Question

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

Waterway Pharmaceutical Industries
Selected Balance Sheet Information
June 30, 2020
Long-term debt      
Notes payable, 10% $990,000
8% convertible bonds payable       5,030,000
10% bonds payable 5,880,000
Total long-term debt $11,900,000
       
Shareholders’ equity      
Preferred stock, 5% cumulative, $50 par value, 107,000 shares authorized, 26,750 shares issued and outstanding $1,337,500
Common stock, $1 par, 9,800,000 shares authorized, 980,000 shares issued and outstanding 980,000
Additional paid-in capital 3,940,000
Retained earnings 6,110,000
Total shareholders’ equity $12,367,500

The following transactions have also occurred at Waterway.

1.       Options were granted on July 1, 2019, to purchase 190,000 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 980,000 shares of common stock were outstanding for the entire 2020 fiscal year.
6.       Net income for fiscal year 2020 was $1,490,000, and the average income tax rate is 20%.

For the fiscal year ended June 30, 2020, calculate the following for Waterway 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

Please find below table useful to compute desired results: -

End results would be as follows: -