Question

On December 31, 2020, Berclair Inc. had 460 million shares of common stock and 3 million shares of 9%, $100 par value cumulative preferred stock issued and outstanding. On March 1, 2021, Berclair purchased 24 million shares of its common stock as treasury stock. Berclair issued a 5% common stock dividend on July 1, 2021. Four million treasury shares were sold on October 1. Net income for the year ended December 31, 2021, was $700 million. The income tax rate is 25%.

Also outstanding at December 31 were incentive stock options granted to key executives on September 13, 2016. The options are exercisable as of September 13, 2020, for 30 million common shares at an exercise price of $56 per share. During 2021, the market price of the common shares averaged $70 per share.

In 2017, $50.0 million of 8% bonds, convertible into 6 million common shares, were issued at face value.

Required:
Compute Berciair's basic and diluted earnings per share for the year ended December 31, 2021.

Answer 1

Answer:

Basic earnings per share = $1.46

Diluted earnings per share  = $1.40

Explanation:

Basic earnings per share = Earnings Attributable to Holders of Common Stock / Weighted Average Number of Common Stockholders

Earnings Attributable to Holders of Common Stock Calculation :

Net income for the year ended December 31                 $700,000,000

Less Preference dividend ( 3,000,000 × 9%×$100×5%)     ($1,350,000)

Earnings Attributable to Holders of Common Stock       $698,650,000

Weighted Average Number of Common Stockholders Calculation :

Common Shares 1 January 2021                                       460 million

Purchased  On March 1, 2021, (10/12×24,000,000)           20  million

Weighted Average Number of Common Stockholders   480 million

Basic earnings per share = $698,650,000/ 480,000,000

                                           = $1.46

Diluted earnings per share = Adjusted Earnings Attributable to Holders of Common Stock /Adjusted  Weighted Average Number of Common Stockholders

Adjusted Earnings Attributable to Holders of Common Stock Calculation :

Net income for the year ended December 31                 $700,000,000

Less Preference dividend ( 3,000,000 × 9%×$100×5%)     ($1,350,000)

Earnings Attributable to Holders of Common Stock       $698,650,000

Adjusted Weighted Average Number of Common Stockholders Calculation

Common Shares 1 January 2021                                       460 million

Purchased  On March 1, 2021, (10/12×24,000,000)           20  million

Weighted Average Number of Common Stockholders   480 million

Diluted earnings per share = $698,650,000/ 500,000,000

                                               = $1.40