Question

Paul Company had 100,000 shares of common stock outstanding on January 1, 2021. On September 30, 2021, Paul sold 41,000 shares of common stock for cash. Paul also had 6,500 shares of convertible preferred stock outstanding throughout 2021. The preferred stock is $100 par, 5%, and is convertible into 3 shares of common for each share of preferred. Paul also had 430, 7%, convertible bonds outstanding throughout 2021. Each $1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2021 was $280,000 with a 40% tax rate. Common shareholders received $1.30 per share dividends after preferred dividends were paid in 2021. Required: Compute basic and diluted earnings per share for 2021.

Answer 1

A. Basic earning per share 2.24 per share

B. Diluted earning per share 2.07 per share

Step-by-step explanation:

Computation for the basic and diluted earnings per share for 2021.

First step is to calculate the Weighted common share

Weighted common share = 100,000+(41,000*3/12)

Weighted common share=100,000+10,250

Weighted common share= 110,250 Shares

a) Calculation for Basic earning per share using this formula

Basic earning per share = (Net income-Preferred dividend) / Share outstanding

Let plug in the formula

Basic earning per share = [$280,000-(5%*100*6,500)/110,250

Basic earning per share=[$280,000-$32,500)/110,250

Basic earning per share=$247,500/110,250

Basic earning per share =2.24 per share

Therefore Basic earning per share for 2021 will be 2.24 per share

b) Computation for the diluted earnings per share for 2021.

Using this formula

Diluted earning per share = Adjusted net income/Adjusted diluted share

First step is to calculate the Adjusted net income

Adjusted net income = $280,000+(430*1000*7%*60%)

(100%-40%=60%)

Adjusted net income = $280,000+$18,060

Adjusted net income =$298,060

Second step is to calculate the Adjusted diluted shares

Adjusted diluted shares = 110,250 +(6,500*3)+(430,000/30)

(430*1,000=430,000)

Adjusted diluted shares = 110,250+19,500+14,333

Adjusted diluted shares = 144,083

Now let calculate Diluted earning per share by plugging in the formula

Diluted earning per share = 298,060/ 144,083

Diluted earning per share= 2.068 per share

Diluted earning per share=2.07 per share (Approximately)

Therefore The Diluted earning per share for 2021 will be 2.07 per share