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    Compute Basic EPS and Diluted EPS for Bare Industry

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    Please show how you get all calculations.

    William Crane, controller at Bare Industry, a public company, is currently preparing the calculation for basic and diluted earnings per share and the related disclosure for Bare's external financial statements. Below is selected financial information for the fiscal year ended

    June 30, 2011.

    Bare Industry
    Selected Statement of Financial Position
    June 30, 2011

    Long- term debt Notes payable, 10% $1,000,000
    7% convertible bonds payable 5,000,000
    10% bonds payable 6,000,000
    Total long- term debt $12,000,000

    Shareholders equity
    Preferred stock, 8.5% cumulative, $ 50 par value,
    100,000 shares authorized, 25,000 shares issued
    and outstanding $1,250,000
    Common stock, $ 1 par, 10,000,000 shares authorized,
    1,000,000 shares issued and outstanding 1,000,000
    Additional paid- in capital 4,000,000
    Retained earnings 6,000,000
    Total shareholders equity $12,250,000

    The following transactions have also occurred at Bare.

    1. Options were granted in 2009 to purchase 100,000 shares at $15 per share.
    Although no options were exercised during 2011, the average price per common
    share during fiscal year 2011 was $20 per share.

    2. Each bond was issued at face value. The 7% convertible debenture will
    convert into common stock at 50 shares per $1,000 bond.
    It is exercisable after 5 years and was issued in 2010.

    3. The 8.5% preferred stock was issued in 2009.

    4. There are no preferred dividends in arrears; however, preferred dividends
    were not declared in fiscal year 2011.

    5. The 1,000,000 shares of common stock were outstanding for the entire
    2011 fiscal year.

    6. Net income for fiscal year 2011 was $1,500,000 and the average income
    tax rate is 40%

    Instructions: For the fiscal year ended June 30, 2011, calculate the following for
    Bare Industry.

    ( a) Basic earnings per share.

    ( b) Diluted earnings per share.

    Instructions: For the fiscal year ended June 30, 2011, calculate the following for
    Bare Industry.

    Net Income - Preferred Dividends
    ( a) Basic earnings per share = Average Common Shares Outstanding

    Formula
    Basic earnings per share = Amount

    Basic earnings per share = Formula

    Net Income - (1) Preferred Dividends + (2) Interest [net of tax]
    ( b) Diluted EPS = Ave. Common Shares Outstanding + (3) Potentially Dilutive Shares

    Notes: (1) Preferred Dividends = Rate x (Shares Outstanding x Par Value)

    Preferred Dividends = Formula

    (2) Interest = (interest rate x covertible bonds) x (1 - tax rate)

    Interest = Formula

    (3) Potentially Dilutive Shares include (a) convertible bonds & (b) stock options:

    a. Convertible Bonds = (Principal divided by $1,000) x 50 shares

    Convertible Bonds = Formula shares

    b. Stock Options = Use Treasury Method to determine incremental shares

    1. Calculate proceeds from exercise of options = shares x price

    Formula

    2. Calculate incremental shares from options:

    Shares issued upon exercise of options Amount shares

    Shares to be purchased from proceeds (b1)
    = Proceeds divided by Average Market Price Formula shares

    Net incremental shares from options = #VALUE! shares

    Formula
    Diluted earnings per share = Amount

    Diluted earnings per share = Formula

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    https://brainmass.com/business/convertible-bonds/compute-basic-eps-and-diluted-eps-for-bare-industry-440063

    Attachments

    Solution Summary

    Your tutorial is in Excel (attached). Click in cells to see computations.

    A note is left for you about how to handle cumulative preferred stock when dividends are not declared.

    $2.19

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