Question

1. The company is authorized to issue 7,920,000 shares of $10 par value common stock. As of December 31, 2017, 1,980,000 shares had been issued and were outstanding. 2. The per share market prices of the common stock on selected dates were as follows. Price per Share July 1, 2017 $20.00 January 1, 2018 21.00 April 1, 2018 25.00 July 1, 2018 11.00 August 1, 2018 10.50 November 1, 2018 9.00 December 31, 2018 10.00 3. A total of 720,000 shares of an authorized 1,080,000 shares of convertible preferred stock had been issued on July 1, 2017. The stock was issued at its par value of $25.00, and it has a cumulative dividend of $3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30. 4. Kingbird Corporation is subject to a 40% income tax rate. 5. The after-tax net income for the year ended December 31, 2018, was $11,890,000. The following specific activities took place during 2018. 1. January 1—A 5% common stock dividend was issued. The dividend had been declared on December 1, 2017, to all stockholders of record on December 29, 2017. 2. April 1—A total of 436,800 shares of the $3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2018. 3. July 1—A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1. 4. August 1—A total of 315,600 shares of common stock were issued to acquire a factory building. 5. November 1—A total of 21,600 shares of common stock were purchased on the open market at $9.00 per share. These shares were to be held as treasury stock and were still in the treasury as of December 31, 2018. 6. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows. April 15—$0.30 per share October 15—$0.20 per share 7. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled. (a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2018. (Round answer to 0 decimal places, e.g. $1,500.) Number of shares to compute basic earnings per share (b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2018. (Round answer to 0 decimal places, e.g. $1,500.) Number of shares to compute diluted earnings per share (c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2018.

Answer 1

a) The number of common stock issued for 436,800 converted preferred stock = 1.05*436800 = 458,640

The Weighted average common shares outstanding for basic EPS

= 3/12 * 458640 + 6/12 * 458640 + 6/12 * 1,980,000 + 5/12 * 315,600 - 2/12 * 21,600

=114,660 + 229,320 + 990,000 + 131,500 - 3600

= 1,461,880

b) The weighted average shares for diluted eps :

The remaining shares of preferred stock = 283,200

The dilution effect = 283,200 * 1.05 * 2 = 594,720

Thus the weighted average shares for Diluted eps = 1,461,880 + 594,720 = 2,056,600

c) Net income = 11,890,000

Preferred dividends = 3 * 720,000 + 283,200 * 3 * 3 = 2,160,000 + 2,548,800 = 4,708,800

Common Dividends = 0.30 * (1,980,000 + 458,640) + 0.2 * 2,056,600 = 731,592 + 411,320 = 1,142,912

Adjusted Net Income = 11,890,000 - 4,708,800 - 1,142,912 = 6,038,288