Question

On June 1, 2018, Stellar Company and Pearl Company merged to form Martinez Inc. A total of 802,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis. On April 1, 2020, the company issued an additional 625,000 shares of stock for cash. All 1,427,000 shares were outstanding on December 31, 2020. Martinez Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2020. Each $1,000 bond converts to 38 shares of common at any interest date. None of the bonds have been converted to date. Martinez Inc. is preparing its annual report for the fiscal year ending December 31, 2020. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,507,000. (The tax rate is 20%.) Determine the following for 2020. (a) The number of shares to be used for calculating: (Round answers to 0 decimal places, e.g. $2,500.) (1) Basic earnings per share 1204000 shares (2) Diluted earnings per share 1216000 shares (b) The earnings figures to be used for calculating: (Round answers to O decimal places, e.g. $2,500.) (1) Basic earnings per share $ 1577000 (2) Diluted earnings per share $ 1596200

Answer 1

To calculate the number of shares to be used for calculating basic and diluted earnings per share, we need to take into account the additional shares issued and the convertible bonds:

Total shares outstanding on December 31, 2020 = 1,427,000

Additional shares issued on April 1, 2020 = 625,000

Total number of shares for basic earnings per share = 1,427,000 + 625,000 = 2,052,000

To calculate diluted earnings per share, we need to take into account the potential conversion of the bonds into common shares. Each $1,000 bond converts to 38 shares of common, so the potential number of shares from the bonds is:

Number of convertible bonds = $600,000 / $1,000 = 600

Potential number of shares from bond conversion = 600 × 38 = 22,800

Total number of shares for diluted earnings per share = 1,427,000 + 625,000 + 22,800 = 2,051,800

Therefore, the answers are:

(a) (1) Basic earnings per share = 1,507,000 / 2,052,000 = $0.73 per share (rounded to 0 decimal places) (2) Diluted earnings per share = 1,507,000 / 2,051,800 = $0.73 per share (rounded to 0 decimal places)

(b) (1) Basic earnings per share = $1,507,000 / 2,052,000 = $0.73 per share (rounded to 0 decimal places) (2) Diluted earnings per share = $1,507,000 / 2,051,800 = $0.78 per share (rounded to 0 decimal places)

Step-by-step explanation: