Question

Problem 16-7 Charles Austin of the controller's office of Cheyenne Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2018. Austin has compiled the information listed below. 1. The company is authorized to issue 7,800,000 shares of $10 par value common stock. As of December 31, 2017, 1.950,000 shares had been issued and were outstanding, 2. The per share market prices of the common stock on selected dates were as follows. Price per Share $20.00 21.00 25.00 July 1, 2017 January 1, 2018 April 1, 2018 July 1, 2018 August 1, 2018 November 1, 2018 December 31, 2018 11.00 10.50 9.00 10.00 3. A total of 748,800 shares of an authorized 1,236,000 shares of convertible preferred stock had been issued on July 1, 2017. The stock was issued at its par value of $25.00, and it has a cumulative dividend of $3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 20, December 31, March 31, and June 30. 4. Cheyenne Corporation is subject to a 40% income tax rate. 5. The after-tax net income for the year ended December 31, 2018, was $11.150.000 The following specific activities took place during 2018, 1. January 1-A5% common stock dividend was issued. The dividend had been declared on December 1, 2017 to all stockholders of record on December 29, 2017 2. April 1-A total of 418.800 shares of the $3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2018,

Answer 1

5 (a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2018 6 7 Dates Outstanding Shares outstanding (A) Restatement B) Parts of Year (C) Weighted Shares A* B*C) 8 9 2,047,500 2 3 months 1,023,750 10 11 2,487,240 213 months 1,243,620 12 13 Beginning balance; Add 5% common stock dividend from Jan. to April (1,950,000+1950000*5%) Conversion of preferred Stock (April - July) (418800+418800*5%) Stock Split (July - Aug.) (2487240*2) Shares issued for factory Building (4974480+327600) Treasury Stock (5302080-25200) (Nov.- Dec.) Total no. of weighted average shares 4,974,480 5,302,080 5,276,880 1 month 3 months 414,540 1,325,520 14 15 16 2 months 879,480 17 4,886,910 18 19 Note; Restatement is done as there s stock split i.e.2 for 1 20 21

23 24 22 (b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2018. Particulars Number of shares Total no. of weighted average shares 4,886,910 25 Add Convertible Preferred Stock still Outstanding (748800 -418800) =330000*2*1.05 693,000 Add Convertible Preferred Stock Converted 418800*2*1.05*3/12 219,870 27 Total no. of shares used to calculate diluted earnings per share 5,799,780 26 28 31 32 29 (c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2018. 30 Particulars Amount $ After tax Net Income 11,150,000 33 Less Preferred dividend up to March 31 (561,600) 34 (748800 * $3/4) 35 Preferred Dividend from Sept. to December ( 748800 -418800)* $.75 *3) (742,500) 37 Adjusted Net Income 9,845,900 38 36 30