Question

Problem 16-5

Amy Dyken, controller at Ivanhoe Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Ivanhoe’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2017.

IVANHOE PHARMACEUTICAL INDUSTRIES SELECTED BALANCE SHEET INFORMATION JUNE 30, 2017
Long-term debt
Notes payable, 11%		$1,010,000
8% convertible bonds payable		5,050,000
11% bonds payable		5,950,000
Total long-term debt		$12,010,000
Shareholders’ equity
Preferred stock, 6% cumulative, $50 par value, 105,000 shares authorized, 26,250 shares issued and outstanding		$1,312,500
Common stock, $1 par, 9,800,000 shares authorized, 980,000 shares issued and outstanding		980,000
Additional paid-in capital		3,940,000
Retained earnings		5,910,000
Total shareholders’ equity		$12,142,500

The following transactions have also occurred at Ivanhoe.

1.		Options were granted on July 1, 2016, to purchase 200,000 shares at $15 per share. Although no options were exercised during fiscal year 2017, the average price per common share during fiscal year 2017 was $20 per share.
2.		Each bond was issued at face value. The 8% convertible bonds will convert into common stock at 50 shares per $1,000 bond. The bonds are exercisable after 5 years and were issued in fiscal year 2016.
3.		The preferred stock was issued in 2016.
4.		There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2017.
5.		The 980,000 shares of common stock were outstanding for the entire 2017 fiscal year.
6.		Net income for fiscal year 2017 was $1,520,000, and the average income tax rate is 40%.

For the fiscal year ended June 30, 2017, calculate the following for Ivanhoe Pharmaceutical Industries. (Round answers to 2 decimal places, e.g. $2.45.)

(a) Basic earnings per share.

(b) Diluted earnings per share
.

Answer 1

Ques 1
Basic EPS
=Net income-preferrence dividends / weighted average common shares outstanding
Net income	1520000
Less:preference dividend	78750
1312500*0.06
earnings available to common stockholders	1441250
Weighted average common shares	980000
EPS-Basic	$                                  1.47	per share
1441250/980000
Ques 2
potential dilutive securities are the convertible bonds and stock options
the interest on bonds	404000
5050000*0.08
Less:taxes	161600
After tax amount	242400
Bonds converted to common stock	252500	additional shares
5050000/100050
Stock options
200000shares issued*15option price	3000000
3000000total proceeds/20averagemarket price	150000	shares
200000shares issued-150000shares assumed repurchased	50000	icemental shares
So for diluted EPS we have
Net income	1520000
less:preferrence dividend	-78750
Add:interest saving	242400
earnings available to common stockholders	1683650
Weighted average no. of shares
original	980000
Add:new shares issued
bonds	252500
stock option	50000
total	1282500
Diluted EPS
1683650/1282500	$                                  1.31	PER share