Question

Exercise 16-23 On June 1, 2018, Marin Company and Headland Company merged to form Sage Inc. A total of 834,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis. On April 1, 2020, the company issued an additional 552,000 shares of stock for cash. All 1,386,000 shares were outstanding on December 31, 2020. Sage Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date.

Sage Inc. is preparing its annual report for the fiscal year ending December 31, 2020. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,584,000. (The tax rate is 20%.) Determine the following for 2020. (a) The number of shares to be used for calculating: (Round answers to 0 decimal places, e.g. $2,500.)

(1) Basic earnings per share enter a number of shares rounded to 0 decimal places shares

(2) Diluted earnings per share enter a number of shares rounded to 0 decimal places shares

(b) The earnings figures to be used for calculating: (Round answers to 0 decimal places, e.g. $2,500.)

(1) Basic earnings per share $enter a dollar amount rounded to 0 decimal places

(2) Diluted earnings per share $enter a dollar amount rounded to 0 decimal places

Answer 1

Basic Earnings per share -

Basic earnings per share means net income earned by every shares outstanding shares issued by the company. It is divided by the weighted average number of shares outstanding. Weighted is calculated according the weight of the shares in the financial year.

Diluted Earnings per share -

Dilution takes place when there is any convertible instrument issued by the company like convertible debenture and stock options. Such dilution affects its shares outstanding.