TOPIC 4226

Description

 130. Sugarland Industries reported a net income of $750,750 on December 31, 2006. At the beginning
of the year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000
shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger.

Required:

Compute Sugarland's net income that would produce a basic EPS of $2.00 per share for 2006.

131. Nagy Industries reported a net income of $619,369 on December 31, 2006. At the beginning of the
year, the company had 500,000 common shares outstanding. On April 1, the company sold 27,000
shares for cash. On August 31, the company issued 48,000 additional shares as part of a merger. On
December 1, 2006, the company declared and issued a 10% stock dividend.

Required:

Compute Nagy's net income that would produce a basic EPS of $2.00 per share for 2006.

SOLUTION.

SOL.130

First we calculate weighted average number of shares outstanding during the year:

Weighted Average number of shares outstanding = Common shares + (shares sold x 9/12) + (Additional
shares x 4/12)

                                                                              = 500,000 + (27,000 x 9/12) + (48,000 x 4/12)

                                                                              = 500,000 + 20,250 + 16,000

Weighted average number of shares outstanding = 536,250

Net income at which basic EPS will be $2.00 per share

Basic EPS = Net Income/Weighted average number of shares outstanding

Net income = Weighted average number of shares outstanding x Basic EPS

Net Income = $2.00 x 536,250

Net Income = $1,072,500

SOL.131

We can calculate the weighted average shares as follows;

Weighted Average number of shares outstanding = (Common shares  x 1.10) + (Shares sold x 9/12 x
1.10) + (Additional shares x 4/12 x 1.10)

                                                                               = (500,000 x 1.10) + (27,000 x 9/12 x 1.10) + (48,000 x 4/12 x

1.10)
                                                                               = 550,000 + 22,275 + 17,600

Weighted Average number of shares outstanding = 589,875

Basic EPS = $2.00

Net income = $2.00 x 589,875

                   = $1,179,750