Question

For the year ended December 31, 2018, Norstar Industries reported net income of $940,000. At January 1, 2018, the company had 860,000 common shares outstanding. The following changes in the number of shares occurred during 2018: Apr. 30 Sold 60,000 shares in a public offering. May 24 Declared and distributed a 5% stock dividend. June 1 Issued 60,000 shares as part of the consideration for the purchase of assets from a subsidiary. Required: Compute Norstar's earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.) Numerator 1 Denominator = Earnings per Share

Answer 1

Earnings Per Share = Net Income / Weighted Average Common Shares Outstanding

Assumptions:

1. Assume that an year has 360 days.

2. The shareholders who purchased shares on 30 April 2018 are also eligible for stock dividend.

3. It is assumed that there are no preference shares, hence no preference dividend.

Net Income for the year ended December 2018 is $940,000.

Computation of weighted average common shares outstanding as on December 2018 :

Particulars	Shares	Period Held		Weighted average shares
Shares outstanding on 1 January 2018	860000	360	860000*360/360	860000
Add: Shares issued on 30 April 2018 as public offering	60000	240	60000*240/360	40000
Add: 5% Stock dividend on 24 May 2018	46000	216	46000*216/360	27600
Add: Shares issued on 1 June 2018 as Consideration	60000	210	60000*210/360	35000
				962600

Weighted average common shares outstanding are 962,600 .

On 30 June, shares are sold as public offering which is nothing but issue of shares for capital requirement.

Earnings per share = Net Income / Weighted Average Common Shares Outstanding

= $940,000 / 962,600

= $0.9765

Therefore Earnings per share of Norstar's for the year ended December 31,2018 is $0.9765.