Question

Exercise 16-23 

On June 1, 2018, Andre Company and Agassi Company merged to form Lancaster 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 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2020. 

Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date. 

Lancaster 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 $1,540,000. (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.) shares 

(1) Basic earnings per share 

(2) Diluted earnings per share shares 

(b) The earnings figures to be used for calculating: (Round answers to O decimal places, e.g. $2,500.)

 (1) Basic earnings per share t 

(2) Diluted earnings per share &

Answer 1

(a) The number of shares to be used for calculating :-

(1) Basic Earning Per Share = 1100000

(2) Diluted Earning Per Share = 1112000

Explanations :-

Basic Earning Per Share:

Dates	Shares	Weight	Weighted Shares
Jan 1, 2020 – April 1, 2020	800000	3/12	200000
Apr 1, 2020 – Dec 31, 2020	1200000	9/12	900000
			1100000

Diluted Earning Per Share:

Dates	Shares	Weight	Weighted Shares
Jan 1, 2020 – April 1, 2020	800000	3/12	200000
Apr 1, 2020 – July 1, 2020	1200000	3/12	300000
July 1, 2020 – Dec 31, 2020	1224000	6/12	612000
			1112000

Convertible bond into shares = $600000/$1000 * 40 shares = 24000 shares

(b) The Earnings Figures to be used for calculating :-

(1) Basic Earning Per Share = $1540000

(2) Diluted Earning Per Share = $1559200

Explanations :-

Basic Earning Per Share = Net Income = $1540000

Diluted Earning Per Share

Net Income + Interest Saving - Additional Tax

Interest Saving = $600,000 x 8% x ½ year = $24000

Additional Tax = $24000 * 20% = $4800

Adjusted Net Income = $1540000 + $24000 - $4800 = $1559200