Question

Assume that the following data relative to Kane Company for 2018 is available: Net Income $2,830,000 Transactions in Common Shares Change Cumulative Jan. 1, 2018, Beginning number 690,000 Mar. 1, 2018, Purchase of treasury shares (50,400) 639,600 June 1, 2018, Stock split 2-1 639,600 1,279,200 Nov. 1, 2018, Issuance of shares 246,000 1,525,200 6% Cumulative Convertible Preferred Stock Sold at par, convertible into 210,000 shares of common (adjusted for split): $1,050,000 Stock OptionsExercisable at the option price of $25 per share. Average market price in 2018, $30 (market price and option price adjusted for split): 96,000 sharesa. Compute weighted average shares outstanding for 2018b. Compute the basic earnings per share for 2018.c. Compute the diluted earnings per share for 2018.

Answer 1

Weighted average shares outstanding = 1,337,000

Basic EPS = $2.07

Diluted EPS = $1.78

Step-by-step explanation:

Computation of Weighted Average Shares outstanding for 2018

Date Particulars Shares

1-Jan Outstanding 690,000

1-Mar Repurchase (25/30 x 50,400) -42,000 = 648,000

1-Jun Stock split 2-1 (648,000 x 2) = 1,296,000

1-Nov Issued (1/6 x 246,000) = 41,000

Weighted Average Shares outstanding = 1,337,000

Computation of Basic Earnings per share for the year 2018

Basic Earnings per Share (Total Income - Preferred Dividend) / Outstanding Shares

($2,830,000 - $63,000) / 1,337,000 shares

2,767,000/1,337,000 shares

$2.07

Hence EPS basic = $2.07

Note: Preferred Dividend = 6% x $1,050,000 = $63,000

Additional shares for purposes of diluted earnings per share

Particulars Shares

Potentially Dilutive Securities

6% Cumulative Convertible Preferred Stock 210,000

Stock Options

Proceeds from exercise of 96,000 options (96,000 x $25)

= $2,400,000

Shares issued upon exercise of options = 96,000

Less: Treasury stock purchasable with proceeds

($2,400,000 / $30) = 80,000

hence, (96,000 - 80,000) = 16,000

Dilutive Securities (Additional Shares) = 216,000

Computation of Diluted Earnings per share for the year 2018

Diluted Earnings per Share (Total Income - Preferred Dividend) / (Outstanding Shares + Diluted Shares)

(2,830,000 - $63,000) / (1,337,000 + 216,000) shares

$2,767,000 / 1,553,000 shares

$1.78

Hence EPS dilute = $1.78