Question

FINANCIAL ACCOUNTING II

Edwards and Everett, Inc. had the following items in its capital structure at December 31, 2020:

Common stock options, issued in 2019, exercisable for 22,000 shares, beginning in 2022, at a “strike” price of $20 per share. The cash that would be received from the option-holders from a hypothetical exercise of the options at December 31, 2020 would be sufficient for Edwards & Everett to acquire 13,400 shares of its own common stock (as treasury stock).

Treasury stock, common, 20,000 shares, acquired on November 30, 2019 ...... $280,000

Additional paid-in-capital........................................................................................760,000

Common stock, $10 stated value, issued January 2, 2019 (current market value, $17 per share) ................................................................ 1,200,000

Preferred stock, 10%, $8 par value, convertible into 146,000 commonshares no earlier than 2020, issued at par value on July 1, 2020 (current market value, $8 per share) ...................................................................1,660,000

Stock warrants, issued in 2019 in exchange for legal services at the company’s formation, convertible into 1,300 shares of common stock at the discretion of the warrant-holders, but not earlier than 2022. A hypothetical conversion of the warrants at December 31, 2020 would require a $14,000 cash payment from the warrant-holders, which would be sufficient for Edwards & Everett to acquire 300 shares of its own common stock (as treasury stock)........................................................................ 20,000

Edwards & Everett’s net income for 2020 was $783,000; the company’s Board of Directors has not yet declared a dividend for 2020 for the preferred shareholders.

What earnings per share did Edwards and Everett, Inc. report for the year ended December 31, 2020? Prepare a schedule to support your answer.

Answer 1

Answers:

1)Basic earnings per share for the year ended December 31, 2020.

= Earnings available for Common shareholders ÷ Weighted average number of common shares outstanding

= $783,000÷ 100000

= $7.83

.

Working

Weighted average number of common shares outstanding:-

•Common shares

($120,0000/$10)×12/12

= 120000 shares

Less: Treasury stock 20,000

Total: 100000 shares

.

2) Diluted earnings per share for the year ended December 31, 2020.

= Earnings available for Common shareholders ÷ Weighted average number of common shares outstanding + potential Common shares

= $949000÷255600

=$3.71

.

Working

Earnings:

•Net income= 783,000

•Add: Savings in

preference dividend

(10%×16,60,000)= 1,66,000

Total: $949000

.

Weighted average number of common shares outstanding:-

•Basic(refer1)= 100000

•Convertible

preferred stock

= +146,000

•Common stock options= +22,000

•Treasury stocks= -13,400

• Stock warrants +1,300

• Treasury stocks= -300

Total: 255600 Shares

.

Note: Treasury stocks are not included in Calculation of Earnings per share or diluted earnings per share, as these are issued but not outstanding.