Question

At December 31, 2010, Hancock Company had 500,000 shares of common stock issued and outstanding, 400,000 of which had been issued and outstanding throughout the year and 100,000 of which were issued on October 1, 2010. Net income for the year ended December 31, 2010, was $1,020,000. What should be Hancock's 2010 earnings per common share, rounded to the nearest penny?

a. $2.02
b. $2.55
c. $2.40
d. $2.27

Answer 1

To calculate the earnings per common share for Hancock Company in 2010, we divide the net income by the weighted average number of shares. The earnings per common share is $0.01.

Step-by-step explanation:

To calculate the earnings per common share for Hancock Company in 2010, we first need to calculate the weighted average number of shares outstanding during the year. The 400,000 shares that were issued and outstanding throughout the year and the 100,000 shares that were issued on October 1, 2010, will both be included in the calculation.

To calculate the weighted average, we multiply the number of shares outstanding for each period by the length of time they were outstanding. The 400,000 shares were outstanding for the whole year, so they contributed 400,000 shares * 365 days = 146,000,000 share-days. The 100,000 shares were outstanding for 3 months, so they contribute 100,000 shares * 92 days = 9,200,000 share-days.

The total weighted average number of shares is 146,000,000 share-days + 9,200,000 share-days = 155,200,000 share-days. To calculate the earnings per common share, we divide the net income of $1,020,000 by the weighted average number of shares: $1,020,000 / 155,200,000 shares = $0.006575 per share. Rounded to the nearest penny, the earnings per common share is $0.01.