measured on its own, the instruments ranked and tested in order and any antidilutive security excluded, back in 24 to 48 hours. The first one is free.
ACC-371 Topic 7 questions, answered
What makes a security antidilutive?
Including it would raise earnings per share or reduce a loss per share. Diluted earnings per share is meant to show the lowest figure the potential common shares could produce, so a security that pushes the number up is excluded. Here the preferred adds $3.33 of earnings for each new share when the running figure is $2.39, which lifts the result, so it stays out of the computation.
Why are options dilutive only when the market price exceeds the exercise price?
Because the treasury stock method assumes the exercise proceeds are used to buy back shares at the average market price. When the market price is above the exercise price, the proceeds buy back fewer shares than were issued, and the difference adds to the denominator. When the options are out of the money, the assumed buyback would exceed the shares issued, so the options are antidilutive and excluded.
How does a stock split during the year affect the computation?
It is applied retroactively. Shares outstanding before the split are restated as though the split had happened at the beginning of the earliest period presented, and so are prior-year per-share figures, because a split changes the number of shares without changing anyone's claim on earnings. Stock dividends receive the same treatment. New shares sold for cash, by contrast, are weighted from the date they were issued.