P16.

The basic earnings per share and diluted earnings per share calculations for Fitzgerald
Pharmaceutical Industries for the fiscal year ending June 30, 2020 are presented below.

(a) Basic earnings per share =( Net income – Preferred dividends) /Weighted-average
number of shares outstanding

= ($1,500,000 – $75,000)/ 1,000,000

= $1,425,000 /1,000,000 = $1.425 or $1.43 per share

*Preferred dividend = .06 X $1,250,000 = $75,000

(b) Diluted earnings per share = (Net income – Preferred dividends + Interest (net of tax))/
Weighted-average number of shares outstanding + Potentially dilutive common shares

= ($1,500,000 – $75,000 + $320,000)/( 1,000,000 + 250,000 + 50,000)

= $1,745,000/ 1,300,000

= $1.3423 or $1.34 per share

** For 8% bonds, use the "if converted" technique.

Interest expense adjustment (net of tax)

($5,000,000 X .08 X .8) .............................................. $320,000

*** Shares assumed to be issued if converted

$5,000,000 ÷ $1,000/bond X 50 shares ........................ 250,000

****To calculate the number of additional shares outstanding, use the treasury stock
approach.

Proceeds from option exercise

(200,000 X $15) ........................................................... $3,000,000

Shares issued upon exercise of options .................... 200,000

Shares purchasable with proceeds

(Proceeds ÷ Average market price)

($3,000,000 ÷ $20) ..................................................... (150,000)

Incremental shares outstanding .......................... 50,000