***Question 1:
(EPS: Simple Capital Structure)
On January 1, 2010, Bailey Industries had stock outstanding as follows.
6% Cumulative preferred stock $100 par value
issued and outstanding 10,000 shares
Common stock, $10 par value, issued and
outstanding 200,000 shares
$1,000,000
2,000,000
To acquire the net assets of three smaller companies, Bailey authorized the issuance of an additional 170,000 common shares. The
acquisitions took place as follows.
Date of Acquisition
Company A April 1, 2010
Company B July 1, 2010
Company C October 1, 2010
Shares Issued
60,000
80,000
30,000
On May 14, 2010, Bailey realized a $90,000 (before taxes) insurance gain on the expropriation of investments originally
purchased in 2000.
On December 31, 2010, Bailey recorded net income of $300,000 before tax and exclusive of the gain.
Assuming a 40% tax rate, compute the earnings per share data that should appear on the financial statements of Bailey Industries
as of December 31, 2010. Assume that the expropriation is extraordinary. (Round answer to 2 decimal places, e.g. 0.25.)
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***QUESTION 2
(Computation of Basic and Diluted EPS)
Charles Austin of the controller's office of Thompson Corporation was given the assignment of determining the basic and
diluted earnings per share values for the year ending December 31, 2011. Austin has compiled the information listed below.
1.
2.
The company is authorized to issue 8,000,000 shares of $10 par value common stock. As of December 31, 2010,
2,000,000 shares had been issued and were outstanding.
The per share market prices of the common stock on selected dates were as follows.
July 1, 2010
January 1, 2011
April 1, 2011
July 1, 2011
August 1, 2011
November 1, 2011
December 31, 2011
3.
4.
5.
Price per Share
$20.00
21.00
25.00
11.00
10.50
9.00
10.00
A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July
1, 2010. The stock was issued at its par value of $25, and it has a cumulative dividend of $3 per share. 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 quarterly
on September 30, December 31, March 31, and June 30.
Thompson Corporation is subject to a 40% income tax rate.
The after-tax net income for the year ended December 31, 2011 was $11,550,000.
The following specific activities took place during 2011.
1.
2.
3.
4.
5.
6.
7.
January 1–A 5% common stock dividend was issued. The dividend had been declared on December 1, 2010, to all
stockholders of record on December 29, 2010.
April 1–A total of 400,000 shares of the $3 convertible preferred stock was converted into common stock. The
company issued new common stock and retired the preferred stock. This was the only conversion of the preferred
stock during 2011.
July 1–A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the
split on June 1.
August 1–A total of 300,000 shares of common stock were issued to acquire a factory building.
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, 2011.
Common stock cash dividends–Cash dividends to common stockholders were declared and paid as follows.
April 15–$0.30 per share
October 15–$0.20 per share
Preferred stock cash dividends–Cash dividends to preferred stockholders were declared and paid as scheduled.
Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2011.
shares
Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2011.
shares
Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year
ended December 31, 2011.
$