Question

On June 1, 2018, Flounder Company and Culver Company merged to form Larkspur Inc. A total of 877,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2020, the company issued an additional 652,000 shares of stock for cash. All 1,529,000 shares were outstanding on December 31, 2020.

Larkspur Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 44 shares of common at any interest date. None of the bonds have been converted to date.

Larkspur Inc. is preparing its annual report for the fiscal year ending December 31, 2020. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,444,000. (The tax rate is 20%.)

Determine the following for 2020.

(a) The number of shares to be used for calculating: (Round answers to 0 decimal places, e.g. $2,500.)

(1)		Basic earnings per share		enter a number of shares rounded to 0 decimal places		shares
(2)		Diluted earnings per share		enter a number of shares rounded to 0 decimal places		shares

(b) The earnings figures to be used for calculating: (Round answers to 0 decimal places, e.g. $2,500.)

(1)		Basic earnings per share		$enter a dollar amount rounded to 0 decimal places
(2)		Diluted earnings per share		$enter a dollar amount rounded to 0 decimal places

Answer 1

(a)	No. of shares
	Shares
1.Basic	877,000*12/12 = 877,000
	652,000 * 9/12 = 489,000
	877,000+ 489,000= 1,366,000
2.Diluted	877,000*12/12 = 877,000
	652,000 * 9/12 = 489,000
	($600,000/$1,000)*44* 6/12 = 13,200
	877,000+ 489,000+ 13,200= 1,379,200
(b)	Earning figures
1.Basic	Net Income = $1,444,000
2.Diluted	Interest on bonds = $600,000*8%*6/12 = $24,000
	Tax savings on interest = $24,000 * 20% = $4,800
	Earnings = $1,444,000 + $24,000 - $4,800= $1,463,200