Question

Blossom Company’s net income for 2020 is $49,300. The only potentially dilutive securities outstanding were 1,200 options issued during 2019, each exercisable for one share at $6. None has been exercised, and 9,300 shares of common were outstanding during 2020. The average market price of Blossom’s stock during 2020 was $18.

(a) Compute diluted earnings per share. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$

(b) Assume the same facts as those assumed for part (a), except that the 1,200 options were issued on October 1, 2020 (rather than in 2019). The average market price during the last 3 months of 2020 was $18. (Round answer to 2 decimal places, e.g. $2.55.)

Diluted earnings per share

$

Answer 1

Solution:

Requirement A:

Diluted Earnings Per Share = Net Income / [Common Stock + Diluted Securities]

Diluted Earnings Per Share = $49,300 / [9300+800]

Diluted Earnings Per Share = $ 4.88

Notes:

1) Diluted Securities/Incremental No. of Shares = [(Market Price - Option Price)/ Market Price] * Number of Option

Diluted Securities/Incremental No. of Shares = [(18-6)/18]*1200 = 800 Shares.

Requirement B:

Diluted Earnings Per Share = Net Income / [Common Stock + Diluted Securities]

Diluted Earnings Per Share = $49,300 / [ 9300+200]

Diluted Earnings Per Share = $ 5.19

Notes:

1) Diluted Securities/Incremental No. of Shares, if 1,200 options were issued on October 1, 2020.

Diluted Securities/Incremental No. of Shares = Diluted Securities * Holding Months / total Months

Diluted Securities/Incremental No. of Shares = 800 * 3 Months /12 Months = 200 Shares