Question

Problem 2 L Company had 500,000 shares of common stock outstanding on January 1, 2021. During 2021, it had the following transactions that affected the common stock account: • February 1st - issued 90,000 shares March 1st – issued a 10% stock dividend • June 1st – issued a 2-for-1 stock split Required: a. Determine the weighted average number of shares outstanding as of December 31, 2021 (round to whole numbers). b. Assume that L Company had net income of $2,500,000 during 2021. In addition, it had 100,000 shares of 7%, $100 par nonconvertible, cumulative preferred stock outstanding for the entire year. Compute earnings per share for 2021, using the weighted average shares determined in part (a). C. Assume the same facts in part (b), except that there was a loss from discontinued operations of $260,000 (net of tax). Compute earnings per share for 2021.

Answer 1

a.

	Shares Outstanding	Portion of the Year	Weighted Shares
Jan. 1	500000	1/12	41667
Feb. 1	90000	1/12	7500
Mar. 1	59000	3/12	14750
Jun. 1	649000	7/12	378583
Weighted Average number of common shares outstanding			442500

Mar. 1: 10% x (500000 + 90000) = 10% x 590000 = 59000

Jun. 1: 590000 + 59000 = 649000

b. Earnings per share = (Net income - Preferred dividends)/Weighted average number of shares outstanding

Preferred dividend = 7% x $100 x 100000 = $700000

Earnings per share = ($2500000 - $700000)/442500 = $1800000/442500 = $4.07

Kindly round off the earnings per share as required since specific instructions have been provided regarding rounding off the same.

c.

Income from continuing operations	2500000
Loss from discontinued operations	-260000
Net income	2240000
Less: Preferred dividends	700000
	1540000
Weighted average shares outstanding	442500
Earnings per share $	3.48

Note: The instructions for part c. are not very clear. The net income of $2500000 is considered as from continuing operations since loss from discontinued operations is separately mentioned.

For any clarifications kindly write under comments.