Question

Presented below is information related to Starr Company.

1.		Net Income [including a discontinued operations gain (net of tax) of $117,000]				$325,500
2.		Capital Structure
		a.		Cumulative 5% preferred stock, $100 par, 6,300 shares issued and outstanding		$630,000
		b.		$10 par common stock, 74,000 shares outstanding on January 1. On April 1, 40,000 shares were issued for cash. On October 1, 16,000 shares were purchased and retired.		$1,000,000
		c.		On January 2 of the current year, Starr purchased Oslo Corporation. One of the terms of the purchase was that if Oslo net income for the following year is $241,000 or more, 50,000 additional shares would be issued to Oslo stockholders next year. Oslo’s net income for the current year was $2,600,000.
3.		Other Information
		a.		Average market price per share of common stock during entire year		$30
		b.		Income tax rate		30%

Part 1

Compute weighted average shares outstanding.

Weighted average shares outstanding

Part 2

Compute earnings per share for the current year. (Round answers to 2 decimal places, e.g. 52.75.)

Basic earnings per share		$
Diluted earnings per share		$

Answer 1

Part 1 :-Compute weighted average shares outstanding.

Weighted average shares outstanding:
January 1	74000
3/4 × 40,000	30000
1/4 × 16,000	-4000
	100000

Part 2 :-

Basic earnings per share:-

Basic earnings per share:
Income before extraordinary item ($177000/100000)	$1.77
Extraordinary item (net of tax) ($117000/100000)	$1.17
Net income ($294000/100000)	$2.94

Income before extraordinary item	$208,500
Less preferred dividends ($630000 * 5%)	($31,500)
Available to common before extraordinary item	$177,000
Add extraordinary gain (net of tax)	$117,000
Income available to common	$294,000

Diluted :-

Diluted earnings per share:
Income before extraordinary item ($177000/150000)	$1.18
Extraordinary item (net of tax) ($117000/150000)	$0.78
Net income ($294000/150000)	$1.96

Shares outstandung in diluted = 100000 + 50000 = 150000