Question

1. Lancaster Company had earnings net of tax but before extraordinary items of $500,000. They had an extraordinary loss net of tax of $100,000. Lancaster had a weighted average number of shares of 200,000 common shares. They also had 10,000 shares of convertible $100 par preferred stock, 6%, with one year’s dividend in arrears, convertible into 20,000 shares of common stock. Their tax rate is 40%.

Show in good format all earnings per share calculations necessary.

Answer 1

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Calculation for EPS: Net income before extraordinary items Less: Extraordinary loss (net of taxes) Less: Preferred stock dividend (WN 1) Net Income (A) Weighted average shares: 200,000 shares (B) Basic EPS (A/B) Diluted shares: 20,000 shares (C) Diluted EPS (WN 2) $500,000 ($100,000) ($60,000) $340,000 $1.7/Share $1.55/Share Working Notes: (1)Preferred stock dividend = 10,000 shares * $100/share x 6% Preferred stock dividend = $60,000 (If there are dividends in arrears, only the current year's cumulative preferred stock dividend is deducted while calculating EPS. Previous year's dividends have already been deducted in the prior year's eps computations.) $340000 (2) Diluted EPS = $1.55/Share 200000+20000 Formulas: Basic EPS = Net Income-Dividends on preferred stock Average outstanding shares Diluted EPS Net Income – Dividends on preferred stock (Average outstanding shares + Diluted shares)