Amy Dyken, controller at Fitzgerald Pharmaceutical Industries, a public company,

Question

Amy Dyken, controller at Fitzgerald Pharmaceutical Industries, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Fitzgerald’s financial statements. Below is selected financial information for the fiscal year ended June 30, 2014. FITZGERALD PHARMACEUTICAL INDUSTRIES SELECTED BALANCE SHEET INFORMATION JUNE 30, 2014 Long-term debt Notes payable, 9% $1,055,000 8% convertible bonds payable 5,107,000 9% bonds payable 6,062,000 Total long-term debt $12,224,000 Shareholders’ equity Preferred stock, 5% cumulative, $50 par value, 108,300 shares authorized, 27,075 shares issued and outstanding $1,353,750 Common stock, $1 par, 10,011,000 shares authorized, 1,001,100 shares issued and outstanding 1,001,100 Additional paid-in capital 4,002,200 Retained earnings 6,007,300 Total shareholders’ equity $12,364,350 The following transactions have also occurred at Fitzgerald. 1. Options were granted on July 1, 2013, to purchase 206,500 shares at $16 per share. Although no options were exercised during fiscal year 2014, the average price per common share during fiscal year 2014 was $30 per share. 2. Each bond was issued at face value. The 8% convertible bonds will convert into common stock at 50 shares per $1,000 bond. The bonds are exercisable after 5 years and were issued in fiscal year 2013. 3. The preferred stock was issued in 2013. 4. There are no preferred dividends in arrears; however, preferred dividends were not declared in fiscal year 2014. 5. The 1,001,100 shares of common stock were outstanding for the entire 2014 fiscal year. 6. Net income for fiscal year 2014 was $1,574,000, and the average income tax rate is 45%.

Explanation / Answer

we are given following data

Working for option stock

Summarizing

Long term debt notes payable Amount Interest 9% Long term debt 1055000 94950 8% convertible bonds 5107000 408560 9 % bonds 6062000 545580 12224000 Share Holders Equity Number Outstanding Amount Preference dividend 5% cumulative Preferred stock 27075 1353750 67687.5 Common Stock 1001100 1001100

Working for option stock

Receipts from option at option price 3304000 = 206500 x 16 Number of shares that can be purchased using above receipt = Receipts / Average market price 110133 = 3304000 / 30 Excess of shares issued over purchased shares 96367 = 206500 - 110133 Coversion of bonds Reversal of interest on convertible bonds (net of taxes) 224708 = interest ( 1-t) , where t = tax rate = 408560 (1-0.45) Issue of common stock on bonds convertible 255350 (Value of convertible Bonds / $1000) x 50 shares ( 5107000 / 1000) x 50 shares

Summarizing

Net Income 1574000 Less Preference dividend ( calculated above) 67687.5 Earnings Available for common stock holders 1506312.5 Number of common stock shares outstanding 1001100 Basic Earnings per share 1.50 = ( Earnings availabe / Number of share outstanding Working for Diluted Earnings per share Adjusted Earnngs Aavailable 1731020.5 = Earnings available + reversal of interest on bonds = 1506312.5 + 224708 Adjusted Number of stocks outstanding 1352817 = Number of common stock outstanding + coversion stock + option stock = 1001100 + 255350 + 96367 Diluted Earnings per share 1.28 = Adjusted earnings / adjusted number of stock outstanding

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