Amy Chang of the controller\'s office of Thompson Corporation was given the assi
ID: 2459520 • Letter: A
Question
Amy Chang of the controller's office of Thompson Corporation was given the assignment determining the basic and diluted earnings per share values for the year ending December 31, 2015. Any has complied the information listed below. The after-tax net income for the year ended December 31, 2015. was $15,000,000. The income is 40%. The company is authorized to issue 10,000,000 shares of $10 par value common stock. As of December 31, 2014, 2,000,000 shares had been issued and were outstanding. A total of 1,000,000 shares of an authorized 1.200,000 shares of convertible preferred stock had been issued on August 1, 2014. The stock was issued at its par value of $25, and it has a staled dividend of $3 per share per year. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid semiannually on July 1 and January 1 to all stockholders of record on Jun2 29 and December 29 respectively The company issued a 10% convertible debenture bonds sold at 100 (total $100,000) on January 1, 2015 and convertible into 30,000 common shares. The interest is paid annually on December 31. The rate of conversion automatically adjusted for stock splits and stock dividends. The common stock options were granted and exercisable in 2014 to purchase 60,000 shares of common stock at the option price of $25 per share. The average market price of common stock is $30 per share in 2015. Assume the market price, option price and granted number of shares are to be automatically adjusted for stock dividend and split. The following specific activities took place during 2015. February 1: A 5% common stock was issued. The dividend had been declared on December 1, 2014, to all stockholders of record on December 29. 2014. April 1: A 2-for-l split of the common stock became effective on this date. August 1: A total of 300,000 shares of common stock were issued to acquire a building. October 1: 50% of the convertible debenture bonds were converted to common shares. November 1: A total of 24,000 shares of common stock were purchased on the open market at $9 per share. These shares were to be held as treasury stock and were still in the treasury as of December 31, 2015. Preferred stock cash dividends - Cash dividends to preferred stockholders were declared and paid as scheduled. Compute the basic earnings per share for the year ended December 31, 2015. Compute the diluted earnings per share for the year ended December 31, 2015.Explanation / Answer
As per problem company is authorized to issue 10,000,000 common stock of $10. Till December 31st 2,000,000 stocks were issued and was outstanding. On 1st February 2015, 5% common stock was issued. So 500,000 stock of $10 has been issued After this issue, number of common stock is 2,500,000 of $10 each. As no other information is available, it is assumed to have bere issued at face value.
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On August 1 2014, prefered stock of 1,000,000 was issued. The Face value was $25. Dividend payable was $3 per share. Dividend is payable after every six month on July 1 and January 1. It is payable on the basis of record of June 29 and December 29. It is convertible into 1:1 ratio in common stock. But the period is not mentioned. So it is assumed that in year 2015 it has not been converted. It is still existing as preferred stock.
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On April 1, 2 for 1 split of common stock has been made. Thus number of common stock has been doubled. It is 2,500,000x2=5,000,000 of $5 each. Total value will not change.
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On August 1 300,000 common stock was issued to acquire a building. Assumed the stocks are at after split off price of $5 each.
After this purchase, number of stock is 5,000,000+300,000=5,300,000 of $5 each.
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On Jauary 1 2015 10% Convertible BOND was issued. Quantity was $100,000. Rate was $100 per bond. So Number of bond issued is 1,000. It will be converted to 30,000 common stock. As the rate of convertion is automatically adjusted on split of stock, it should be 60,000 common stock now of $5 each. Out of this total issue, on October 1 2015, 50% convertion has become effective. So 30,000 common stock of $5 each is now added with the common stock. Now total common stock is 5,300,000+30,000=5,330,000 of $5 each.
Also $50,000 convertible bond of 10% is left on this date. Interest is payable on them.
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On November 1, 24,000 common stock was repurchased from the market at $9 each. So umber of stock has come down to 5,330,000-24,000=5,306,000 of $5 each.
So final position on 31st December is-
1. 5,306,000 numbers of common stock of $5 each.
2. 1,000,000 preferred stock of par value $25. Dividend payable per year is $3 each. It will be paid semi annually on July 1 and Jauary 1.
3. Also there is 10$ convertible bod valued $50,000.
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In 2015, after tax earning is $15,000,000. As it is after tax, it is clear that interest payable on covertible bond has been already adjusted. So this amount is available for stock holders only. First you have to pay dividend on preferred stock. It is $3 per unit on 1,000,000. So a total of $3,000,000 is payable to them as dividend. Thus $15,000,000-$3,000,000=$12,000,000 is availble for common stock holders. Base number of common stock available at the begining of the year was 2,000,000 of $10 each. After split this number is 4,000,000. Thus basic earning per share in 2015 is $12,000,000/4,000,000 =$3.0 per equity.
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After all such adjustments in year 2015, the number of common stock is 5,306,000 numbers of $5 each. So diluted earning per share is-
$12,000,000/5,306,000=$2.26 per unit of common stock.
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