Question

Charles Austin of the controller's office of Pharoah Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2018. Austin has compiled the information listed below. 1. The company is authorized to issue 7.720,000 shares of $10 par value common stock. As of December 31, 2017, 1,930,000 shares had been issued and were outstanding. 2. The per share market prices of the common stock on selected dates were as follows. July 1, 2017 January 1, 2018 April 1, 2018 July 1, 2018 August 1, 2018 November 1, 2018 December 31, 2018 Price per Share $20.00 21.00 25.00 11.00 10.50 9.00 10.00 3. A total of 766,800 shares of an authorized 1,116,000 shares of convertible preferred stock had been issued on Nily 1, 2017. The stock was issued at its par value of $25.00, 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 4. Pharoah Corporation is subject to a 40% Income tax rate. 5. The after-tax net income for the year ended December 31, 2018, was $11,220,000. The following specific activities took place during 2018, 1. January 1-A5% common stock dividend was issued. The dividend had been declared on December 1, 2017, to all stockholders of record on December 29, 2017. 2. April 1-A total of 415 200 shares of the $3 convertible preferred stock was converted into con non stock. The company issued new common steck and retined the preferred stock. This was the only conversion of the preferred stock during 2018

Answer 1

Solution:

Event	Dates Outstanding	Shares Outstanding	Restatement	Parts of year	Weighted shares
Beginning Balance , including 5% stock dividend	Jan 1 - Apr 1	2,026,500	2.0	3/12	1,013,250
Conversion of preferred stock ( 415,200 x 1.05)	Apr. 1-July 1	435,960+2,026,500 = 2,462,460	2.0	3/12	1,231,230
Stock split (2,462,460 x 2)	July 1-Aug. 1	4,924,920		1/12	410,410
Issued shares for building	Aug. 1-Nov. 1	5,227,320		3/12	1,306,830
Purchase of Treasury stock	Nov. 1-Dec. 31	5,204,520		2/12	867,420

Total number of common shares to compute basic earnings per share 4,829,140

b) The number of shares used to compute diluted earnings per share is ,as shown below.

Number of shares to compute basic earnings per share	4,829,140
Convertible preferred stock still outstanding (766,800 - 415,200) x 1.05 x 2	738,360
Convertible preferred stock converted (415,200 X 2 X 1.05 X 3/12)	217,980
Number of shares to compute diluted earnings per share	5,785,480

c) The adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31,2018, is $12,586,200 as computed below.

After-tax net income $11,220,000

Add: Preferred stock dividends

March 31 (766,800 X$.75) $ 575,100

June 30, September 30,

and December 31 (766,800 - 415,200) X $.75 X 3) 791,100

1,366,200

Adjusted net income $12,586,200