Question

Lerner Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 2011. The preferred stock is convertible into 40,000 shares of common stock. During 2011, Lerner paid dividends of $.90 per share on the common stock and $3.00 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 2011 was $600,000 and the income tax rate was 30%.

Basic earnings per share for 2011 is (rounded to the nearest penny)
a. $2.21.
b. $2.42.
c. $2.51.
d. $2.70.

Answer 1

The correct answer is (D).

The basic earnings per share (EPS) for Lerner Co. for 2011 is calculated by subtracting preferred dividends from net income and dividing by the weighted average shares outstanding. Preferred dividends total $60,000, and there are 200,000 shares of common stock. The basic EPS for Lerner Co. in 2011 is $2.70 per share.

Step-by-step explanation:

To calculate basic earnings per share (EPS) for Lerner Co. for 2011, we must follow the appropriate formula:

Basic EPS = (Net Income - Preferred Dividends) / Weighted Average Shares Outstanding

Lerner Co.'s net income for 2011 was $600,000, and it paid $3.00 per share on the 20,000 shares of preferred stock, equaling $60,000 in preferred dividends. No additional calculations for common stock dividends are needed since they don't affect net income.

After subtracting the preferred dividends, the amount available for common shareholders comes to $540,000 ($600,000 - $60,000).

The number of common shares outstanding is originally 200,000. Since preferred shares and bonds are convertible but we're calculating basic EPS, we do not consider them in this calculation. Therefore, the weighted average shares outstanding remains 200,000.

Finally, basic EPS = $540,000 / 200,000 = $2.70 per share, which is rounded to the nearest penny.