Equity & Earnings Per Share

Equity entries

• Issuance costs → reduce additional paid-in capital (APIC).
• Treasury stock (cost method): reissue above cost → APIC; below → APIC then retained earnings. Never income.
• Small stock dividend (< 20–25%) → fair value; large → par; split → no entry.
• Property dividend → remeasure to fair value first.
• Mandatorily redeemable preferred → liability.

Share-based compensation

Equity awards: grant-date fair value ÷ service period. Liability awards: remeasure each period.

Basic earnings per share (EPS)

• (Net income − current-year preferred dividends) ÷ weighted-average shares.
• Cumulative preferred: subtract whether declared or not. Non-cumulative: only if declared.
• Splits and stock dividends: retroactive to the start of the earliest period.

Diluted EPS

• Options: treasury stock method; include only if average price > exercise price.
• Convertible bonds: + after-tax interest; + shares (if-converted).
• Convertible preferred: + preferred dividends; + shares.
• Exclude antidilutive items; loss from continuing operations → diluted = basic.

Exam traps

• Stock splits and stock dividends are retroactive in EPS, but treasury stock purchases and new issues are weighted from their actual dates.
• Shares issued in a business combination count only from the acquisition date.
• Contingently issuable shares enter basic EPS only once all conditions are met.
• Appropriations of retained earnings don't change total equity.