Question

On December 31, 2017, Berclair Inc. had 560 million shares of common stock and 5 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2018, Berclair purchased 168 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2018. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2018, was $1,050 million.

Also outstanding at December 31 were 30 million incentive stock options granted to key executives on September 13, 2013. The options were exercisable as of September 13, 2017, for 30 million common shares at an exercise price of $56 per share. During 2018, the market price of the common shares averaged $70 per share.
Required:
a. Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2018.

Answer 1

Basic Earnings Per Share = $1,44

Diluted Earnings Per Share = $1,38

Step-by-step explanation:

Basic Earnings Per Share = Earnings Attributable to Holders of Common Stock / Weighted Average Number of Common Shares

Calculation of Earnings Attributable to Holders of Common Stock

Net income for the year ended December 31, 2018, $1,050,000,000

Less cumulative preferred stock dividend ($45,000,000)

Earnings Attributable to Holders of Common Stock $1,005,000,000

Calculation of Weighted Average Number of Common Shares

1 January Outstanding Common Shares 560,000,000

March 1 - Purchases (10/12×168,000,000) 140,000,000

October 1 - Sold (3/12×4,000,0000) (1,000,000)

Weighted Average Number of Common Shares 699,000,000

Basic Earnings Per Share = $1,005,000,000/699,000,000

= $1,44

Diluted Earnings Per Share = Adjusted Earnings Attributable to Holders of Common Stock / Adjusted Weighted Average Number of Common Shares

Calculation of Adjusted Weighted Average Number of Common Shares

Weighted Average Number of Common Shares (Basic) 699,000,000

Incentive Stock Options 30,000,000

Adjusted Weighted Average Number of Common Shares 729,000,000

Diluted Earnings Per Share = $1,005,000,000/ 729,000,000

= $1,38