Question

The information below pertains to Barkley Company for 2019.

a. Net income for 2019 was $300,000.

b. $500,000 of 8% 10-year convertible bonds issued at 97 ($1,000 face per bond); each bond is convertible into 40 shares of common stock, were outstanding the entire period. The discount is being amortized on a straight-line basis.

c. $700,000 of 6% convertible, cumulative preferred stock, $100 par value, which was issued at $104; each share is convertible into 4 shares of common stock were outstanding the entire period.

d. 100,000 shares of $10 par value common stock was outstanding at the beginning of 2019. On July 29, an additional 20,000 shares were issued. On September 15, a 20% stock dividend was declared and issued. On December 1, 6,000 shares were reacquired as treasury stock.

e. Tax rate for 2019 of 30%

f. Average market price of common stock $25 per share for the year

g. Outstanding incentive stock option include options (granted at the beginning of 2018 with a 2 year vesting period) to purchase 8,000 shares of common stock at $20 per share.

Note: the conversion ratios and exchange rates for convertible bonds, preferred stock and options are shown on an as adjusted basis after the stock dividend. Instructions:

1. Compute the basic earnings per share. Show supporting calculations.

2. Compute the diluted earnings per share. Show supporting calculations. 3. Indicate which earnings per share figure(s) Barkley Company would report on its 2019 income statement.

Answer 1

Computation of Basic EPS

Net Profit for the year ended 2019 = $ 300,000

Weighted average no.of equity shares = [(100,000 shares 365/365) + (20,000 shares 246/365) - (6000shares 121/365)]   

= 115468 shares

Earnings available to equity share holders = Net Profit for the year ended 2019 - Preferred stock dividend

= $300,000 - $42000 = $258,000

Basic EPS for year 2019 = Earnings available to equity share holders Weighted average no.of equity shares

= $ 258000 115468 = $2.2344

Computation of Diluted EPS

Computation of earnings available to equity share holders

Net Income for the year ended 2019 = $ 300,000

Add : Interest on convertible debentures = $40,000

Less : Tax benefit on interest on convertible debentures = $12,000

Earnings available to equity share holders = $328,000

Computation of Weighted average no.of equity shares

Weighted average no.of shares as computed above = 115468

Add: Outstanding options (8000 shares - (8000 20 /25)) = 1600

Add: Convertible debentures (500 40) = 20000

Add: Convertible preference shares ( 7000 4) = 28000

Weighted average no.of shares = 165608

Diluted EPS    = $328000 165608 = $ 1.9805

Earnings per share to be reported is

Basic EPS $ 2.2344

Diluted EPS $ 1.9805

Assumption : The above considered Net Income is assumed to be Net Income After Tax.