Question

For the year ended December 31, 2020, Joey Co. reported Net Income of $1,600,000. At January 1, 2020 the company had 900,000 shares of common stock outstanding. Joey Co. also had $1,000,000 of 6% cumulative preferred stock. No preferred dividends were paid in 2020 and the preferred stock is non-convertible. The following changes in the number of shares occurred during 2020:

April 1: Sold 60,000 shares of common stock.

May 31: Declared and Distributed a 20% Stock Dividend

July 1: Issued 80,000 shares of common stock

1. Compute Joey Co’s Basic earnings per share for the year ended December 31, 2020.

2. Given the facts as presented above, Joey Co would have to report Diluted EPS at 12/31/2020. TRUE or FALSE [Circle One] (A) Briefly explain why you chose True or False

Answer 1

1.

Basic EPS for December 31 2020 = Net Income - Preferred Dividend / Weighted Average common shares

Net Income = $1600000

Weighted Average Common shares =

Dates	Shares outstanding	Portion of year outstanding	Weighted shares
1 Jan- 31 Mar	900000	3/12	225000
1 Apr- 31 May	840000	2/12	140000
31 May- 30 Jun	1008000	1/12	84000
1 Jul- 31 Dec	1088000	6/12	544000
		total =	993000

Therefore Basic EPS = 1600000/993000 = 1.61  

2. Diluted EPS is calculated to measure the quality of EPS when all the convertible securities are exercised. Since there are no convertible shares or securities basic eps would be enough. Therefore Joey Co will not have to report diluted EPS.