4. During 2016, Jackson Corporation had 600,000 shares of common stock and 50,00

Question

4. During 2016, Jackson Corporation had 600,000 shares of common stock and 50,000 shares of 9% preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Jackson declared and paid cash dividends of S200,000 and S100,000 to common and preferred shareholders, respectively, during 2016. On January 1, 2015, Jackson issued $3,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into five common shares Jackson's net income for the year ended December 31, 2016, was $4 million. The income tax rate is 15%. Instructions o wieu calculation. (5 points) (b) What will Jackson report as diluted earnings per share for 2016, rounded to the nearest cent? (5 points)

Explanation / Answer

a. Basic earning per share is the  amount of a company’s profit or loss for a reporting period that is available to the shares of its common stockthat are outstanding during the reporting period.

profit or loss for this purpose is caluclated as profit reduced by incometax and any other dividend already paid/ declared on non-cumulative preferred stock, as well as the after-tax amount of any preferred stock dividends, even if the dividends are not declared but does not include any dividends paid or declared during the current period that relate to previous periods.

Therefore,net income for 2016 is 4 million reduced by income tax @ 15%

= $ 4000000-($ 4000000*15%)=3400000

=reduced by non cumulative prefered stock dividend

= ($ 3400000-100000) = $ 3300000

= Basic earning per share =  $ 3300000 / 600000 = $ 5.50

b.Diluted earning per share is net income of the enterprise diluted among the comnvertible options ie because of the exercise of this convertible options earnings of the common stock holders got diluted

= no of shares diluted = $ 3000000/ $ 1000 *5 = 15000 common stock got diluted

so, the diluted earning per share is

net income for 2016 is 4 million reduced by income tax @ 15%

= $ 4000000-($ 4000000*15%)=3400000

=reduced by non cumulative prefered stock dividend

= ($ 3400000-100000) = $ 3300000

= Basic earning per share =  $ 3300000 / 615000 = $ 5.36

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