Question

Crane Corporation Ltd. has the following capital structure at the following fiscal years ended December 31:

		2020		2019
Number of common shares		510,000		360,000
Number of non-convertible, non-cumulative preferred A shares		50,000		50,000
Amount of 6% convertible bonds		$1,000,000		$1,000,000

The following additional information is available.

1.		On July 31, 2020, Crane Corporation exchanged common shares for a large piece of equipment. This was the only transaction that resulted in issuance of common shares in 2020.
2.		Income before discontinued operations for 2020 was $1,300,000, and a loss from discontinued operations of $300,000 was recorded, net of applicable tax recovery.
3.		During 2020, dividends in the amount of $4 per share were paid on the preferred A shares.
4.		Each $1,000 bond can be converted into 25 common shares.
5.		There were unexercised stock options, outstanding since 2017, that allow holders to purchase 20,000 common shares at $4.00 per share.
6.		Written warrants to purchase 10,000 common shares at $7.00 per share were outstanding at the end of 2019, and no warrants were exercised in 2020.
7.		The average market value of the common shares in 2020 was $5.00.
8.		Crane’s tax rate is 20%.
9.		Crane declared and paid a $10,000 dividend to common shareholders on June 1, 2020.

Determine the weighted average number of common shares that would be used in calculating earnings per share for the year ended December 31, 2020.

Weighted average number of common shares

Enter your answer in accordance to the question statement shares

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Starting with the heading “Income from Continuing Operations,” prepare the bottom portion of the income statement for the year ended December 31, 2020. Assume that Crane Corporation discloses all applicable earnings per share data on the face of the income statement. (Round Earnings Per Share amounts to 2 decimal places, e.g. 15.25. Enter negative amounts using either a negative sign preceding the number e.g. -45 or parentheses e.g. (45).)

Crane Corporation Partial Income Statement                                                                       December 31, 2020For the Year Ended December 31, 2020For the Month Ended December 31, 2020
Net Income / (Loss)Income from Discontinued OperationsLoss from Discontinued OperationsIncome from Continuing OperationsLoss from Continuing Operations		$
Loss from Continuing OperationsNet Income / (Loss)Income from Discontinued OperationsLoss from Discontinued OperationsIncome from Continuing Operations
Net Income / (Loss)Income from Discontinued OperationsIncome from Continuing OperationsLoss from Discontinued OperationsLoss from Continuing Operations		$
Basic earnings per share:
Loss from Continuing OperationsIncome from Discontinued OperationsIncome from Continuing OperationsNet Income / (Loss)Loss from Discontinued Operations		$
Loss from Discontinued OperationsLoss from Continuing OperationsNet Income / (Loss)Income from Discontinued OperationsIncome from Continuing Operations
Loss from Continuing OperationsLoss from Discontinued OperationsIncome from Continuing OperationsIncome from Discontinued OperationsNet Income / (Loss)		$
Diluted earnings per share:
Loss from Continuing OperationsIncome from Discontinued OperationsLoss from Discontinued OperationsNet Income / (Loss)Income from Continuing Operations		$
Income from Continuing OperationsNet Income / (Loss)Loss from Continuing OperationsIncome from Discontinued OperationsLoss from Discontinued Operations
Loss from Continuing OperationsLoss from Discontinued OperationsIncome from Discontinued OperationsIncome from Continuing OperationsNet Income / (Loss)		$

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Answer 1

Answer:

a. Computation of weighted average number of common shares that would be used in calculating earnings per share:
Total shares as on 2020 = 510,000shares
From this 510,000shares 360,000 are continued from 2016 and balance i.e.,510,000-360,000 = 150,000sharse are issued on July 31, 2020
Thus, weighted average shares = 360,000 + (150,000*5months from Aug to Dec / 12 months)
= 360,000 + (150,000*5/12) = 360,000 + 62,500 = 422,500 shares

b. Computation of income statement for the year ended December 31, 2020:

Details	Amount ($)
Income before discontinued operations	1,300,000
Less: a loss from discontinued operations	(300,000)
Net income	1,000,000

Now, let us calculate the Basic EPS And Diluted EPS:
Basic EPS = Net income/ weighted average shares
= Income from continuous operation - dividend paid on preferred shares / 422,500 shares
= 1,300,000 - (20,000*$4) / 422,500 = $2.90

Diluted EPS = Net income/ weighted average shares + options if any outstanding + bonds converted
= Income from continuous operation + after tax interest on bonds - dividend paid on preferred shares / 422,500 + (20,000shares -(20,000*$4/market value $5)) + ($1,000,000/$1000)*25
= 1,300,000 + (1,000,000*4%(1-20% tax) - (20,000*$4) / 422,500 + 4,000 + 25,000
= 1,252,000 / 451,500 = $2.77

Calculating Net income per share:

Details	Basic EPS	Diluted EPS
Income from continuous operations	$2.90	$2.77
Less: a loss from discontinued operations	(200,000/422,500) = (0.47)	(200,000/451,500) = (0.44)
Net income	$2.43	$2.33