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On June 1, 2015, Headland Company and Sage Company merged to form Pronghorn Inc. A total of 761,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2020, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2020. Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date. Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2020. The annual report will show earnings per share figures based upon a reported after-tax net income of (The tax rate is 20%.)

Determine the following for 2020:

a. The number of shares to be used for calculating:________
b. The earnings figures to be used for calculating:_________

Respuesta :

Answer:

a. 1. Basic Earning Per Share = 1,100,000

2. Diluted Earning Per Share = 1,112,000

b. 1. Basic Earning Per Share = $1,540,000

2. Diluted Earning Per Share = $1,559,200

Explanation:

1. The computation of the number of shares to be used for calculating is shown below:-

For Basic Earning Per Share

Date                         Shares        Weight          Weighted Shares

Jan 1 2020

to April 1, 2020        761,000    3 ÷ 12              190,250

Apr 1, 2020 to

Dec 31, 2020           1,200,000      9 ÷ 12            900,000

Total                                                                   1,090,250

For Diluted Earning Per Share

Dates                         Shares        Weight          Weighted Shares

Jan 1, 2020 to

April 1, 2020            761,000        3 ÷ 12             190,250

Apr 1, 2020 to

July 1, 2020             1,200,000        3 ÷ 12           300,000

July 1, 2020 to

Dec 31, 2020          1,224,000         6 ÷ 12          612,000

Total                                                                   1,112,000

Convertible bond into shares

= $600000 ÷ $1,000 × 40 shares

= 24,000

b. The computation of earnings figures to be used for calculating is shown below:-

Basic Earning Per Share = Net Income = $1,540,000

Diluted Earning Per Share

= Net Income + Interest Saving - Additional Tax

where,

Interest Saving = $600,000 × 8% × 1 ÷ 2 years

= $24,000

Additional Tax = $24,000 × 20%

= $4,800

Adjusted Net Income = $1,540,000 + $24,000 - $4,800

= $1,559,200

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