Question

On June 1, 2023, Windsor Company and Sheridan Company merged to form Skysong Inc. A total of 870,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2025, the company issued an additional 543,000 shares of stock for cash. All 1,413,000 shares were outstanding on December 31, 2025.
Skysong Inc. also issued $600,000 of 20 -year, 8% convertible bonds at par on July 1,2025. Each $1,000 bond converts to 38 shares of common at any interest date. None of the bonds have been converted to date.
Skysong Inc. is preparing its annual report for the fiscal year ending December 31, 2025. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,613,000. (The tax rate is 20%.)
Determine the following for 2025.
a. The number of shares to be used for calculating: (Round answers to 0 decimal places, e.g. 2,500.)
1. Basic earnings per share __ shares
2. Diluted earnings per share ___ shares
b. The earnings figures to be used for calculating: (Round answers to 0 decimal places, e.g. 2,500.)
1. Basic earnings per share $ ___
2. Diluted earnings per share $ ___

Answer 1

To calculate Skysong Inc.'s earnings per share (EPS), we need to determine both basic and diluted EPS. Basic EPS is the after-tax net income divided by the weighted number of shares outstanding, while diluted EPS considers the potential conversion of convertible bonds. The exact EPS figures cannot be calculated without further information regarding the number of weighted shares.

Step-by-step explanation:

To determine the earnings per share (EPS) figures for Skysong Inc. for the fiscal year ending December 31, 2025, we need to calculate both basic EPS and diluted EPS. For the basic EPS, we would solely use the actual number of shares outstanding during the year. Since there were 870,000 shares initially, and an additional 543,000 shares were issued on April 1, 2025, the weighted average number of shares to be used for the calculation would account for these newly issued shares being outstanding for nine months of the year (i.e., from April to December).

Basic EPS is calculated using the formula: Basic EPS = Net Income / Weighted Average Number of Shares Outstanding. However, the exact number is not provided here without more information. For diluted EPS, potential conversions that could occur must be included, such as those resulting from convertible bonds. As none of the convertible bonds were actually converted, we use the 'if-converted' method to find out the potential dilution. The formula for diluted EPS would be: Diluted EPS = (Net Income + Convertible Bond Interest (1 - Tax Rate)) / (Weighted Average Number of Shares Outstanding + Shares from Conversion of Bonds).

For the earnings figures of Skysong Inc., the basic earnings figure is the after-tax net income which is given as $1,613,000. For diluted earnings, you would add the after-tax value of the convertible bond interest back to the net income since the interest would not have been paid had the bonds been converted to shares.