Question

On December 31, 2020, Jackson Company had 100,000 shares of common stock outstanding and 40,000 shares of 6%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Jackson purchased 34,000 shares of common stock on the open market as treasury stock for $45 per share. Jackson sold 7,000 treasury shares on September 30, 2021, for $47 per share. Net income for 2021 was $190,905. Also outstanding during the year were fully vested incentive stock options giving key executives the option to buy 60,000 common shares at $50. The market price of the common shares averaged $49 during 2021.

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

Basic:

Diluted:

Answer 1

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

Basic earnings per share = (Net Income - Prefrence Dividend) / Weighted Average Outstanding Common Shares.

Weighted Average Outstanding Common Shares = 100,000 - (34,000 * 10/12) + (7,000 * 3/12)

= 100,000 - 28,333 + 1,750

= 73,417 Shares

Basic earnings per share  = ($190,905 - (40,000 * $50 * 6%) / 73,417 Shares

= ($190,905 - $120,000) / 73,417 Shares

= $70,905 / 73,417 Shares

= $0.97

Basic earnings per share = $0.97

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

Basic earnings per share = (Net Income - Prefrence Dividend) / Weighted Average Outstanding Common Shares.

Weighted Average Outstanding Common Shares

= 100,000 - (34,000 * 10/12) + (7,000 * 3/12) - ((60,000 / 49)*50) - 60,000)

= 100,000 - 28,333 + 1,750 - 1,225

  = 72,192 Shares

Diluted earnings per share = ($190,905 - (40,000 * $50 * 6%) / 72,192 Shares

= ($190,905 - $120,000) / 72,192 Shares

= $70,905 / 72,192 Shares

= $0.98

Diluted earnings per share = $0.98