Dooley Co. had 200,000 shares of common stock, 20,000 shares of convertible preferred stock, and $1,000,000 of 10% convertible bonds outstanding during 20x1. The preferred stock is convertible into 40,000 shares of common stock. During 20x1, Dooley paid dividends of $1.20 per share on the common stock and $3.00 per share on the preferred stock. Each $1,000 bond is convertible into 45 shares of common stock. The net income for 20x1 was $600,000 and the income tax rate was 30%

Basic earnings per share for 20x1 is (rounded to the nearest penny)

a. $2.50.

b. $2.70.

$2.73*.

$3.00.

The basic earnings per share for 20*1 = $2.70

Explanation:

Basic Earnings Per Share = Earnings Available to Common Stockholders / No. of Common Stock outstanding

Basic EPS (2001) = Earnings Available to Common Stockholders / No. of Common Stock outstanding = $540,000 / 200,000 = $2.70

Earnings Available to Common Stockholders = Net Income - Dividend to Preferred Stockholders

= $600,000 - (20,000 x $3) = $600,000 - $60,000 = $540,000

No. of Common Stock outstanding at the end of 2001 = 200,000 Shares

Diluted Earnings Per Share (2001) = Earnings After adjusting Potential Common Shares / No. of Common Stock outstanding including potential convertible common stock

= $670,000 / 285,000 Shares = $2.35

No. of Common Stock outstanding including potential convertible common stock = Common Stock Outstanding 2001 + 40,000 Shares of Preferred Stock Convertible into common stock + (45 Shares x $1,000,000 / $1,000) = 200,000 + 40,000 + 45,000 = 285,000 Shares

Earnings After adjusting Potential Common Shares = After conversion into Common Stock, company will not be paid Preference Dividend and interest on debentures. These payments will be saved, and it will not be paid by the company, hence earnings will increase by $70,000 Interest of Debentures after giving effect of tax i. e. $1,000,000 x 10% x (1 - 0.30) = $70,000

Earnings After adjusting Potential Common Shares = $600,000 + $70,000 = $670,000