Final answer:
The number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2011 is 1,030,000 shares (option A).
Step-by-step explanation:
The number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2011 is 1,030,000 shares (option A). To calculate diluted earnings per share, we need to consider the additional shares issued during the year and any potential impact from stock options. In this case, Fugate Company issued an additional 500,000 shares on July 1, 2011. Additionally, there were stock options outstanding at the beginning and end of 2011 allowing the holders to purchase 150,000 shares of common stock at $20 per share.
To calculate the number of shares for diluted earnings per share, we need to consider both the actual shares outstanding and the potential dilution from stock options. The formula is as follows:
- Actual Shares Outstanding + Additional Shares Issued - Shares Purchased Through Stock Options
- 500,000 + 500,000 - 150,000 = 850,000 shares
However, since the average market price of Fugate's common stock was $25 during 2011, all stock options were considered anti-dilutive (i.e., they would not reduce earnings per share if exercised). As a result, we add all of the potential dilutive shares back to the calculation:
- Actual Shares Outstanding + Additional Shares Issued
- 500,000 + 500,000 = 1,000,000 shares
Therefore, the number of shares that should be used in computing diluted earnings per share for the year ended December 31, 2011 is 1,000,000 shares. Option A, 1,030,000 shares, is the closest answer choice.