Question

(Show work and calculations)

Amy Dyken, controller at Blue Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Blue’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2017.

BLUE PHARMACEUTICAL INDUSTRIES SELECTED BALANCE SHEET INFORMATION JUNE 30, 2017
Long-term debt
Notes payable, 9%		$980,000
8% convertible bonds payable		4,960,000
9% bonds payable		5,940,000
Total long-term debt		$11,880,000
Shareholders’ equity
Preferred stock, 6% cumulative, $50 par value, 105,000 shares authorized, 26,250 shares issued and outstanding		$1,312,500
Common stock, $1 par, 9,800,000 shares authorized, 980,000 shares issued and outstanding		980,000
Additional paid-in capital		4,020,000
Retained earnings		5,930,000
Total shareholders’ equity		$12,242,500

The following transactions have also occurred at Blue.

1.		Options were granted on July 1, 2016, to purchase 220,000 shares at $16 per share. Although no options were exercised during fiscal year 2017, the average price per common share during fiscal year 2017 was $20 per share.
2.		Each bond was issued at face value. The 8% 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 2016.
3.		The preferred stock was issued in 2016.
4.		There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2017.
5.		The 980,000 shares of common stock were outstanding for the entire 2017 fiscal year.
6.		Net income for fiscal year 2017 was $1,510,000, and the average income tax rate is 40%.

For the fiscal year ended June 30, 2017, calculate the following for Blue Pharmaceutical Industries. (Round answers to 2 decimal places, e.g. $2.45.)

(a) Basic earnings per share.

(b) Diluted earnings per share.

Answer 1

Net income after tax	1,510,000
Less: dividend to preferred stock (1312500*6%)	78,750
Net income available for common stock holders	1,431,250
Net income available for common stock holders	1,431,250
Divided by: weighted average share in common stock	980,000
Basic earnings per share	$            1.4605
Stock options
Market value of option exercisable (220000*20)	4,400,000
Less: exercisable value of option (220000*16)	3,520,000
Value of option	880,000
Number of share adjusted (880000/20)	44,000
Convertible bond
Interest paid to bond (4960000*8%)	396,800
Less: tax on interest (396800*40%)	158,720
Adjustment in income for convertible bond	238,080
Conversion ratio	50
Multiply by: Number of bond (4960000/1000)	4,960
Number of share adjusted	248,000
Convertible preferred stock
There is No Convertible preferred stock

Instruments	Increase in earning	Increase in number of common shares	Earning per incremental share (Increase in earning / increase in number of common shares)
				Options	0	44,000	0.00
				Convertible bond	238,080	248,000	0.96

The order in which to include dilutive instruments (lowest Earning per incremental share considered First.)
1	Options
2	Convertible bond

Dilutive Earning per share
	Adjusted Net income	Potential common share	Per share (Adjusted Net income / potential common share)	Nature
					As per Basic Earning per share	1,431,250	980,000	$                                              1.4605
					Add: options	0	44,000		Dilutive
	1,431,250	1,024,000	$                                              1.3977
Add: Convertible bond	238,080	248,000		Dilutive
	1,669,330	1,272,000	$                                              1.3124

Reported under financial statement
Basic earnings per share	$                               1.46
Diluted Earnings per share	$                               1.31