Question

On June 1, 2015, Ivanhoe Company and Shamrock Company merged to form Bridgeport Inc. A total of 752,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2017, the company issued an additional 562,000 shares of stock for cash. All 1,314,000 shares were outstanding on December 31, 2017.

Bridgeport Inc. also issued $600,000 of 20-year, 7% convertible bonds at par on July 1, 2017. Each $1,000 bond converts to 44 shares of common at any interest date. None of the bonds have been converted to date.

Bridgeport Inc. is preparing its annual report for the fiscal year ending December 31, 2017. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,614,000. (The tax rate is 40%.)

Determine the following for 2017.

(a) The number of shares to be used for calculating: (Round answers to 0 decimal places, e.g. $2,500.)

(1) Basic earnings per share
(2) Diluted earnings per share


(b) The earnings figures to be used for calculating: (Round answers to 0 decimal places, e.g. $2,500.)

(1) Basic earnings per share $
(2) Diluted earnings per share $

Answer 1

Solution:

a-1) Calculation of the number of shares used for calculating Basic Earning per share    

No. of shares                         period        

752000                                    3/12                           188000    

1314000                                    9/12                           985500    

Weighted average No of shares outstanding   1173500

a-2) Calculation of the number of shares used for calculating Diluted Earning per share    

                        No. of shares                 period        

                          752000                   3/12                 188000                                     1314000                    3/12                  328500      with Bonds       1340400                    6/12                670200      

Weighted average No of shares outstanding           1186700   

Each bonds to per converted into 44 common stock

i.e. 600 Bonds *44 common=26400 Potential equity shares

b-1) Calculation of earning figures to be used for calculating Basic Earning per share    

After Tax net Income will be earnings = $1614000      

b-2) Calculation of earning figures to be used for calculating Diluted Earning per share    

After tax net Income                                                   1614000      

Interest for the 2017 =600000*7*6/12   21000      

Tax effect on Interest @40%                     8400      12600                                                                                                 1626600

Earnings = 1626600