Question

Computing Basic and Diluted Earnings per Share

Zeller Corporation began 2018 with 120,000 shares of common stock and 16,000 shares of convertible preferred stock outstanding. On March 1 an additional 10,000 shares of common stock were issued. On August 1, another 16,000 shares of common stock were issued. On November 1, 6,000 shares of common stock were acquired for the treasury. The preferred stock has a $2 per-share dividend rate, and each share may be converted into one share of common stock. Zeller Corporation’s 2018 net income is $501,000.

Required
a. Compute basic earnings per share for 2018. Round to two decimal places.
$

b. Compute diluted earnings per share for 2018. Round to two decimal places.
$

Answer 1

A)

Calculation for outstanding number of common stock at the end of 2018:

Number of common stock outstanding at the beginning of 2018	120,000
Add: Issuance of common stock on March 01	10,000
Add: Further issuance of common stock on August 01	16,000
	146,000
Less: Treasury stock purchased on November 01	6,000
Closing number of common stock on December 31, 2018	140,000

Calculation for basic earning per share for 2018

Net income	$ 501,000
Less: Preferential dividend [ 16,000X $ 2]	$ 32,000
Available income for common stock holders	$469,000
Basic earning per share [ $ 469,000 / 140,000]	$ 3.35

B) Calculation for diluted earning per share for 2018

Net income	$ 501,000
Less: Preferential dividend [ If conversation takes place , nothing to be paid as preferential dividend ]	nil
Available income for common stock holders	$501,000
Total number of common stock at the end of 2018 [ Assume if conversation of preference shares takes place ] = [ 140,000 + 16,000]	156,000
Diluted earning per share [ $ 501,000 / 156,000]	$ 3.21