Ringmeup Inc had net income of $126,300 for the year ended December 31, 2013. At

Question

Ringmeup Inc had net income of $126,300 for the year ended December 31, 2013. At the beginning of the year, 44,000 shares of common stock were outstanding. On May 1, an additional 13,000 shares were issued. On December 1, the company purchased 4,500 shares of its own common stock and held them as treasury stock until the end of the year. No other changes in common shares outstanding occurred during the year. During the year, Ringmeup, Inc., paid the annual dividend on the 7,000 shares of 4.75%, $100 par value preferred stock that were outstanding the entire year. Calculate basic earnings per share of common stock for the year ended December 31, 2013

Explanation / Answer

Solution

Basic Earnings Per Share = Earnings attributable to Common Stock Holders / Weighted Average number of shares outstanding at the end of year

Earnings attributable to common stock holders = Net Income – Preferred Stock Dividend paid in the year

= $126,300 – ($100*4.75%*7,000 Shares)

= $126,300 - $33,250

= $93,050

Weighted Average number of shares outstanding at the end of year = (44,000 x 11/12) + [(44,000 – 4,500) x 1/12] + (13,000 x 8/12)

= 40,333.33 + 3,291.67 + 8,666.67

= 52,291.67

Basic Earnings Per Share = $93,050 / 52,291.67 = $1.78

Note – the treasury stock shares are excluded from EPS calculations from the date of acquisition.

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