Question

On December 31, 2020, Clarkson Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Clarkson purchased 24,000 shares of common stock on the open market as treasury stock paying $45 per share. Clarkson sold 6,000 of the treasury shares on September 30, 2021, for $47 per share. Net income for 2021 was $180,905. Also outstanding at December 31, 2020, were fully vested incentive stock options giving key executives the option to buy 50,000 common shares at $40. These stock options were exercised on November 1, 2021. The market price of the common shares averaged $50 during 2021. Required: Compute Clarkson's basic and diluted earnings per share for 2021. (Round your answers to 2 decimal places.) Basic EPS Diluted EPS

Answer 1

Answer:Basic Earnings per share =0.93

Diluted Earnings per share = 0.83

Explanation:

basic earnings per share = (net income - preferred dividends) / weighted average stocks

Net income                                                                        $180,905

Less Preference Dividend (30,000× $50×7%)                  ($105,000)

Attributable to Holders of Common Stock       $75,905

Also, Weighted Average Number of Common Stocks is given as

Common Stocks 1 January                                         100,000

 (outstanding sharesx 12/12)

add common Stocks September 30, 2021                 1,500

(sold 6000 treasury stocks x 3/12)

less Common Stocks February 28, 2021                   (20,000)

(purchased -24,000 treasury stocks x 10/12 )

Weighted Average Number of Common Stocks         81,500    

 

Basic Earnings per share =  $75,905/ 81,500    =0.93

B)

Diluted earnings per share = (net income - preferred dividends) / (weighted average stocks + diluted stocks) =

Net income                                                                          $180,905

Less Preference Dividend(30,000× $50×7%)                    (($105,000)

Earnings To Holders of Common Stock                              $75,905

Also, Adjusted Weighted Average Number of Common Stocks  

Weighted Average Number of Common Stocks                  81,500  

Add                                                  

diluted stocks = [($50 - $40) / $50] x 50,000 =                   10,000

Adjusted Weighted Average Number of Common Stocks     91,500  

Diluted Earnings per share = $75,905 /91,500 =0.83