The 2009 net income of Atwater Inc. was $200,000 and 100,000 shares of its commo

Question

The 2009 net income of Atwater Inc. was $200,000 and 100,000 shares of its common stock were out-standing during the entire year. In addition, there were outstanding options to purchase 10,000 sharesof common stock at $10 per share. These options were granted in 2006 and none had been exercisedby December 31, 2009. Market prices of Atwater's common stock during 2009 wereJanuary 1$20 per shareDecember 31$40 per shareAverage Price$25 per shareThe amount that should be shown as Atwater's diluted earnings per share for 2009 (rounded to thenearest cent) isa.$2.00.b.$1.95.c.$1.89.d.$1.86.ANS:C

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Explanation / Answer

Answer:

For calculating diluted earning per share, incase where share options are outstanding, treasury stock method is to applied.

Particulars in $ A Net Income 200000 No of shares outstanding 100000 Add: In the money options 10000 Less: Share repurchased 4000 B No of shares outstanding for diluted shares calculation 106000 Diluted earning per share 1.89 (ans) *Share repurchased Inflow on exercise of option 100000 (10,000*$10) No of share can be Bought back @average price 4000 (100,000/$25)

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