Question

Assume that the following data relative to Kane Company for 2021 is available:

Net Income $2,100,000
Transactions in Common Shares Change Cumulative
Jan. 1, 2021, Beginning number 700,000
Mar. 1, 2021, Purchase of treasury shares (60,000) 640,000
June 1, 2021, Stock split 2-1 640,000 1,280,000
Nov. 1, 2021, Issuance of shares 240,000 1,520,000

6% Cumulative Convertible Preferred Stock
Sold at par, convertible into 200,000 shares of common $1,000,000

Stock Options
Exercisable at the option price of $25 per share. Average market price in 2021. $30 (market price and option price adjusted for split). 90,000 shares

Required:
a. Compute the basic earnings per share for 2021.
b. Compute the diluted earnings per share for 2021.

Answer 1

a) The computation of the basic earnings per share of Kane Company for 2021 is $1.38 ($2,100,000/1,520,000).

b) The computation of the diluted earnings per share of Kane Company for 2021 is $1.16 ($2,100,000/1,810,000).

What are the basic and diluted earnings per share?

Basic earnings per share are based on the weighted average number of ordinary shares outstanding during the period, which is used to divide the net income.

Diluted earnings per share are the net income divided by the weighted average number of ordinary shares plus the dilutive potential ordinary shares (including stock options and convertible instruments) that meet the required criteria.

Data and Calculations:

Net Income  = $2,100,000

Transactions in Common Shares               Change      Cumulative

Jan. 1, 2021, Beginning number                700,000

Mar. 1, 2021, Treasury shares                    (60,000)            640,000

June 1, 2021, Stock split 2-1                      640,000           1,280,000

Nov. 1, 2021, Stock Issuance                    240,000          1,520,000

6% Cumulative Convertible Preferred Stock at par, convertible into 200,000 shares of common $1,000,000                           200,000

Stock Options = 90,000 shares                                             90,000

Total number of shares for diluted earnings = 1,810,000 (1,520,000 + 200,000 + 90,000)

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