Question

On June 1, 2018, Crane Company and Cheyenne Company merged to form Ayayai Inc. A total of 876,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis. On April 1, 2020, the company issued an additional 637,000 shares of stock for cash. All 1,513,000 shares were outstanding on December 31, 2020. Ayayai Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 44 shares of common at any interest date. None of the bonds have been converted to date. Ayayai Inc. is preparing its annual report for the fiscal year ending December 31, 2020. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,491,000. (The tax rate is 20%.)
Determine the following for 2020.
(a) The number of shares to be used for calculating:
(1) Basic earnings per share
(2) Diluted earnings per share
(b) The earnings figures to be used for calculating:
(1) Basic earnings per share
(2) Diluted earnings per share

Answer 1

Answer:

A-1 Basic earnings per share=$1,353,750

A-2 Diluted earnings per share = 2,136,650

B-1 Basic earnings per share $1,491,000

B-2 Diluted earnings per share= $1,510,200

Explanation:

(a)Calculation of number of shares to be used for calculating

(1) Basic earnings per share = (876,000*3/12) + (1,513,000*9/12)

Basic earnings per share=$219,000+$1,134,750

Basic earnings per share=$1,353,750

Therefore Basic earnings per share is $1,353,750

(2) Diluted earnings per share = (876 000*3/12) (1,513,000*3/12) + (1,513,000 + ($600000/$1000 * 44)

Diluted earnings per share =219,000+378,250+(1,513,000+26,400)

Diluted earnings per share =219,000+378,250+1,539,400

Diluted earnings per share = 2,136,650

Therefore Diluted earnings per share is 2,136,650

(b) Calculation of earnings figures to be used for

(1) Calculation to determine the Basic earnings per share

Using this formula

Basic earnings per share = Net income after tax

Let plug in the formula

Basic earnings per share= $1,491,000

Therefore Basic earnings per share is $1,491,000

(2) Calculation to determine Diluted earnings per share

First step is to calculate the interest expense after tax adjustment

Interest Savings ($600000 * 8% * ½) $24000

Additional Tax ($24000 * 20%) $4800

Interest expense after tax adjustment $19,200

Now let calculate the Diluted earnings per share

Using this formula

Diluted earnings per share = Net income + interest expense after tax adjustment

Let plug in the formula

Diluted earnings per share= $1,491,000 +$19,200

Diluted earnings per share= $1,510,200

Therefore Diluted earnings per share is $1,510,200