Question

Question 4 --/1 View Policies Current Attempt in Progress On June 1, 2018, Sarasota Company and Ivanhoe Company merged to form Shamrock Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis. On April 1, 2020, the company issued an additional 563,000 shares of stock for cash. All 1,363,000 shares were outstanding on December 31, 2020. Shamrock Inc. also issued $600,000 of 20-year, 7% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 42 shares of common at any interest date. None of the bonds have been converted to date. Shamrock Inc. is preparing its annual report for the fiscal year ending December 31, 2020. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,421,000. (The tax rate is 20%.) Determine the following for 2020. (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 shares (2) Diluted earnings per share shares (b) The earnings figures to be used for calculating: (Round answers to 0 decimal places, eg. $2,500.) (1) Basic earnings per share $ (2) Diluted earnings per share $ e Textbook and Media Save for Later Attempts: 0 of 3 used Submit Answer

Answer 1

Question 4:

(a) No. of shares to be used for calculating

(1) Basic earnings per share

       = Weighted average number of equity shares outstanding during the period

       = (800,000 * 12/12 ) + (563,000 * 9^# /12)

       = 800,000 + 422,250

       = 1,222,250 shares

# = Since the additional shares are issued on 1 April 2020.

(2) Diluted earnings per share

    = Weighted average number of equity shares outstanding during the period + potential dilutive equity shares

Here,

Weighted average number of equity shares outstanding during the period = 1,222,250 shares

Potential dilutive equity shares = 7% convertible bonds

                                                          = [($600,000 / $1,000) * 42 ] = 25,200 shares

= 1,222,250 shares + 25,200 shares

= 1,247,450 shares

(b) The earnings figures to be used for calculating

(1) Basic earnings per share

                       = After tax-net income = $1,421,000

(2) Diluted earnings per share                                  

   After tax-net income      = $1,421,000, tax rate is 20%

Before tax-net income ($1,421,000 * 100/80) = $1,776,250

Add: Interest expense for 6 months ($600,000 * 7% *6/12) = $21,000

Before tax-net income = $1,797,250

Less: Tax @ 20%         = ($359,450)

After tax-net income = $1,437,800

After tax-net income is $1,437,800 for computing diluted EPS purposes.