White Corporation has 4,000,000 shares of common stock outstanding on 12/31/10.
ID: 2402684 • Letter: W
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
Explanation / Answer
Answer
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
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
Hence, the correct answer is Option ‘B’
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
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