Question

Ahnberg Corporation had 760,000 shares of common stock issued and outstanding at January 1. No common shares were issued during the year, but on January 1, Ahnberg issued 380,000 shares of convertible preferred stock. The preferred shares are convertible into 760,000 shares of common stock. During the year Ahnberg paid $228,000 cash dividends on the preferred stock. Net income was $3,040,000 What were Ahnberg's basic and diluted earnings per share for the year?

Answer 1

Ahnberg Corporation's basic earnings per share for the year is $4.00, calculated by dividing their net income by the common shares outstanding. Their diluted earnings per share is $2.15, considering the conversion of convertible preferred stock into common shares and adjusting net income for dividends paid on preferred stock.

Step-by-step explanation:

To calculate Ahnberg Corporation's basic earnings per share (EPS), you need to divide the net income by the number of common shares outstanding. The company had 760,000 common shares and a net income of $3,040,000. So, the basic EPS is $4.00 ($3,040,000 / 760,000).

For the diluted earnings per share, we have to consider the potential conversion of preferred shares into common stock.

Since the preferred stock is convertible into an additional 760,000 common shares, we pretend these shares were converted at the beginning of the year, which would double the outstanding common shares to 1,520,000.

We must also adjust the net income by adding back the preferred dividends, as those would not have been paid out if the shares were converted.

Thus, the diluted net income is $3,268,000 ($3,040,000 + $228,000), and the diluted EPS is $2.15 ($3,268,000 / 1,520,000).