PROBLEMS

Pr. 16-145—Earnings per share.

Colson Corp. had $500,000 net income in 2011. On January 1, 2007
there were 200,000 shares of common stock outstanding. On April 1,
20,000 shares were issued and on September 1, Adcock bought 30,000
shares of treasury stock. There are 30,000 options to buy common stock
at $40 a share outstanding. The market price of the common stock
averaged $50 during 2011. The tax rate is 40%.

During 2011, there were 40,000 shares of convertible preferred stock

outstanding. The preferred is $100 par, pays $3.50 a year dividend, and
is convertible into three shares of common stock.

Colson issued $2,000,000 of 8% convertible bonds at face value during

2010. Each $1,000 bond is convertible into 30 shares of common stock.

Instructions
Compute diluted earnings per share for 2011. Complete the schedule and
show all computations.

Net Adjust- Adjusted Adjust- Adjusted

Security Income ment Net Income Shares ment Shares
EPS

Solution 16-145
Net Adjust- Adjusted Adjust- Adjusted
Security Income ment Net Income Shares ment
Shares EPS
Com. Stock $500,000 $(140,000)$360,000 200,000 5,000a
205,000 $1.76
Options 360,000 205,000 6,000b 211,000 1.71
Bonds 360,000 96,000c 456,000 211,000 60,000
271,000 1.68
Preferred 456,000 140,000 596,000 271,000 120,000
391,000 1.52

a 20,000 × 3/4 = 15,000

30,000 × 1/3 = (10,000)
5,000 SA

Solution 16-145 (Cont.)

b 30,000
$1,200,000 ÷ $50 = (24,000) (or) [(50 ¬– 40) ÷ 50]
× 30,000 = 6,000 SA
6,000 SA

$96,000 $140,000
c $2,000,000 × .08 × .6 = $96,000 ———— = $1.60
———— = $1.17
60,000 120,000