PROBLEMS

Pr. 16-146—Basic and diluted EPS.

Assume that the following data relative to Kane Company for 2010 is
available:
Net Income $2,100,000

Transactions in Common Shares Change Cumulative

Jan. 1, 2010, Beginning number 700,000
Mar. 1, 2010, Purchase of treasury shares (60,000) 640,000
June 1, 2010, Stock split 2-1 640,000 1,280,000
Nov. 1, 2010, Issuance of shares 120,000 1,400,000

8% Cumulative Convertible Preferred Stock

Sold at par, convertible into 200,000 shares of common
(adjusted for split). $1,000,000

Stock Options
Exercisable at the option price of $25 per share. Average
market price in 2010, $30 (market price and option price
adjusted for split). 60,000 shares

Instructions
(a) Compute the basic earnings per share for 2010. (Round to the
nearest penny.)
(b) Compute the diluted earnings per share for 2010. (Round to the
nearest penny.)

Solution 16-146
Computation of weighted average shares outstanding during the year:
January 1 Outstanding 700,000
March 1 Repurchase (5/6 × 60,000) (50,000)
 650,000

June 1 2-for-1 split 1,300,000

November 1 Issued (1/6 × 120,000) 20,000
1,320,000

Solution 16-146 (Cont.)

Additional shares for purposes of diluted earnings per share:
Potentially dilutive securities
8% convertible preferred stock 200,000
Stock options
Proceeds from exercise of 60,000 options (60,000 × $25)
$1,500,000
Shares issued upon exercise of options 60,000
Less: treasury stock purchasable with proceeds
($1,500,000 ÷ $30) 50,000 10,000
Dilutive securities—additional shares 210,000

$2,100,000 – $80,000
(a) Basic earnings per share: —————————— = $1.53
1,320,000

$2,100,000
(b) Diluted earnings per share: ———–—————— = $1.37
1,320,000 + 210,000