Question

Problem 16-5 Amy Dyken, controller at Kingbird Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Kingbird’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2017. KINGBIRD PHARMACEUTICAL INDUSTRIES SELECTED BALANCE SHEET INFORMATION JUNE 30, 2017 Long-term debt Notes payable, 9% $1,000,000 8% convertible bonds payable 4,910,000 9% bonds payable 6,080,000 Total long-term debt $11,990,000 Shareholders’ equity Preferred stock, 7% cumulative, $50 par value, 96,000 shares authorized, 24,000 shares issued and outstanding $1,200,000 Common stock, $1 par, 10,000,000 shares authorized, 1,000,000 shares issued and outstanding 1,000,000 Additional paid-in capital 4,010,000 Retained earnings 5,880,000 Total shareholders’ equity $12,090,000 The following transactions have also occurred at Kingbird. 1. Options were granted on July 1, 2016, to purchase 220,000 shares at $15 per share. Although no options were exercised during fiscal year 2017, the average price per common share during fiscal year 2017 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 2016. 3. The preferred stock was issued in 2016. 4. There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2017. 5. The 1,000,000 shares of common stock were outstanding for the entire 2017 fiscal year. 6. Net income for fiscal year 2017 was $1,500,000, and the average income tax rate is 40%. For the fiscal year ended June 30, 2017, calculate the following for Kingbird 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

	KINGBIRD PHARMACEUTICAL INDUSTRIES
	Balance Sheet
	Long Term Debt
	Note Payable 9%	$     10,00,000.00
	8% Convertible Bonds Payable	$     49,10,000.00
	9% Bonds Payable	$     60,80,000.00
	Total long term debt	$ 1,19,90,000.00
	Shareholder's Equity
	Preferred Stock 7% cumulative, $50 par value , 96000 shares authorized ,24000 shares issued and outstanding	$     12,00,000.00
	Common Stock, $1 par value ,10,000,000 shares authorized ,1000000 shares issued and outstanding	$     10,00,000.00
	Additional paid in capital	$     40,10,000.00
	Retained Earnings	$     58,80,000.00
	Total Shareholder's Equity	$ 1,20,90,000.00
	Net Income of fiscal year	$     15,00,000.00
a)	Basic Earning Per Share=(Net Income-Preferred dividend)/Weighted Average number of shares outstanding
	Preferred Dividend=($1200000*7%)	$           84,000.00
	Basic Earning per share=($1500000-$84000)/1000000	$                      1.42
b)	Diluted Earnings per share=(Net Income-Preferred dividend+Interest(Net of tax))/(Weighted average number of shares outstanding+Diluted common shares)
	Interest after tax on converted bonds=($4910000*8%*(1-.40))	$       2,35,680.00
	Shares issued in conversion of bonds=($4910000/$1000)*50 shares)	245500
	Proceeds from exercise of option =(220000*$15)	$     33,00,000.00
	Shares issued to exercise of option	220000
	Shares issued to exercise of option=($3300000/$20)	-165000
	Incremental shares outstanding=(220000-165000)	55000
	Diluted Earnings per share=($1500000-$84000+$235680)/(1000000+245500+55000)	$                      1.27