Question

On June 1, 2018, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 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 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2020.
Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date.
Lancaster 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 $1,540,000. (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 shares.
(b) The earnings figures to be used for calculating:
(1) Basic earnings per share.
(2) Diluted earnings per share.

Answer 1

Answer:

Lancaster Inc.

a) The number of shares to be used for calculating:

(1) Basic earnings per share  = 1,200,000 (800,000 + 400,000)

(2) Diluted earnings per share shares = 1,224,000 (1,200,000 + 24,000)

(b) The earnings figures to be used for calculating:

(1) Basic earnings per share = $1,540,000

(2) Diluted earnings per share = $1,540,000

Explanation:

a) Data and Calculations:

June 1, 2018, Number of shares issued = 800,000

April 1, 2020, additional shares issued =  400,000

July 1, 2020, 8% convertible bonds = $600,000

Conversion ratio = $1,000 bonds to 40 shares

= $600,000/1,000 * 40 = 24,000

After-tax net income = $1,540,000

Tax rate = 20%

Before tax income = $1,925,000 ($1,540,000/(1 - 0.2))

Before Bonds interest income = $2,092,391 ($1,925,000/(1 - 0.08))