Question

Ahnberg Corporation had 560,000 shares of common stock issued and outstanding at January 1. No common shares were issued during the year, but on January 1, Ahnberg issued 180,000 shares of convertible preferred stock. The preferred shares are convertible into 360,000 shares of common stock. During the year Ahnberg paid $108,000 cash dividends on the preferred stock. Net income was $1,060,000. What were Ahnberg's basic and diluted earnings per share for the year

Answer 1

Ahnberg Corporation's basic earnings per share is $1.89, calculated by dividing the net income of $1,060,000 by the outstanding 560,000 common shares. The diluted earnings per share is $1.03, which factors in the potential conversion of preferred stock into 360,000 additional common shares, after adjusting for the $108,000 preferred dividends.

Step-by-step explanation:

Calculation of Basic and Diluted Earnings Per Share

The basic earnings per share (EPS) calculation involves taking the net income and dividing it by the number of outstanding common shares. For Ahnberg Corporation, the calculation would be as follows:

• Net Income: $1,060,000
• Common Shares Outstanding: 560,000
• Basic EPS = Net Income / Common Shares Outstanding = $1,060,000 / 560,000 = $1.89

The diluted earnings per share considers the effect of dilutive securities such as convertible preferred stock. If the preferred shares are converted to common stock, there will be an increase in the total number of common shares outstanding. The calculation is as follows (assuming full conversion of preferred stock):

• Net Income: $1,060,000
• Net Income adjusted for preferred dividends: $1,060,000 - $108,000 = $952,000
• Common Shares Outstanding after conversion: 560,000 + 360,000 = 920,000
• Diluted EPS = Adjusted Net Income / Common Shares Outstanding after conversion = $952,000 / 920,000 = $1.03

Note that for the diluted EPS, we subtract the dividends on preferred stock from the net income, because after conversion, these dividends would not be paid.