Question

Range Energy Corp.’s financial statements for the current year ended December 31, 2017, have been completed and submitted to you for review. The equity account balances a year ago, at December 31, 2016, are as follows:

Preferred shares, $4.20 non-cumulative, 12,000 shares authorized,     issued, and outstanding	$768,050
Common shares, unlimited shares authorized,    140,000 shares issued and outstanding	1,460,350
Retained earnings	705,795

The only share transactions during 2017 were the declaration and distribution of a 28,000 common share dividend on July 1 and the issuance of 18,000 common shares for cash on October 31. The company’s 2017 profit was $630,880. A cash dividend on the preferred shares was declared on December 1, but was not paid as of December 31. Earnings per share for 2017 were calculated as follows:

Profit	=	$630,880	=	$3.39
Common shares outstanding on Dec. 31, 2017		186,000

Required:
1-a. The earnings per share is incorrect. Indicate what changes should be made to the numerator and the denominator?

	In numerator, profit should decrease by In denominator, common shares outstanding should decrease by

Answer 1

If we treat dividend distributed on July 1 = 28000 as stock dividend.

	Calculation of Weighted Number of Shares outstanding for computing EPS for 2017 :-
	Time Interval	Portion of Year	Share Transaction at the beginning of Time Interval	Shares Outstanding during Time Interval	Stock Dividend	Calculation	Weighted Shares
	Jan 1 - June 30	6 months	Beginning Balance	140,000	1.20	6/12 * 140000* 1.20	84000
	July 1 - Oct30	4 months	Stock Dividend (28000/140000*100 =20%)	140,000 + 28000 = 168,000		4/12 * 168000	56000
	Oct 31 - Dec 31	2 months	Stock Issued	168,000+ 18,000 = 186,000		2/12 * 186000	31000
	Weighted Average Number of Shares outstanding						171,000
	1. Basic EPS	=	Net Income - Preferred Dividends
			Weighted Average Number of Shares outstanding
		=	630,880 - 50,400*
			171,000
	Basic EPS	=	$3.39
	*Preferred Dividends	=	$4.20 * 12000 shares     =	$50,400
	In numerator, profit should			decrease by	$50,400
	In denominator, common shares outstanding should			decrease by (186,000 - 171000)	15000

Feel free to ask any clarification, if required. Please provide feedback by thumbs up, if satisfied. It will be highly

If we treat dividend distributed on July 1 = 28000 as cash dividend.

	Calculation of Weighted Number of Shares outstanding for computing EPS for 2017 :-
	Time Interval	Portion of Year	Share Transaction at the beginning of Time Interval	Shares Outstanding during Time Interval	Calculation	Weighted Shares
	Jan 1 - Oct30	303 days	Beginning Balance	140,000	303/365 * 140000	116219
	Oct 31 - Dec 31	62 days	Stock Issued	140,000+ 18,000 = 158,000	62/365 * 158000	26838
	Weighted Average Number of Shares outstanding					143,058
	1. Basic EPS	=	Net Income - Preferred Dividends
			Weighted Average Number of Shares outstanding
		=	630,880 - 50,400*
			143,058
	Basic EPS	=	$4.06
	*Preferred Dividends	=	$4.20 * 12000 shares     =	$50,400
	In numerator, profit should			decrease by	$50,400
	In denominator, common shares outstanding should			decrease by (186,000 - 143058)	42942

Feel free to ask any clarification, if required. Please provide feedback by thumbs up, if satisfied. It will be highly appreciated. Thank you.