Information from the financial statements of Topps Fambricators, Inc., Included
ID: 2512352 • Letter: I
Question
Information from the financial statements of Topps Fambricators, Inc., Included the following :
Common shares 100,000
Convertible preferred shares $100 par, 5% (convertible into 36,000 shares of common) 12,000
10% convertible bonds (convertible into 25,000 shares of common) $1,000,000
Stock options for 120,000 shares of common stock (option price of $20 per share; market price of $25 per share)
Topps's net income for the year ended December 31,2018, is $680,000. The income tax rate is 40%. Topps paid dividends of $5 per share on its preferred stock during 2018.
Compute basic and diluted earnings per share for the year ended December 31, 2018.
Explanation / Answer
1. Basic earnings per share=Profit or loss attributable to common equity holders/weighted average no. of shares outstanding during the period
Profit/loss for common equity holders=680,000*(100%-40%)=408,000
=408,000-dividend to preference shareholders
=408,000-(5*12,000)
=$348,000
Weighted average no. of shares outstanding during the period=100,000
Basic earnings per share=348,000/100,000
=$3.48
2. Diluted earnings per share=Adjusted net profit for the year/Adjusted outstanding shares
Adjusted net profit= (Net income + interest on convertible bonds)*(100%-40%)
= (680,000 + (10,00,000*10%))*60%
=$ 468,000
Adjusted outstanding shares=common shares + convertible preference shares+ convertible bonds+ stock options
=100,000+36,000+25,000+120,000
=281,000
Diluted earnings per share= $468,000/281,000
= $ 1.66