Question

Assume that the following data relative to Cullumber Company for 2021 is available: Net Income $2,820,000 Transactions in Common Shares Change Cumulative Jan. 1, 2021, Beginning number 740,000 Mar. 1, 2021, Purchase of treasury shares (60,000) 680,000 June 1, 2021, Stock split 2-1 680,000 1,360,000 Nov. 1, 2021, Issuance of shares 234,000 1,594,000 6% Cumulative Convertible Preferred Stock Sold at par, convertible into 180,000 shares of common (adjusted for split). $900,000 Stock Options Exercisable at the option price of $25 per share. The average market price in 2021, $30 (market price and option price adjusted for split).
Compute the basic earnings per share for 2021. (Round to the nearest penny.)
Compute the diluted earnings per share for 2021.

Answer 1

Answer:

(a)Basic earnings per share $1.94

(b)Diluted earnings per share $1.74

Explanation:

Cullumber Company

Computation of weighted average shares outstanding during the year:

January 1 Outstanding 740,000

March 1 Repurchase (5/6 × 60,000)(50,000) 690,000

June1 2-for-1 split 1,380,000

(740,000+690,000-50,000)

November 1 Issued (1/6 × 234,000)39,000

(1,380,000+39,000) 1,419,000

Additional shares for purposes of diluted earnings per share:

Potentially dilutive securities

6% convertible preferred stock 180,000

Stock options

Proceeds from exercise of 90,000 options (90,000 × $25)$2,250,000

Shares issued upon exercise of options

$90,000

Less: treasury stock purchasable with proceeds ($2,250,000 ÷ $30)75,000

($90,000-$75,000) $15,000

Dilutive securities—additional shares ($180,000+$15,000) $195,000

(a)Basic earnings per share:$2,820,000 -$60,000/1,419,000

=$2,760,000/$1,419,000

=$1.94

(b)Diluted earnings per share:

$2,820,000/$1,419,000+$195,000

=$2,820,000/$1,614,000

=$1.74