Question

Shari Patel of the controller's office of Sheridan Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ended December 31, 2020. Patel has gathered the following information.

1.The company is authorized to issue 8 million common shares. As at December 31, 2019, 2 million shares had been issued and were outstanding.2.The per share market prices of the common shares on selected dates were as follows:

Price per Share July 1,

2019 $18.00 Jan. 1,

2020 22.00 Apr. 1,

2020 24.00 July 1,

2020 13.00 Aug. 1,

2020 8.50 Nov. 1,

2020 8.00 Dec. 31,

2020 9.00

3.A total of 800,000 shares of an authorized 1.2 million convertible preferred shares had been issued on July 1, 2019. The shares were issued at $25, and have a cumulative dividend of $2 per share. The shares are convertible into common shares at the rate of one convertible preferred share for one common share. 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.Sheridan Corporation is subject to a 30% income tax rate.5.The after-tax net income for the year ended December 31, 2020, was $11,600,000.

The following specific activities took place during 2020:

1.January 1: A 5% common stock dividend was issued. The dividend had been declared on December 1, 2019, to all shareholders of record on December 29, 2019.2.April 1: A total of 400,000 shares of the $2 convertible preferred shares were converted into common shares. The company issued new common shares and retired the preferred shares. This was the only conversion of the preferred shares during 2020.3.July 1: A 2-for-1 split of the common shares became effective on this date. The board of directors had authorized the split on June 1.4.August 1: A total of 600,000 common shares were issued to acquire a factory building.5.November 1: A total of 21,000 common shares were purchased on the open market at $8 per share and cancelled.6.Cash dividends to common shareholders were declared and paid as follows:

April 15:$0.30per shareOctober 15:$0.20per share

7. Cash dividends to preferred shareholders were declared and paid as scheduled.

Determine the number of shares to use in calculating basic earnings per share for the year ended December 31, 2020.

Number of shares

Enter your answer in accordance to the question statement

shares

  

  

Determine the number of shares to use in calculating diluted earnings per share for the year ended December 31, 2020.

Number of sharesEnter your answer in accordance to the question statement

shares

  

  

Calculate the adjusted net income amount to use as the numerator in the basic earnings per share calculation for the year ended December 31, 2020.

Adjusted net income$

Enter your answer in accordance to the question statement

Answer 1

a) The Number of shares to use in calculating basic earnings per share for the year ended December 31, 2020 is computed as below:-

Particulars	Number of shares	Weighted Number of shares
Common Stock as at December 31, 2019	2,000,000 shares	2,000,000
Preference shares converted into common stock on April 1	400,000 shares for 9 months	4,00,000 x 9 /12 = 3,00,000
2 for 1 split of Common Share July 1	2,400,000 shares for 7 months	2,400,000 x 7 /12 = 1,400,000
August 1, 600,000 common shares issued for building	600,000 shares for 5 months	600,000 x 5 /12 =250,000
Number of Shares for calculation of basic EPS		5,950,000

b) The Number of shares to use in calculating diluted earnings per share for the year ended December 31, 2020 is computed as below:-

Particulars	Number of shares	Weighted Number of shares
Common Stock as at December 31, 2019	2,000,000 shares	2,000,000
Preference shares converted into common stock on April 1	400,000 shares for 9 months	4,00,000 x 9 /12 = 3,00,000
2 for 1 split of Common Share July 1	2,400,000 shares for 7 months	2,400,000 x 7 /12 = 1,400,000
August 1, 600,000 common shares issued for building	600,000 shares for 5 months	600,000 x 5 /12 =250,000
Convertible Preference shares not yet converted into common stock (800,000-400,000)	400,000	400,000
Number of Shares for calculation of diluted EPS		6,350,000

c) Adjusted Net Income for Basic EPS is computed as below:-

Particulars	Amount in $	Amount in $
After-tax net income for the year ended December 31, 2020		11,600,000
Less: 5% common stock dividend was issued on January 1	5 % of 2,000,000 common stock x $22 per share	2,200,000
Less : Dividend declared on 800,000 preference shares on April 15 $0.30 per shares paid quarterly	June 30 - $60,000 September 30 - $60,000 December 31 - $60,000 Total Dividend - $180,000	180,000
Less : Dividend declared on 400,000 preference shares on October 15 $0.20 per shares paid quarterly	December 31 - $20,000	20,000
The adjusted net income amount to use as the numerator in the basic earnings per share		9,200,000