Question

On June 1, 2018, Stellar Company and Pearl Company merged to form Martinez Inc. A total of 733,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis. On April 1, 2020, the company issued an additional 577,000 shares of stock for cash. All 1,310,000 shares were outstanding on December 31, 2020. Martinez Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 42 shares of common at any interest date. None of the bonds have been converted to date. Martinez Inc. is preparing its annual report for the fiscal year ending December 31, 2020. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,475,000. (The tax rate is 20%.) Determine the following for 2020.

a. The number of shares to be used for calculating:_______
b. The earnings figures to be used for calculating: ________

Answer 1

a. The number of shares to be used for calculating:_______

• basic EPS = 733,000 + (577,000 x 9/12) = 1,165,750 shares
• diluted EPS = 1,165,750 + (600,000/1,000 x 42) = 1,190,950

b. The earnings figures to be used for calculating: ________

• basic EPS = net income = $1,475,000
• diluted EPS = $1,475,000 + ($600,000 x 8%) - (20% x $600,000 x 8%) = $1,475,000 + $48,000 - $9,600 = $1,513,400