Question

Information from the financial statements of Topps Fambricators, Inc., Included the following :

Common shares 100,000

      Convertible preferred shares $100 par, 5% (convertible into 36,000 shares of common) 12,000

      10% convertible bonds (convertible into 25,000 shares of common) $1,000,000

      Stock options for 120,000 shares of common stock (option price of $20 per share; market price of $25 per share)

Topps's net income for the year ended December 31,2018, is $680,000. The income tax rate is 40%. Topps paid dividends of $5 per share on its preferred stock during 2018.

Compute basic and diluted earnings per share for the year ended December 31, 2018.

Answer 1

1. Basic earnings per share=Profit or loss attributable to common equity holders/weighted average no. of shares outstanding during the period

Profit/loss for common equity holders=680,000*(100%-40%)=408,000
=408,000-dividend to preference shareholders

=408,000-(5*12,000)

=$348,000

Weighted average no. of shares outstanding during the period=100,000

Basic earnings per share=348,000/100,000

=$3.48

2. Diluted earnings per share=Adjusted net profit for the year/Adjusted outstanding shares

Adjusted net profit= (Net income + interest on convertible bonds)*(100%-40%)

= (680,000 + (10,00,000*10%))*60%

=$ 468,000

Adjusted outstanding shares=common shares + convertible preference shares+ convertible bonds+ stock options

=100,000+36,000+25,000+120,000

=281,000

Diluted earnings per share= $468,000/281,000

= $ 1.66