Question

Question 4 Amy Dyken, controller at Marigold Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Marigold’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2020.

Marigold Pharmaceutical Industries Selected Balance Sheet Information June 30, 2020

Long-term debt Notes payable, 10% $1,020,000

8% convertible bonds payable 5,080,000

10% bonds payable 6,110,000

Total long-term debt $12,210,000

Shareholders’ equity Preferred stock, 6% cumulative, $50 par value, 98,000 shares authorized, 24,500 shares issued and outstanding $1,225,000

Common stock, $1 par, 10,200,000 shares authorized, 1,020,000 shares issued and outstanding 1,020,000

Additional paid-in capital 3,990,000

Retained earnings 5,900,000

Total shareholders’ equity $12,135,000

The following transactions have also occurred at Marigold

. 1. Options were granted on July 1, 2019, to purchase 200,000 shares at $15 per share. Although no options were exercised during fiscal year 2020, the average price per common share during fiscal year 2020 was $20 per share.

2. Each bond was issued at face value. The 8% convertible bonds will convert into common stock at 50 shares per $1,000 bond. The bonds are exercisable after 5 years and were issued in fiscal year 2019.

3. The preferred stock was issued in 2019.

4. There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2020.

5. The 1,020,000 shares of common stock were outstanding for the entire 2020 fiscal year.

6. Net income for fiscal year 2020 was $1,530,000, and the average income tax rate is 20%.

For the fiscal year ended June 30, 2020, calculate the following for Marigold Pharmaceutical Industries. (Round answers to 2 decimal places, e.g. $2.45.)

(a) Basic earnings per share.

Basic earnings per share

$

(b) Diluted earnings per share.

Diluted earnings per share

$

Answer 1

Answer:

(a).

Basic earnings per share

1.43

(b).

Diluted earnings per share.

1.35

Calculation:

(a).

To calculate the Basic earnings per share, we need to deduct the Preferred dividends from the Net income and divide it with the Weighted average number of shares outstanding.

Basic earnings per share = (Net income – Preferred dividends) / Weighted average number of shares outstanding

Preferred dividend = .06 × $1,225,000 = $73,500

Basic earnings per share = (1,530,000 – 73,500) / 1,020,000 = 1,456,500 / 1,020,000 = 1.43

(b).

To calculate the Diluted earnings per share, we need to deduct the Preferred dividends from net income and add the Interest net of tax, Then divide it with the sum of Weighted average number of shares outstanding and Potentially dilutive common shares

Diluted earnings per share = Net income – Preferred dividends+Interest (net of tax) / Weighted average number of shares outstanding + Potentially dilutive common shares

The interest net of tax is calulated by deducting the tax from the bond interest.

Adjustment for interest expense (net of tax) = Bond interest ($5,080,000 * 8%) - tax 20% = 406,400 - 81,280 = 325,120

Then we need to calculate the Potential shares for Convertible Bonds as below:

Shares assumed to be issued if converted = 5,080,000 /1000 x 50 = 254,000

Then, we need to use the treasury stock method to determine incremental shares outstanding:

Proceeds from exercise of options = 200,000 x 15 = 3,000,000

Shares issued upon exercise of options = 3,000,000 / 20 = 150,000

So,  Potential shares for Options = Options granted for - Shares issued upon exercise of options = 200,000 - 150,000 = 50,000

Diluted earnings per share = 1,530,000 – 73,500 + 325,120 / 1,020,000 + 254,000 + 50,000 = 1,781,620 / 1,324,000 = 1.35