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1. The Simmons Company started the year with 20,000 shares of common stock outstanding. On May...

1. The Simmons Company started the year with 20,000 shares of common stock outstanding. On May 1, a 10 percent stock dividend was issued to the shareholders. Finally, on October 1, another 8,000 shares were issued to the public so that the company finished the year with 30,000 shares outstanding. If the company reported net income for the year of $100,000, what should be reported as basic earnings per share?

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Answer #1

Stock dividends, Stock splits or Stock subscriptions (retroactively adjusted) - Shares are treated as if they had always been outstanding and included at full amount for current year.

January 1 Shares outstanding 20,000
May 1 Stock dividend 2,000 (20,000*10%)
October 1 Shares issued 2,000 (8,000*3/12)
Weighted average number of common stock outstanding   24,000

Earnings per share = (Net Income - Preferred stock dividends) / Weighted average number of common stock outstanding  

= ($100,000 - $0) / 24,000

= $4.17

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