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# Computation of Basic and Diluted EPS

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Computation of Basic and Diluted EPS - Edmund Halvor of the controller's office of East Aurora Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2007. Halvor has compiled the information listed below.

1. The company is authorized to issue 8,000,000 shares of \$10 par value common stock. As of
December 31, 2006, 3,000,000 shares had been issued and were outstanding.

2. The per share market prices of the common stock on selected dates were as follows.
Price per Share
July 1, 2006 \$20.00
January 1, 2007 21.00
April 1, 2007 25.00
July 1, 2007 11.00
August 1, 2007 10.50
November 1, 2007 9.00
December 31, 2007 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2006. The stock was issued at its par value of \$25, and it has a cumulative dividend of \$3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30.

4. East Aurora Corporation is subject to a 40% income tax rate.

5. The after-tax net income for the year ended December 31, 2007 was \$13,550,000.

The following specific activities took place during 2007.
1. January 1-A 5% common stock dividend was issued. The dividend had been declared on
December 1, 2006, to all stockholders of record on December 29, 2006.
2. April 1-A total of 200,000 shares of the \$3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2007.
3. July 1-A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1.
4. August 1-A total of 300,000 shares of common stock were issued to acquire a factory building.
5. November 1-A total of 24,000 shares of common stock were purchased on the open market at \$9 per share. These shares were to be held as treasury stock and were still in the treasury as of
December 31, 2007.
6. Common stock cash dividends-Cash dividends to common stockholders were declared and paid as follows.
April 15 -\$0.30 per share
October 15 -\$0.20 per share
7. Preferred stock cash dividends-Cash dividends to preferred stockholders were declared and paid as scheduled.

Instructions
(a) Determine the number of shares used to compute basic earnings per share for the year ended
December 31, 2007.
(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2007.
(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2007.

#### Solution Summary

Computation of Basic and Diluted EPS - Edmund Halvor of the controller's office of East Aurora Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending December 31, 2007. Halvor has compiled the information listed below.

1. The company is authorized to issue 8,000,000 shares of \$10 par value common stock. As of
December 31, 2006, 3,000,000 shares had been issued and were outstanding.

2. The per share market prices of the common stock on selected dates were as follows.
Price per Share
July 1, 2006 \$20.00
January 1, 2007 21.00
April 1, 2007 25.00
July 1, 2007 11.00
August 1, 2007 10.50
November 1, 2007 9.00
December 31, 2007 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2006. The stock was issued at its par value of \$25, and it has a cumulative dividend of \$3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30.

4. East Aurora Corporation is subject to a 40% income tax rate.

5. The after-tax net income for the year ended December 31, 2007 was \$13,550,000.

The following specific activities took place during 2007.
1. January 1-A 5% common stock dividend was issued. The dividend had been declared on
December 1, 2006, to all stockholders of record on December 29, 2006.
2. April 1-A total of 200,000 shares of the \$3 convertible preferred stock was converted into common stock. The company issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2007.
3. July 1-A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1.
4. August 1-A total of 300,000 shares of common stock were issued to acquire a factory building.
5. November 1-A total of 24,000 shares of common stock were purchased on the open market at \$9 per share. These shares were to be held as treasury stock and were still in the treasury as of
December 31, 2007.
6. Common stock cash dividends-Cash dividends to common stockholders were declared and paid as follows.
April 15 -\$0.30 per share
October 15 -\$0.20 per share
7. Preferred stock cash dividends-Cash dividends to preferred stockholders were declared and paid as scheduled.

Instructions
(a) Determine the number of shares used to compute basic earnings per share for the year ended
December 31, 2007.
(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2007.
(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year ended December 31, 2007.

\$2.19