Charles Austin of the controller’s office of Thompson Corporation was given the
ID: 2482469 • Letter: C
Question
Charles Austin of the controller’s office of Thompson Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2015. Austin has compiled the information listed below.
1. The company is authorized to issue 9,350,400 shares of $10 par value common stock. As of December 31, 2014, 2,337,600 shares had been issued and were outstanding.
2. The per share market prices of the common stock on selected dates were as follows. Price per Share July 1, 2014 $20 January 1, 2015 21 April 1, 2015 25 July 1, 2015 11 August 1, 2015 10.5 November 1, 2015 9 December 31, 2015 10
3. A total of 752,400 shares of an authorized 1,419,600 shares of convertible preferred stock had been issued on July 1, 2014. The stock was issued at its par value of $25, and it has a cumulative dividend of $3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30.
4. Thompson Corporation is subject to a 40% income tax rate.
5. The after-tax net income for the year ended December 31, 2015, was $12,300,000. The following specific activities took place during 2015. 1. January 1—A 5% common stock dividend was issued. The dividend had been declared on December 1, 2014, to all stockholders of record on December 29, 2014. 2. April 1—A total of 400,800 shares of the $3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2015. 3. July 1—A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1. 4. August 1—A total of 337,200 shares of common stock were issued to acquire a factory building. 5. November 1—A total of 25,600 shares of common stock were purchased on the open market at $9 per share. These shares were to be held as treasury stock and were still in the treasury as of December 31, 2015. 6. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows. April 15—$0.30 per share October 15—$0.20 per share 7. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled.
Explanation / Answer
We will first determine the number of shares used to compute basic earnings per share for the year ended December 31 / 2015
particulars
Shares outstanding
Restatement
parts of year
Weighted shares
Beginning balance Add 5% common stock dividend from Jan to april (23,37,600 + 116,880)
2454480
2
0.25
613620
Conversion of preferred stock (april to july)(400,800 +20,040)
2875320
2
0.25
718830
Stock split (july - august)
5750640
0.08
479220
Shares issued for factory building
6087840
0.25
1521960
treasury stock (nov-dec)
6062240
0.17
1010373
Total no. of weighted average shares
4344003
Now we will calculate the number of shares for diluted earnings per share for the year ended December 31 / 2015
particulars
number of shares
Total no. of weighted average shares
4344003
Add convertible preferred stock still outstanding(752400-400800
351600*2*1.05
738360
add convertible preferred stock converted
400,800*2*1.05*3/12
210420
Total number of shares used to calculate diluted EPS
5292783
We will now calculate the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2015.
particulars
amount
After tax net income
12,300,000
Less - preferred dividend upto march,31
752400*$.75
(564,300)
Less - preferred dividend upto April to december
400800*$0.75*3
(901,800)
Adjusted net income
10,833,900
The calculation for basic EPS is = Adjusted net income / total no. of weighted average shares
EPS = 10,833,900 /4344003 =$2.49
the calculation of diluted EPS
EPS = 12,300,000 /5292783 = $2.32
particulars
Shares outstanding
Restatement
parts of year
Weighted shares
Beginning balance Add 5% common stock dividend from Jan to april (23,37,600 + 116,880)
2454480
2
0.25
613620
Conversion of preferred stock (april to july)(400,800 +20,040)
2875320
2
0.25
718830
Stock split (july - august)
5750640
0.08
479220
Shares issued for factory building
6087840
0.25
1521960
treasury stock (nov-dec)
6062240
0.17
1010373
Total no. of weighted average shares
4344003