Assume that the following data relative to Chaps, Inc. for 2015 is available:
Net Income $1,400,000
Transactions in Common Shares Change Cumulative
Jan. 1, 2012, Beginning number 500,000
Mar. 1, 2012, Purchase of treasury shares (60,000) 440,000
June 1, 2012, Stock split 2-1 440,000 880,000
Nov. 1, 2012, Issuance of shares 120,000 1,000,000
8% Cumulative Convertible Preferred Stock
Sold at par, convertible into 200,000 shares of common
(adjusted for split). $1,000,000
Stock Options
Exercisable at the option price of $25 per share. Average
market price in 2012, $30 (market price and option price
adjusted for split). 60,000 shares
Instructions
(a) Compute the basic earnings per share for 2015. (Round to the nearest penny.)
(b) Compute the diluted earnings per share for 2015. (Round to the nearest penny.)
| Computation of weighted average shares outstanding during the year |
||
| Date | ||
| 1-Jan | Outstanding | 500,000 |
| 1-Mar | Repurchase (5/6 × 60,000) | -50000 |
| 450,000 | ||
| 1-Jun | 2-for-1 split | 900,000 |
| 1-Nov | Issued (1/6 × 120,000) | 20,000 |
| 920,000 |
Additional shares for purposes of diluted earnings per share
| Potentially dilutive securities | ||
| 8% convertible preferred stock | 200,000 | |
| Stock options | ||
| Proceeds from exercise of 90,000 options (60,000 × $25) |
1,500,000 | |
| Shares issued upon exercise of options | 60,000 | |
| Less: treasury stock purchasable with proceeds ($1,500,000 ÷ $30) | 50,000 | 10,000 |
| Dilutive securities—additional shares | 210,000 |
(a)
Basic earnings per share:
=1,400,000-80,000/ 920,000
=1.46 per share
(b)
Diluted earnings per share:
=1,400,000/ 920,000+210,000
=1,400,000/ 1,130,000
=1.24per share
