Question

On December 31, 2020, Heffner Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $100 par, cumulative preferred stock outstanding. On February 28, 2021, Heffner purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Heffner sold 6,000 of the treasury shares on September 30, 2021, for $47 per share. Net income for 2021 was $540,000. The income tax rate is 25%. Also outstanding at December 31, 2020, were fully vested incentive stock options giving key employees the option to buy 50,000 common shares at $40. The market price of the common shares averaged $50 during 2021. Five thousand 6% bonds were issued at par on January 1, 2021. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds had been converted by December 31, 2021, and no stock options were exercised during the year.

Compute basic and diluted earnings per share (rounded to 2 decimal places) for Heffner Company for 2021.

Answer 1

First lets calculate Basic EPS, refer to the table given below

Particuliars	No of shares
Equity	100000
treasury stock	24000
Treasury stock sold	(6000)
Total	118000

This table shows the number of share outstanding at the end of the period. With regards to treasury stock, since Heffner sold 6000 balance pending with us is 18000 shares (24000-6000) at cost. This represents all the common stock available with us.

We will use this as a base for calculating Basic EPS.

Next we need to calculate any Preferred dividends payable. For Heffner its the dividend payable on the 7% $100 cumulative preference shares which is calculated as follows.

No of shares: 30000 shares

Par value per share: $100

dividend payable = 30000*100*7% = $210000

with this we have all required data to calculate Basic EPS.

The formula is as follows

Basic EPS = (Net income- Preferred dividends)/Total outstanding shareholding

= (540000-210000)/118000

= $2.80 per share

For diluted share holding we need to consider if there are any conversions that can possibly take place which can increase the common stock. Refer to the table given below

Particuliars	No of shares
Equity	100000
Treasury stock	24000
Treasury stock sold	(6000)
Stock option	50000
Convertible bond	625000
Total	793000

6000 treasury stock was sold, Employees have an option to purchase 50000 shares and each bond can be converted into 125 share thus (5000 bond *125 shares)

Preference share dividend will be the same as before $210000

Thus diluted EPS= (540000-210000)/793000 = $)0.45 per share.