Question

Purple Cab Company had 70,000 shares of common stock outstanding on January 1, 2021. On April 1, 2021, the company issued 40,000 shares of common stock. The company had outstanding fully vested incentive stock options for 7,000 shares exercisable at $12 that had not been exercised by its executives. The average market price of common stock was $14. The company reported net income in the amount of $289,915 for 2021. What is the basic earnings per share (rounded)

Answer 1

Answer:

Purple Cab Company

The basic earnings per share is:

= $2.64 per share.

Explanation:

a) Data and Calculations:

January 1, 2021, Outstanding common stock shares = 70,000

April 1, 2021, Issue of new common stock shares = 40,000

December, 31, 2021, Outstanding common stock shares = 110,000

Outstanding fully vested incentive stock options = 7,000

Exercise price of options = $12

Common stock market price = $14

Reported net income = $289,915

The basic earnings per share = $ (Net income/Outstanding common stock)

= $289,915/110,000

= $2.64 per share

b) The basic earnings per share does not include the fully vested incentive stock options.  It is only when calculating the diluted earnings per share that the stock options will be included.