January 1, 2018, Woody Forrest Corporation granted executive stock options to pu

Question

January 1, 2018, Woody Forrest Corporation granted executive stock options to purchase 27,000 of its common shares at $7 each. The market price of common stock was $10 per share on December 31, 2018, and averaged $9 per share during the year then ended. There was no change in the 150,000 shares of outstanding common stock during the year. Net income for the year was $25,000. The number of shares to be used in computing diluted earnings per share for the quarter is 150,000 156,000 171,000 177,000

Explanation / Answer

156000 is correct.

since exercise price of option(7) is less than average market price (9) of share during the year, treasury stock method is used to compute additional shares outstanding.

additional shares outstanding= Number of shares - (number of shares*exercise price/average market price)

additional shares outstanding= 27000 -(27000*7/9)= 6000

existing shares outstanding= 150000

number of shares to be used in computing diluted EPS= 6000+150000= 156000

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