Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2016. On April 1, 2016, the company issued

20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares

exercisable at $10 that had not been exercised by its executives. The average market price of common stock for the year was

$12. What number of shares of stock (rounded) should be used in computing diluted earnings per share?

A. 65,000.

B. 56,667.

C. 55,000.

D. 46,667.

B. 56,667.

Explanation:

For computing, the number of shares, the following computations are required which are shown below

1. Number of shares for January 1 would be

= 40,000 shares * 12 months : 12 months

= 40,000 shares

2. Number of shares for April 1 would be

= 20,000 shares * 9 months : 12 months

= 15,000 shares

Now the fully vested stock options would be 10,000 shares for $10 and its average market price would be $12 so the required proceed shares would be

= (10,000 shares * $10) : ($12)

= 8,333 shares

Now the incremental shares would be

= 10,000 shares - 8,333 shares

= 1,667 shares

SO, the number of shares would be

= 40,000 shares + 15,000 shares + 1,667 shares

= 56,667 shares