Question

For the year ended December 31, 2020, Joey Co. reported Net Income of $1,600,000. At January 1, 2020 the company had 900,000 shares of common stock outstanding. Joey Co. also had $1,000,000 of 6% cumulative preferred stock. No preferred dividends were paid in 2020 and the preferred stock is non-convertible. The following changes in the number of shares occurred during 2020:

April 1:            Sold 60,000 shares of common stock.

May 31:           Declared and Distributed a 20% Stock Dividend

July 1:             Issued 80,000 shares of common stock

Required:

1.	Compute Joey Co’s Basic earnings per share for the year ended December 31, 2020.
2.	Given the facts as presented above, Joey Co would have to report Diluted EPS at 12/31/2020. TRUE or FALSE [Circle One] 2(A) Briefly explain why you chose True or False

Answer 1

Solution:

Requirement 1 Calculation of Weighted Average Outstanding Ordinary shares Period Outstanding Shares Outstanding Fraction (A) (B) Jan-01 to Mar-31 9,00,000 3:12 Apr-01 to May-31 8,40,000 2-12 May-31 to June-30 10,08,000 1+12 Jul-01 to Dec-31 10,88,000 6 + 12 Weighted Average Outstanding Ordinary Shares Weighted Shares (C = A x B) 2,25,000 1,40,000 84,000 5,44,000 9,93,000 Calculation of Earnings per share Net Income for the year Dec 31, 2020 Less: Preferred Dividend ($1,000,000 * 6%) Earnings available to common shareholders (+) Weighted Average Outstanding Ordinary shares Earnings per share $16,00,000 $60,000 $15,40,000 9,93,000 $1.55 Requirement 2 False, Joey Co would not required to report Diluted EPS Diluted EPS is calculated to judge the quality of earnings per share (EPS) if all convertible securities were exercised. But in the given case there are no convertible securities at all. Hence, diluted EPS will be equal to EPS. So, Joey Co would not required to report Diluted EPS.