The information below pertains to Barkley Company for 2015. There were no change

Question

The information below pertains to Barkley Company for 2015.

There were no changes during 2015 in the number of common shares, preferred shares, or convertible bonds outstanding. There is no treasury stock. The company also has common stock options (granted in a prior year) to purchase 75,400 shares of common stock at $20 per share.

(a) Compute basic earnings per share for 2015. Round answer to 2 decimal places

(b) Compute diluted earnings per share for 2015. Round answer to 2 decimal places

Net income for the year $1,217,000 9% convertible bonds issued at par ($1,000 per bond); each bond is convertible into 40 shares of common stock 2,669,000 6% convertible, cumulative preferred stock, $100 par value; each share is convertible into 3 shares of common stock 4,078,000 Common stock, $10 par value 6,080,000 Tax rate for 2015 40% Average market price of common stock $30 per share

Explanation / Answer

Answer for question a):

Net income =$1,217,000 - dividends to be paid to preference

=$1217000 -$4,078,000*6%

=$1217000 - $244,680

=$972,320--------(A)

Number of common shares =608,000 ----(B)

Basic earnings per share=A/B =$1.60

Answer for question b):

Net income to be considered for diluted earnings per share:

Diluted EPS = B/A =$1.58

Stock options shares are arrived as follows:

As the value of the shares at which the stock option is exercisable is more than the market price, then the stock options are calculated as follows:

Number of shares =75,400 *20

=$1,508,000.

Market price of the share =$30.

Number of shares that can be acquired =$1,508,000/$30

=50,266.67.

Number of shares to be considered for diluted earning per share =75,400 -50,267

=25,133.

Particulars Conversion Number of shares Number of common stock 6080000/10 608000 9% convertible bonds (2669000/1000)*40 106760 6% Convertible preferred stock (4078000/100)*3 122340 Stock options 75400- [(75400*20)/30] 25133 Total shares to be considered for Diluted EPS(A) 862233

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