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it View Go Tools Bookmarks re Harris 001 (2).tif 1 ous Next Zoom Move iText Select Question 1: Based on the following facts, prepare the Earnings per share amounts for X Corp for 2014 under the: A-Basic EPS and B-Diluted EPS methods. Common Shares Outstanding as of 1/1/2014 ils 100,000 shares On October 1, 2015 the company issued 10,000 shares of common stock to the public On June 5, 2014 the company declared a 5 percent stock dividend. Additionally, the Corporation has $500 000 of 6% $100 par convertible Preferred Stock. Each Preferred Stock is converted into 6 shares of common stock. Net Income for 2014 was $150,000.Explanation / Answer
1. Calculation of Basic EPS
Basic EPS = (Net Income - Preferred Stock) / Weighted Average number of stock outstanding
Net Income = $150,000
Preferred Dividend = 500,000 x 6% = 30,000
Outstanding Stock in 2014 = (10,000 / 12 x 12) + (100,000 x 5%) + (10,000 x 3 / 12)
= 17,500 shares
Basic EPS for 2014 = $150,000 - 30,000 / 17,500 = $6.857 per share
2. Calculation of DIluted EPS.
Diluuted EPS = Revised Net income / Weighted average number of shares
Revised net income = 150,000 (Since it is not net of preferred dividend stock)
Weighted average shares:
Type
Number of shares
Weighted Average
Common stock on 01/01/2014
10,000
10,000 x 12 /12 = 10,000
Convertible preferred
500,000 / 100 x 6 shares = 30,000 shares
30,000 x 12 / 12 = 30,000
Stock Dividend
40,000 shares x 5%
2,000
Issuance of common stock
10,000
10,000 x 3 /12 = 2,500
TOTAL
44,500
Note:
a. Preferred convertible stock is taken for the full year assuming converted on start of the year only.
b. Stock dividends are always treated for the whole year as they are paid out of last year retained earnings.
c. Stock dividend is assumed to paid to converted preferred stock in the current year.
Diluted EPS = 150,000 / 44,500 = $3.37 per share
Type
Number of shares
Weighted Average
Common stock on 01/01/2014
10,000
10,000 x 12 /12 = 10,000
Convertible preferred
500,000 / 100 x 6 shares = 30,000 shares
30,000 x 12 / 12 = 30,000
Stock Dividend
40,000 shares x 5%
2,000
Issuance of common stock
10,000
10,000 x 3 /12 = 2,500
TOTAL
44,500
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