Question

On December 31, 2020, Jackson Company had 100,000 shares of common stock outstanding and 27,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Jackson purchased 14,000 shares of common stock on the open market as treasury stock for $25 per share. Jackson sold 5,000 treasury shares on September 30, 2021, for $27 per share. Net income for 2021 was $170,905. Also outstanding during the year were fully vested incentive stock options giving key executives the option to buy 40,000 common shares at $30. The market price of the common shares averaged $29 during 2021.

Required: Compute Jackson's basic and diluted earnings per share for 2021. (Round your answers to 2 decimal places.)

Answer 1

1)Jackson's basic per share for 2021 is calculated as follows:

Basic Earning Per Share (EPS) = (Net Income - Prefrence Dividend) /Weighted Average Outstanding Common Shares

Prefrence Dividend = (27,000 shares * $50) * 7%

= $94,500

Weighted Average Outstanding Common Shares = 100,000 - (14,000 * 10/12) + (5,000 * 3/12)

= 100,000 - 11,667 + 1,250

= 89,583 Shares

Basic Earning Per Share (EPS) = ($170,905 - $94,500) / 89,583 Shares

= $76,405 / 89,583 Shares

= $ 0.85

Basic Earning Per Share (EPS) = $ 0.85

2)Jackson's diluted earnings per share for 2021 is calculated as follows:

Diluted Earning Per Share = (Net Income - Prefrence Dividend) /Weighted Average Outstanding Common Shares

Prefrence Dividend = (27,000 shares * $50) * 7%

= $94,500

Weighted Average Outstanding Common Shares =

100,000 - (14,000 * 10/12) + (5,000 * 3/12) - (( 40,000/ 29 *30) - 40,000 ))

= 100,000 - 11,667 + 1,250 - 1,379

  = 88,204 Shares

Diluted Earning Per Share = ($170,905 - $94,500) / 88,204 Shares

= $76,405 / 88,204 Shares

= $ 0.87

Diluted Earning Per Share = $ 0.87