Question

Stanley Hugo, company secretary and CFO in the finance department of Allied Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2019. Stanley has compiled the information listed below.
1. The company is authorized to issue 8,000,000 shares of $10 par value common stock. As of December 31, 2018, 2,000,000 shares had been issued and were outstanding.
2. The per share market prices of the common stock on selected dates were as follows.
                                   

         Price per Share

July 1, 2018 January 1, 2019 April 1, 2019 July 1, 2019 August 1, 2019 November 1, 2019 December 31, 2019

$20.00 21.00 25.00 11.00 10.50 9.00 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2018.
The stock was issued at its par value of $25, and it has a cumulative dividend of $3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. 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. The Corporation is subject to a 40% income tax rate.
5. The after-tax net income for the year ended December 31, 2019, was $11,550,000.
The following specific activities took place during 2019.
1. January 1—A 5% common stock dividend was issued. The dividend had been declared on December 1, 2018, to all stockholders of record on December 29, 2018.
2. April 1—A total of 400,000 shares of the $3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2019.
3. July 1—A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1.
4. August 1—A total of 300,000 shares of common stock were issued to acquire a factory building.
5. November 1—A total of 24,000 shares of common stock were purchased on the open market at $9 per share. These shares were to be held as treasury stock and were still in the treasury as of December 31, 2019.
6. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows.
April 15—$0.30 per share
October 15—$0.20 per share
7. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled.

Instructions
(a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2019.
(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2019.
(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2019.

Answer 1

	Allied Corporation
	Basic & Dliuted EPS Calculation
a	Calculation of No of shares outstanding for Basic EPS	No of Common Stock stocks	Time Weight	Weighted no of Common Stock for Basic EPS Calculation
	Opening no of Common stock outstanding as on Jan 1 2019	2,000,000	1
	Add 5% Stock Dividend issued on Jan 1 2019	100,000	1
	Apr1 Conversion of 400,000 Preference shares to Common Stock	400,000	=9/12
	Total Outstanding Common stock as on June 30	2,500,000
	Jul 1 2for 1 split of all common stock	5,000,000	No time weightage for share splits	5000,000
	Aug 1 Issue of 300000 new common stock	300,000	=5/12	125,000
	Nov 1 purchase of 24000 shares as Treasury stock	(24,000)	=2/12	(4,000)
	Number of Common Stock for Basic EPS			5,121,000

b	Number of Shares for Diluted EPS
	Number of Common Stock for Basic EPS	5,121,000
	Adjustemnt for Dilutive Potential Equity shares
	1. 300000 Convertible Pref shares- Dilutive no of common stock	300,000
	2. 400,000 Convertible Pref shares , converted on April 1, having Dilutive potential no from Jan 1 to March 1 =400000*3/12	100,000
	Total Number of Common Stock for Diluted EPS Calculation	5,521,000

c	Adjusted Net Income for Basic EPS Numerator
1	After Tax Net Income in 2019	$        115,550,000
	Less Preference Dividends Paid Out @ $0.75/Qtr per Pref shares
	1. March 31 on 700,000 Pref shares @ $0.75/ Pref share=	$                525,000
	2. June 30, on 300,000 Pref Shares @ $0.75/Share	$                225,000
	2. Sep 30 30, on 300,000 Pref Shares @ $0.75/Share	$                225,000
	2. Dec 31, on 300,000 Pref Shares @ $0.75/Share	$                225,000
2	Total Preference Dividend Paid	$            1,200,000
	Adjusted Net Income for Basic EPS Numerator (1-2)	$        114,350,000