Question

On December 31, 2020, Berclair Inc. had 400 million shares of common stock and 14 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 120 million shares of its common stock as treasury stock. Berclair issued a 6% common stock dividend on July 1, 2021 Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2021, was $700 million Also outstanding at December 31 were 63 million incentive stock options granted to key executives on September 13, 2016. The options were exercisable as of September 13, 2020, for 63 million common shares at an exercise price of $60 per share. During 2021, the market price of the common shares averaged $70 per share. The options were exercised on September 1, 2021. Required: Compute Berclair's basic and diluted earnings per share for the year ended December 31, 2021. (Enter your answers in millions (i.e., 10,000,000 should be entered as 10) Do not round intermediate calculations.) Earnings per Share Numerator Denominator Basic Diluted I

Answer 1

Answer- A: Basic EPS

Step-1 Calculation of Earnings available for common shareholders:

= Net Income – Preference Share Holders Dividend = $700 – (14 * 100 * 9%) = $700 - $126 = $574

Step-2: Calculation of Weighted Average shares of common stock outstanding:

	No. of Shares	Period		Average Shares
Common Stock	400	01-01-2021 to 12-31-2021	400 * 12/12	400
Treasury Stock Purchased	-120	03-01-2021 to 12-31-2021	120 * 10/12	-100
				300
Stock Dividend	6%	Note:1	300 * 6%	18
Treasury Stock Sold	4	10-01-2021 to 12-31-2021	4 * 3/12	1
Weighted Average Shares				319

Note:1 According to IAS 33 – Earnings per share, Bonus shares issued during the year are deemed to have been issued at the beginning of the year.

Basic Earnings Per Share = Earnings for Common Shareholder / Average Shares Outstanding

   = 574 / 319 = $1.80 per share

Answer- B Diluted EPS

As the market price of share ($70) is greater than exercise price ($60), so stock options are dilutive:

Using the “The Treasury Stock Method” that assumes the proceed received upon exercise will be used to buy back stock at market price, net effect on outstanding shares will be;

Proceed from exercise of option = 63 million options * $60 = $3,780

Shares to be re-purchased = $3,780 / $70 per share price = 54 million shares.

Net increase in shares = 63 – 54 = 9 million (by selling 63 million share on option exercise and purchasing 54 million)

Diluted EPS = Earnings for Common Shareholder / Diluted Shares Holding

       = 574 / (319 + 9) = 574 / 328 = 1.75 per share