Question

Information from the financial statements of Ames Fabricators, Inc., included the following:

December 31
2016 2015
Common shares 100,000 100,000
Convertible preferred shares (convertible into 60,000 shares of common) 28,800 28,800
10% convertible bonds (convertible into 30,000 shares of common) $1,000,000 $1,000,000
Ames's net income for the year ended December 31, 2016, is $780,000. The income tax rate is 40%. Ames paid dividends of $5 per share on its preferred stock during 2016.
Required:
Compute basic and diluted earnings per share for the year ended December 31, 2016. (Enter your answers in thousands.)

Answer 1

Basic Earnings per Share = $5.76 and

Diluted Earnings per Share = $4.11

Step-by-step explanation:

Basic Earnings per Share = Earnings Attributable to Holders of Common Stock ÷ Weighted Average Number of Common Stocks

Calculation of Earnings Attributable to Holders of Common Stock :

Net income for the year ended December 31, 2016 $780,000

Less Preference Shares dividends (28,800 × $5) ($144,000)

Less Interest on convertible bonds ( $1,000,000 × 10% × 60%) ($60,000)

Earnings Attributable to Holders of Common Stock $576,000

Calculation of Weighted Average Number of Common Stocks :

Common Stocks Outstanding 100,000

Weighted Average Number of Common Stocks 100,000

Thus,

Basic Earnings per Share = $576,000 ÷ 100,000

= $5.76

Diluted Earnings per Share = Adjusted Earnings Attributable to Holders of Common Stock ÷ Adjusted Weighted Average Number of Common Stocks

Calculation of Adjusted Earnings Attributable to Holders of Common Stock :

Net income for the year ended December 31, 2016 $576,000

Add Preference Shares dividends (28,800 × $5) ($144,000)

Add Interest on convertible bonds ( $1,000,000 × 10% × 60%) ($60,000)

Earnings Attributable to Holders of Common Stock $780,000

Calculation of Adjusted Weighted Average Number of Common Stocks :

Common Stocks Outstanding 100,000

Add Convertible preferred shares 60,000

Add convertible bonds 30,000

Adjusted Weighted Average Number of Common Stocks 190,000

Thus,

Diluted Earnings per Share = $780,000 ÷ 190,000

= $4.11