Question

Nolte Co. has 4,000,000 shares of common stock outstanding on December 31, 2010. An additional 200,000 shares are issued on April 1, 2011, and 480,000 more on September 1. On October 1, Nolte issued $6,000,000 of 9% convertible bonds. Each $1,000 bond is convertible into 40 shares of common stock. No bonds have been converted. The number of shares to be used in computing basic earnings per share and diluted earnings per share on December 31, 2011 is

a. 4,310,000 and 4,310,000.
b. 4,310,000 and 4,370,000.
c. 4,310,000 and 4,550,000.
d. 5,080,000 and 5,320,000.

Answer 1

The number of shares to be used in computing basic earnings per share is 4,680,000. The number of shares to be used in computing diluted earnings per share is 5,080,000.

Step-by-step explanation:

To determine the number of shares to be used in computing basic earnings per share and diluted earnings per share, we need to consider the various share issuances and conversions during the year.

1. Shares outstanding on December 31, 2010: 4,000,000
2. Additional shares issued on April 1, 2011: 200,000
3. Additional shares issued on September 1, 2011: 480,000
4. Convertible bonds issued on October 1, 2011: $6,000,000 (each convertible into 40 shares)

To compute basic earnings per share, we only consider the shares outstanding on December 31, 2011, without accounting for any potential conversions:

Total shares on December 31, 2011: 4,000,000 + 200,000 + 480,000 = 4,680,000

Therefore, the number of shares to be used in computing basic earnings per share is 4,680,000.

To compute diluted earnings per share, we need to consider the potential conversion of the convertible bonds:

Total shares if all bonds were converted: 4,680,000 + (6,000,000 / 1,000) * 40 = 5,080,000

Therefore, the number of shares to be used in computing diluted earnings per share is 5,080,000.