Question

Shari Patel of the controller's office of Diamond Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ended December 31, 2017. Patel has gathered the following information.

1.The company is authorized to issue 8 million common shares. As at December 31, 2016, 2 million shares had been issued and were outstanding.

2.The per share market prices of the common shares on selected dates were as follows:

Price per Share

July 1, 2016. $20.00

Jan. 1, 2017. 21.00

Apr. 1, 2017.  25.00

July 1, 2017. 11.00

Aug. 1, 2017. 10.50

Nov. 1, 2017. 9.00

Dec. 31, 2017. 10.00

3.A total of 700,000 shares of an authorized 1.2 million convertible preferred shares had been issued on July 1, 2016. The shares were issued at $25, and have a cumulative dividend of $3 per share. The shares are convertible into common shares at the rate of one convertible preferred share for one common share. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30.

4.Diamond Corporation is subject to a 30% income tax rate.

5.The after-tax net income for the year ended December 31, 2017 was $11,550,000.

The following specific activities took place during 2017:

1.January 1: A 5% common stock dividend was issued. The dividend had been declared on December 1, 2016 to all shareholders of record on December 29, 2016.

2.April 1: A total of 400,000 shares of the $3 convertible preferred shares were converted into common shares. The company issued new common shares and retired the preferred shares. This was the only conversion of the preferred shares during 2017.

3.July 1: A 2-for-1 split of the common shares became effective on this date. The board of directors had authorized the split on June 1.

4.August 1: A total of 300,000 common shares were issued to acquire a factory building.

5.November 1: A total of 24,000 common shares were purchased on the open market at $9 per share and cancelled.

6.Cash dividends to common shareholders were declared and paid as follows:

April 15:

$0.30 per share

October 15:

$0.20 per share

7.Cash dividends to preferred shareholders were declared and paid as scheduled.

Instructions

(a)

Determine the number of shares to use in calculating basic earnings per share for the year ended December 31, 2017.

(b)

Determine the number of shares to use in calculating diluted earnings per share for the year ended December 31, 2017.

(c)

Calculate the adjusted net income amount to use as the numerator in the basic earnings per share calculation for the year ended December 31, 2017.

Answer 1

Solution:

a) Determining the Number of Shares to Use in Calculating the Basic Earnings Per Share for the Year Ended December 31, 2017:

Event	Dates Outstanding	Shares Outstanding	Restatement	Fraction of Year	Weighted Shares
Beginning Balance, including 5% stock dividend	Jan 1 - Apr 1	2,100,000	2.0	3/12	1,050,000
Conversion of preferred stock	Apr 1 - July 1	2,520,000	2.0	3/12	1,260,000
Stock split	July 1 - Aug 1	5,040,000		1/12	420,000
Issued Shares for Building	Aug 1 - Nov 1	5,340,000		3/12	1,355,000
Purchase of Treasury Stock	Nov 1 - Dec 31	5,316,000		2/12	886,000
Total Number of Common Shares					4,951,000

Therefore, the Number of Shares to Use in Calculating the Basic Earnings Per Share for the Year Ended December 31, 2017 is 4,951,000.

b) Determining the Number of Shares to Use in Calculating the Diluted Earnings Per Share for the Year Ended December 31, 2017:

Number of shares to compute basic earnings per share	4,951,000
Convertible preferred stock still outstanding (300,000 * 2 * 1.05)	630,000
Convertible preferred stock-converted (400,000 * 2 * 1.05 * 3/12)	210,000
Number of shares to compute diluted earnings per share	5,791,000

c) Calculation of the Adjusted Net Income Amount to Use as the Numerator in the Basic Earnings Per Share Calculation for the Year Ended December 31, 2017:

After-tax net income		$11,550,000
Less: Preferred stock dividends
March 31 (700,000 * $0.75)	$525,000
June 30, September 30, and December 31 (300,000 * $0.75 * 3)	$675,000	($1,200,000)
Adjusted Net Income		$10,350,000