Question

The Frost Company has accumulated the following information relevant to its 2018 earnings per share. 1. Net income for 2018, $150,000. 2. Bonds payable: On January 1, 2018, the company had issued 10%, $200,000 bonds. Each $1,000 bond is currently convertible into 20 shares of ordinary share. To date, no bonds have been converted. 3. Bonds payable: On January 31, 2018, the company had issued $540,000 of 5.8% bonds. Each $1,000 bond is currently convertible into 11 shares of ordinary share. To date, no bonds have been converted. 4. Preference share: On July 1, 2017, the company had issued 3,800 shares of $7.5 preference share at $108 per share. Each share of preference share is currently convertible into 2.45 shares of ordinary share. To date, no preference share has been converted and no additional shares of preference share have been issued. The current dividends have been paid. 5. Ordinary share: At the beginning of 2018, 25,000 shares were outstanding. On July 1, 7,000 additional shares were issued. On September 1, a 20% bonus issue was declared and issued. On November 1, 2,000 shares were repurchased by the company. 6. Share options: Options to acquire ordinary share at a price of $33 per share were outstanding during all of 2018. Currently, 4,000 shares may be acquired. TO date, No options have been exercised. 7. Miscellaneous: Stock market prices on ordinary share averaged $41 per share during 2018, and the 2018 ending stock market price was $40 per share. The corporate income tax rate is 30%. Required: Compute the basic and diluted earnings per share for 2018 (Round to 2 decimal places).

Answer 1

	Event	Dates Outstanding	Shares O/S	Reinstatement	Fraction of Yr	Weighted Shares
	Beginning balance	1 Jan -30 June	25000	1.2	6/12	15000
	Shares issued	1 july-31 Aug	32000	1.2	2/12	6400     7000 shares were issued.
	Bonus Issue	1 sep-30 Nov	38400		3/12	9600   it is assumed that bonus is declared on that date
	Treasury Stock	1 Nov-31 Dec	36400		2/12	6066.66
						37066.66
1	Basic earnings per share	Net Income -Pref Dividends/Weighted Average no of shares
		150000-30780/37066.66
		$3.23
	Pref Dividend	3800*108*7.5%
		30780
2	Calculation of shares to be included for diluted shares
	Weighted Shares	37066.66
	Add Conversion Option
	Bond Issued on 1 january	4000	$200000/1000*20
	Bond issued on 31 January	5940	$540000/1000*11
	Preferred Stock	9310	3800*2.45
	Stock Option	4000
	Total Shares	60316.66
	Calculation of adjusted Net Income
	Net Income	150000
	Add int on Bond	13300	(200000*10%-1000)*70%
	Add int on bond	21924	540000*5.8%70%
		185224
	Diluted earnings Per share	Adjusted Net income /Total Shares
		185224/60316.66
		$3.07