Problem 16-8 The information below pertains to Barkley Company for 2015. There w

Question

Problem 16-8

The information below pertains to Barkley Company for 2015.

There were no changes during 2015 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 79,900 shares of common stock at $15 per share.

(a) Compute basic earnings per share for 2015. (Round answer to 2 decimal places, e.g. $2.55.)

(b) Compute diluted earnings per share for 2015. (Round answer to 2 decimal places, e.g. $2.55.)

Net income for the year $1,242,000 8% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 40 shares of common stock 2,676,000 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock 4,074,000 Common stock, $10 par value 6,067,000 Tax rate for 2015 40% Average market price of common stock $30 per share

Explanation / Answer

Solution:

(a) Basic Earnings Per Share = Net Income available for common stock holders / No. of Common Stock outstanding at the end of year = $997,560 / 606,700 = $1.644

Net Income available for common stock holders = Net Income – Preference Dividend = $1,242,000 - $244,440 = $997,560

(b) Diluted Earnings Per Share = Potential Net Income / Potential No. of Common Stock outstanding = $1,370,448 / 915,860 = $1.496 or $1.50

Potential Income = Net Income + Interest on Bonds (1 – Tax Rate) = $1,242,000 + ($2,676,000 x 8% x (1-0.40) = $1,242,000 + $128,448 = $1,370,448

Potential No. of Common Stock Outstanding = Common Stock Outstanding + Convertible Bonds + Convertible Preference Stock + Stock Option Shares = 606,700 + (2,676 x 40) + (40,740 x 3) + 79,900 = 915,860 Common Stock

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