January 1, 2018, Parker Corporation granted options to purchase 12,000 of its co

ID: 341130 • Letter: J

Question

January 1, 2018, Parker Corporation granted options to purchase 12,000 of its common shares at $8 each. The market price of common stock was $10 per share on March 31, 2018, and averaged $12 per share during the quarter then ended. There was no change in the 60,000 shares of outstanding common stock during the quarter ended March 31, 2018. Net income for the quarter was $50,000. The number of shares to be used in computing diluted earnings per share for the quarter is

a) 60,000
b) 64,000
c) 68,000
d) 72,000

Explanation / Answer

Value of options in current shares = Amount paid to exercise options/Current (Average) share price

Amount paid to exercise options (12,000*8)

96,000

Average share price in quarter

Value of options in current shares (96,000/12) (A)

8,000

Diluted shares = Options issued - Value of options in current shares

Options issued (B)

12,000

Diluted shares (12,000-8000) (C=B-A)

4,000

Existing no of shares (D)

60,000

Total no of shares to be used for diluted earnings (E=C+D)

64,000

Ans

Options (B) 64,000 shares