Earnings Per Share

A section of the balance sheet of Delta Corporation is provided below.

Delta Corporation

Selected Balance Sheet Information

At December 31, 2018

Long-Term Debt:

Notes Payable, 10%$2,000,000

12% Convertible Bonds Payable6,000,000

Total Long-Term Debt$8,000,000

Shareholders’ Equity:

$5 cumulative dividend, convertible preferred shares, no par

value; 200,000 shares authorized, 120,000 shares issued

and outstanding$4,500,000

Common Shares, no par value; 5,200,000 shares authorized,

1,500,000 shares issued and outstanding1,500,000

Contributed Surplus3,400,000

Retained Earnings 6,500,000

Total Shareholders’ Equity $15,900,000

Notes and Assumptions

December 31, 2018

• Options were granted/written in December 2016 to purchase 60,000 common shares at $25 per share.The average market price of Delta’s common shares during 2018 was $30 per common share.The options expire in 2020 and no options were exercised during 2018.
• The 12% bonds were issued in 2017 at face value.Each convertible bond is convertible into 50 common shares (each bond has a face value of $1,000).
• The $5 cumulative, convertible preferred shares were issued at the beginning of 2016.Each preferred share is convertible into 3 common shares.
• The average income tax rate is 40%.
• The 1,500,000 common shares were issued at $1 per share and were outstanding during the entire year.
• Preferred dividends were not declared in 2018.
• Net income was $4,200,000 in 2018.
• No bonds or preferred shares were converted during 2018.

Required:(Show all calculations)

• Calculate basic earnings per share for Delta for 2018.
• Calculate diluted earnings per share for Delta for 2018 by following the proper steps.
• Show the presentation of earnings per share for Delta for 2018.

Problem 2 (11 Marks)

Each of the following are considered independent situations.

• On January 1, 2019, Dalton Corporation had 840,000 common shares outstanding. On April 1, the corporation issued 160,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2 for 1 stock split. On November 1, the corporation purchased on the market 400,000 of its own outstanding shares and retired them.
• Jade Corporation has 200,000 common shares outstanding throughout 2019. In addition, the corporation has 6,000, 20-year, 10% bonds issued at par in 2016. Each $1,000 bond is convertible into twenty-five (25) common shares after 9/23/20. During the year 2019, the corporation earned $420,000 after deducting all expenses. The tax rate was 40%.
• Boston Company had 240,000 common shares outstanding during the year 2019. In addition, at December 31, 2019, 60,000 shares were issuable upon exercise of executive stock options, which require a $50 cash payment upon exercise (options granted in 2016). The average market price during 2019 was $60.

Instructions (4 Marks)

Calculate the weighted average number of shares to be used in calculating earnings per share for 2019

Instructions (4 Marks)

Calculate the proper earnings per share for 2019.

Instructions (3 Marks)

Calculate the number of shares to be used in determining diluted earnings per share for 2019.

Problem 3 (9 Marks)

Harris Kelly’s is in existence for the past fifteen years.However, during recent years, its common shares outstanding changed as below.Harris Kelly’s accounting year ends on December 31st.

2018 20172016

Shares outstanding, January 1st 300,000240,000200,000

Shares sold, April 1, 201640,000

25% stock dividend, July 1st 201760,000

2-for-1 stock split, July 1st 2018 300,000

Shares sold, October 1st 2018100,000

Shares outstanding, December 31st700,000300,000240,000

Net Income$ 750,000660,000 598,000

Required:

• Determine the weighted average number of shares outstanding for each of the years above. (3 Marks)
• Assuming there were no preferred shares outstanding, compute EPS for each year based on the computation of years in part 1. (3 Marks)
• Assume instead that Harris Kelly’s Corporation has 800,000 common shares outstanding throughout 2018. In addition, the corporation has 10,000, 20-year, 7% bonds issued at par in 2016. Each $1,000 bond is convertible into twenty (20) common shares after 9/23/19. During the year 2018, the corporation earned $1,200,000 after deducting all expenses. The tax rate was 30%.Calculate the basic and fully diluted earnings per share for 2018. (3 Marks)