During its first year of operations, McCollum Tool Works entered into the follow

Question

During its first year of operations, McCollum Tool Works entered into the following transactions relating to shareholders’ equity. The corporation was authorized to issue 100 million common shares, $1 par per share. Jan. 2 Issued 55 million common shares for cash. 3 Entered an agreement with the company president to issue up to 2 million additional shares of common stock in 2017 based on the earnings of McCollum in 2017. If net income exceeds $140 million, the president will receive 1 million shares; 2 million shares if net income exceeds $150 million. Mar. 31 Issued 4 million shares in exchange for plant facilities. Net income for 2016 was $148 million. Required: Compute basic and diluted earnings per share for the year ended December 31, 2016.

Explanation / Answer

McCollum Tool Works Share details No of shares Period in a year Weighted avg no Jan 2. issue               55,000,000                            1.00                55,000,000 Mar 31. issue            4,000,000.00 3/4                  3,000,000 Weighetd average no of common shares                58,000,000 Net Income 2016 $         148,000,000 Weighetd average no of common shares               58,000,000 Basic earning per share                            2.55 Diluted Earning per share will be same as basic EPS. The contingent share issue to President is only taken for Diluted earning when the event of profitearning actually happens in 2017 Therefore, it is not considered for diluted earning in 2016.

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