PROBLEMS

Pr. 16-147—Basic and diluted EPS.

Presented below is information related to Starr Company.

1. Net Income [including an extraordinary gain (net of tax) of

$70,000] $230,000

2. Capital Structure
a. Cumulative 8% preferred stock, $100 par,
6,000 shares issued and outstanding $600,000

b. $10 par common stock, 74,000 shares outstanding on January

1.
On April 1, 40,000 shares were issued for cash. On October
1,
16,000 shares were purchased and retired. $1,000,000

c. On January 2 of the current year, Starr purchased Oslo

Corporation.
One of the terms of the purchase was that if Starr's net
income for the
following year is $2,400,000 or more, 50,000 additional
shares would
be issued to Oslo stockholders next year.

3. Other Information
a. Average market price per share of common stock during
entire year $30
b. Income tax rate 30%

Instructions
Compute earnings per share for the current year.
Solution 16-147
Income before extraordinary item$160,000
Less preferred dividends (48,000)
Available to common before extraordinary item 112,000
Add extraordinary gain (net of tax) 70,000
Income available to common $182,000

Weighted average shares outstanding:

January 1 74,000
3/4 × 40,000 30,000
1/4 × 16,000 (4,000)
100,000
Basic earnings per share:
Income before extraordinary item$1.12 (a)
Extraordinary item (net of tax) .70 (b)
Net income $1.82 (c)

Calculations:
$112,000 $70,000 $182,000
(a) ———— (b) ———— (c) ————
100,000 100,000 100,000

Diluted earnings per share:

Income before extraordinary item$ .75 (a)
Extraordinary item (net of tax) .46 (b)
Net Income $1.21 (c)

Calculations:
$112,000 $70,000 $182,000
 (a) ———————— (b) ———— (c)
————————
100,000 + 50,000 150,000 100,000 +
50,000