Question

Colt Corporation purchased Massey Inc. and agreed to give stockholders of Massey Inc. 50,000 additional shares in 2012 if Massey Inc.'s net income in 2011 is $400,000 or more; in 2010 Massey Inc.'s net income is $410,000. Colt has net income for 2010 of $800,000 and has an average number of common shares outstanding for 2010 of 500,000 shares. What should Colt report as earnings per share for 2010?

Basic Earnings Diluted Earnings
Per Share Per Share
a. $1.60 $1.60
b. $1.45 $1.60
c. $1.60 $1.45
d. $1.45 $1.45

Answer 1

The correct answer is A. The correct earnings per share calculation for Colt Corporation based on their net income and average shares outstanding for 2010 results in both basic and diluted EPS being $1.60; the potential future issuance of additional shares does not affect the 2010 EPS.

Step-by-step explanation:

The calculation of earnings per share (EPS) for Colt Corporation in 2010 should be based on its net income and the average number of common shares outstanding during the year, which does not include the contingent issuance of additional shares. Since the additional shares are contingent upon Massey Inc.'s net income in the subsequent year (2011), they are not considered in the 2010 EPS calculation.

Basic EPS is calculated by taking the net income and dividing it by the average number of shares outstanding. For Colt Corporation:

• Net Income: $800,000
• Average Shares Outstanding: 500,000

Therefore, the Basic EPS for 2010 is calculated:

Basic EPS = Net Income / Average Shares Outstanding = $800,000 / 500,000 shares = $1.60 per share.

As for the diluted EPS, since the contingent 50,000 shares are not yet issued, they do not dilute the EPS for 2010. Thus, the diluted EPS is also $1.60. The correct answer is a. $1.60 $1.60.