Question

Comprehensive: EPS

Frost Company has accumulated the following information relevant to its 2016 earnings per share.

1. Net income for 2016: $150,500.
2. Bonds payable: On January 1, 2016, the company had issued 10%, $200,000 bonds at 110. The premium is being amortized in the amount of $1,000 per year. Each $1,000 bond is currently convertible into 22 shares of common stock. To date, no bonds have been converted.
3. Bonds payable: On December 31, 2014, the company had issued $540,000 of 5.8% bonds at par. Each $1,000 bond is currently convertible into 11.6 shares of common stock. To date, no bonds have been converted.
4. Preferred stock: On July 3, 2015, the company had issued 3,800 shares of 7.5%, $100 par, preferred stock at $108 per share. Each share of preferred stock is currently convertible into 2.45 shares of common stock. To date, no preferred stock has been converted and no additional shares of preferred stock have been issued. The current dividends have been paid.
5. Common stock: At the beginning of 2016, 25,000 shares were outstanding. On August 3, 7,000 additional shares were issued. During September, a 20% stock dividend was declared and issued. On November 30, 2,000 shares were reacquired as treasury stock.
6. Compensatory share options: Options to acquire common stock at a price of $33 per share were outstanding during all of 2016. Currently, 4,000 shares may be acquired. To date, no options have been exercised. The unrecognized compensation cost (net of tax) related to these options is $5 per share.
7. Miscellaneous: Stock market prices on common stock averaged $41 per share during 2016, and the 2016 ending stock market price was $40 per share. The corporate income tax rate is 30%.

Required:

1. Compute the basic earnings per share. Round intermediate calculations to the nearest whole number, then round your final answer to two decimal places.
   $ per share
2. Compute the diluted earnings per share. Round intermediate calculations to the nearest whole number, then round your final answer to two decimal places.
   $ per share
3. Indicate which earnings per share figure(s) Frost would report on its 2016 income statement.
   Choose: (1) Basic EPS only (2) Both basic and diluted EPS (3) Diluted EPS only

Answer 1

ANSWER:-

Weighted Average Shares Outstanding
		Number of days
1-Jan	25000	215	5375000
4-Aug	32000	35	1120000		7000 shares issued
8-Sep	38400	83	3187200		It is assumed that stock dividend was declared on this date (20% 0f 32000) 6400
30-Nov	36400	32	1164800		2000 shares reacquired
		365	10847000
Weighted outstanding shares			29718	108470000/365
a Basic Earnings per share
Net income - Preferred stock dividend/Weighted Average Outstadning shares
150000-28500/29718=		$                      4.088		Preferred Stock Dividend = 3800X100X7.5%
Weighted outstanding shares	29718
Add:conversion option
Bonds issued on Jan 1	4400	200000/1000*22
Bond issued on Dec 31 2014	6264	540*11.6
Preferred stock	9310	3800*2.45
Stock option	4000
Total shares	53692
b Diluted Earnings per share
Adjusted Net income/Total shares	185224/53692
	$                   3.45
Adjusted Net income
Net Income	150000
Add:Interest on bond	13300	(200000 X 10%-1000)X70%
Add: Interest on bond	21924	(540000 X 5.8%)X70%
	185224