Effect of New Year Stock Dividend on Prior Year EPS

Facts:

For the year ended 31^st December, X1 Target Inc. had net income of $10,000. At this date Target had 1,000 common shares issued and outstanding (par value =$1 per share). The number of general shares issued and outstanding did not change during the X1 year. Also, Target Inc. has no outstanding convertible securities. Target Inc. issued its 31^st December, X1 annual report to shareholders on February 1, X2.

On 15^th January, X2 the Board of Directors declared a 10 percent stock dividend to be distributed on January 20, X2. At the date of declaration the market price of the general stock was $10 per share.

Question:

Does the stock dividend declared and distributed in early X2 affect the EPS disclosure that will seem in the 31^st December, X1 annual report?

1. Give a brief written description of the proper treatment for the January 15, X2 stock dividend with respect to the December 31, X1 EPS disclosure.

2. Evaluate the EPS disclosure that will appear in the December 31, X1 annual report.