Question

2. On December 31, 2010, the Momentum Company had 150,000 shares of common stock issued and outstanding.

On April 1, 2011, an additional 30,000 shares of common stock were issued. Momentum’s net income for the year ended December 31, 2011, was $517,500.

During 2011, Momentum declared and paid $300,000 in cash dividends on its nonconvertible preferred stock and $100,000 on its common stock. The basic earnings per common share, rounded to the nearest cent, for the year ended December 31, 2011, should be;        

Answer 1

Net income for the year ended December 31,,2011 = $517,500

Dividend paid = $300,000

Shares outstanding in the beginning of the year = 150,000

Additional shares issued on April,1,2011 =30,000

Basic Earnings Per share= ( Net Income - Preferred Dividends) / Weighted average of common shares outstanding during the period

Basic Earning Per Share = ( $517,500 - $300,000) / (150,000 + (30,000*9/12)

= $217,500 / 172,500

= $1.26

• Note: While calculating basic earnings per share dividends on preferred stock are deducted.
• 30,000 shares issued was issued on April 1,2011 ,thus it is multiplied by 9/12.