Earnings per Share
Response to the following problem:
The controller of Lafayette Corporation has requested assistance in determining income, basic earnings per share, and diluted earnings per share for presentation in the company's income statement for the year ended September 30, 2011. As currently calculated, the company's net income is $540,000 for fiscal year 2010-2011.
Your working papers disclose the following opening balances and transactions in the company's capital stock accounts during the year:
1. Common stock (at October 1, 2010, stated value $10, authorized 300,000 shares; effective December 1, 2010, stated value $5, authorized 600,000 shares):
Balance, October 1, 2010-issued and outstanding 60,000 shares
December 1, 2010-60,000 shares issued in a two-for-one stock split
December 1, 2010-280,000 shares (stated value $5) issued at $39 per share
2. Treasury stock-common:
March 3, 2011-purchased 40,000 shares at $38 per share
April 1, 2011-sold 40,000 shares at $40 per share
3. Noncompensatory stock purchase warrants, Series A (initially, each warrant was exchangeable with $60 for one common share; effective December 1, 2010, each warrant became exchangeable for two common shares at $30 per share):
October 1, 2010-25,000 warrants issued at $6 each
4. Noncompensatory stock purchase warrants, Series B (each warrant is exchangeable with $40 for one common share):
April 1, 2011-20,000 warrants authorized and issued at $10 each.
5. First mortgage bonds, 51/2%, due 2023 (nonconvertible; priced to yield 5% when issued):
Balance October 1, 2010-authorized, issued, and outstanding-the face value of $1,400,000
6. Convertible debentures, 7%, due 2030 (initially, each $1,000 bond was convertible at any time until maturity into 20 common shares; effective December 1, 2010, the conversion rate became 40 shares for each bond):
October 1, 2010-authorized and issued at their face value (no premium or discount) of $2,400,000.
The following table shows the average market prices for the company's securities during 2010-2011:
Average for Year Ended September 30, 2011
Common stock 37 ½*
First mortgage bonds 87
Convertible debentures 115
Series A Warrants 15
Series B Warrants 9 1/2
*Adjusted for stock spilt
Required
Prepare a schedule computing:
1. The basic earnings per share.
2. The diluted earnings per share that should be presented in the Company's income statement for the year ended September 30, 2011.
A supporting schedule computing the numbers of shares to be used in these computations should also be prepared. Assume an income tax rate of 30%.