Question

Beaty Inc. purchased Dunbar Co. and agreed to give stockholders of Dunbar Co. 10,000 additional shares in 2012 if Dunbar Co.'s net income in 2011 is $500,000; in 2010 Dunbar Co.'s net income is $520,000. Beaty Inc. has net income for 2010 of $200,000 and has an average number of common shares outstanding for 2010 of 100,000 shares. What should Beaty report as diluted earnings per share for 2010?

a. $2.22
b. $2.00
c. $1.82
d. $1.67

Answer 1

Beaty Inc. should report diluted earnings per share for 2010 of $1.82.

Step-by-step explanation:

To calculate the diluted earnings per share for 2010, we first need to determine the effect of the additional shares from the Beaty Inc. and Dunbar Co. stock purchase. Since Dunbar Co.'s net income in 2010 was $520,000, which is greater than the target net income of $500,000, the additional shares will be included in the diluted earnings per share calculation for 2010.

First, calculate the weighted average number of common shares outstanding for 2010. The starting number of shares is 100,000. The additional shares to be issued is 10,000, and it is assumed that these shares are outstanding the entire year. Therefore, the weighted average number of common shares for 2010 is 110,000.

Next, calculate the diluted earnings per share by dividing Beaty Inc.'s net income for 2010 by the weighted average number of common shares. Diluted earnings per share = ($200,000 / 110,000) = $1.82.