In: Accounting
Stanley Hugo, company secretary and CFO in the finance
department of Allied Corporation was given the assignment of
determining the basic and diluted earnings per share values for the
year ending December 31, 2019. Stanley has compiled the information
listed below.
1. The company is authorized to issue 8,000,000 shares of $10 par
value common stock. As of December 31, 2018, 2,000,000 shares had
been issued and were outstanding.
2. The per share market prices of the common stock on selected
dates were as follows.
Price per Share
July 1, 2018
January 1, 2019
April 1, 2019
July 1, 2019
August 1, 2019
November 1, 2019
December 31, 2019
$20.00
21.00
25.00
11.00
10.50
9.00
10.00
3. A total of 700,000 shares of an authorized 1,200,000 shares
of convertible preferred stock had been issued on July 1,
2018.
The stock was issued at its par value of $25, and it has a
cumulative dividend of $3 per share. The stock is convertible into
common stock at the rate of one share of convertible preferred for
one share of common. The rate of conversion is to be automatically
adjusted for stock splits and stock dividends. Dividends are paid
quarterly on September 30, December 31, March 31, and June
30.
4. The Corporation is subject to a 40% income tax rate.
5. The after-tax net income for the year ended December 31, 2019,
was $11,550,000.
The following specific activities took place during 2019.
1. January 1—A 5% common stock dividend was issued. The dividend
had been declared on December 1, 2018, to all stockholders of
record on December 29, 2018.
2. April 1—A total of 400,000 shares of the $3 convertible
preferred stock was converted into common stock. The company issued
new common stock and retired the preferred stock. This was the only
conversion of the preferred stock during 2019.
3. July 1—A 2-for-1 split of the common stock became effective on
this date. The board of directors had authorized the split on June
1.
4. August 1—A total of 300,000 shares of common stock were issued
to acquire a factory building.
5. November 1—A total of 24,000 shares of common stock were
purchased on the open market at $9 per share. These shares were to
be held as treasury stock and were still in the treasury as of
December 31, 2019.
6. Common stock cash dividends—Cash dividends to common
stockholders were declared and paid as follows.
April 15—$0.30 per share
October 15—$0.20 per share
7. Preferred stock cash dividends—Cash dividends to preferred
stockholders were declared and paid as scheduled.
Determine the number of shares used to compute basic earnings
per share for the year ended December 31, 2019.
(b) Determine the number of shares used to compute diluted earnings
per share for the year ended December 31, 2019.
(c) Compute the adjusted net income to be used as the numerator in
the basic earnings per share calculation for the year ended
December 31, 2019.