Problem 16-05
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Your answer is incorrect. Try again. | |
Amy Dyken, controller at Pharoah Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Pharoah’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2020.
Pharoah Pharmaceutical Industries |
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Long-term debt | ||
Notes payable, 10% |
$1,020,000 |
|
9% convertible bonds payable |
5,030,000 |
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10% bonds payable |
5,950,000 |
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Total long-term debt |
$12,000,000 |
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Shareholders’ equity | ||
Preferred stock, 5% cumulative, $50 par value, 100,000 shares authorized, 25,000 shares issued and outstanding |
$1,250,000 |
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Common stock, $1 par, 10,200,000 shares authorized, 1,020,000 shares issued and outstanding |
1,020,000 |
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Additional paid-in capital |
3,990,000 |
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Retained earnings |
5,980,000 |
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Total shareholders’ equity |
$12,240,000 |
The following transactions have also occurred at Pharoah.
1. | Options were granted on July 1, 2019, to purchase 200,000 shares at $16 per share. Although no options were exercised during fiscal year 2020, the average price per common share during fiscal year 2020 was $20 per share. | |
2. | Each bond was issued at face value. The 9% convertible bonds will convert into common stock at 50 shares per $1,000 bond. The bonds are exercisable after 5 years and were issued in fiscal year 2019. | |
3. | The preferred stock was issued in 2019. | |
4. | There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2020. | |
5. | The 1,020,000 shares of common stock were outstanding for the entire 2020 fiscal year. | |
6. | Net income for fiscal year 2020 was $1,510,000, and the average income tax rate is 20%. |
For the fiscal year ended June 30, 2020, calculate the following
for Pharoah Pharmaceutical Industries. (Round answers
to 2 decimal places, e.g. $2.45.)
(a) Basic earnings per share.
Basic earnings per share | $
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(b) Diluted earnings per share.
Diluted earnings per share | $
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EPS shows Net Earnings of the company per outstanding common shares. It expresses the earning capacity of the company whereas Diluted EPS gauge the quality of basic EPS. It further includes those financial securities which are convertible into common underlying shares e.g. convertible debt, warrants, etc.
(a) Basic earning per share = (Net Income - Preferred Dividends)
No. of Common Shares outstanding
=( $ 1,510,000 - $ 62,500 )
1,020,000 = $ 1.41
(b) Diluted earning per share =
[Net Income - Preferred Dividends + potential convertible
securities interest(net of taxes)]
No. of Common Shares outstanding + Potential convertible
Shares
OR
Diluted earnings due to saving in Interest of convertible
securities (net of taxes)
( No. of Common Shares outstanding + Potential convertible Shares
)
= ( $ 1,510,000 - $ 62,500 ) +[ $ 452,700
(1- 20%) ]
(1,020,000 + 251,500 + 200,000)
= 1,809,660
1,471,500 = $ 1.22
**** Potential convertible shares = Convertible bonds + Option rights for 200,000
= [($ 1,020,000
$1000)
50 shares ] + 200,000
= 251,500 + 200,000 = 451,500 Potential convertible shares
Problem 16-05 Your answer is incorrect. Try again. Amy Dyken, controller at Pharoah Pharmaceutical Industries, a...
Problem 16-05
Your answer is incorrect. Try again.
Amy Dyken, controller at Pharoah Pharmaceutical Industries, a
public company, is currently preparing the calculation for basic
and diluted earnings per share and the related disclosure for
Pharoah’s financial statements. Below is selected financial
information for the fiscal year ended June 30, 2020.
Pharoah Pharmaceutical Industries
Selected Balance Sheet Information
June 30, 2020
Long-term debt
Notes payable, 10%
$1,020,000
9% convertible bonds payable
5,030,000
10% bonds payable
5,950,000
Total long-term debt
$12,000,000...
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