Question

White Corporation has 4,000,000 shares of common stock outstanding on 12/31/10. An additional 1,000,000 shares of common stock were issued on 4/1/11, and 500,000 more on 7/1/11.  On 10/1/11, White issued 25,000, $1,000 face value, 8% convertible bonds.  Each bond is convertible into 20 shares of common stock.  No bonds were converted into common stock in 2011.  What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively?

a.    5,000,000 and 5,000,000.

b.    5,000,000 and 5,125,000.

c.    5,000,000 and 5,500,000.

d.    5,500,000 and 6,500,000.

Show all work and how you derived to your answer

Answer 1

• All working forms part of the answer
• Working #1

	Common Stock no. of shares	Cumulative no. of shares	Shares outstanding for	Weighted average no. of shares	Working for “Weighted average no. of shares”
Beginning balance	4,000,000	4,000,000	1 Jan to 31 mar = 3 months	1,000,000	[4000000 x 3/12]
Issued on 1 Apr 2011	1,000,000	5,000,000	1 Apr to 30 June = 3 months	1,250,000	[5000000 x 3/12]
Issued on 1 Jul 2011	500,000	5,500,000	1 Jul to 31 Dec = 6 months	2,750,000	[5500000 x 6/12]
Total shares outstanding for calculating Basic earnings per share				5,000,000

• Working #2

A	Convertible Bonds issued on	01-Oct-11
B	No. of Bonds issued	25,000
C	Each bond convertible into	20 common shares
D = B x C	No. of prospective common shares	500,000
E = 3 months	Period remaining outstanding	1 Oct to 31 Dec = 3 months
F = D x E/12	Weighted average outstanding no. of prospective common stock shares	125,000
G [calculated in Working #1]	Total shares outstanding for calculating Basic earnings per share	5,000,000
H = F + G	Total shares outstanding for calculating Diluted earnings per share	5,125,000

• No. of shares for Basic Earnings per share = 5,000,000 {Working #1] and for Diluted Earnings per share = 5,125,000 [Working #2]

Hence, the correct answer is Option ‘B’