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26 May, 21:06

Assume that the following data relative to Cullumber Company for 2021 is available: Net Income $2,820,000 Transactions in Common Shares Change Cumulative Jan. 1, 2021, Beginning number 740,000 Mar. 1, 2021, Purchase of treasury shares (60,000) 680,000 June 1, 2021, Stock split 2-1 680,000 1,360,000 Nov. 1, 2021, Issuance of shares 234,000 1,594,000 6% Cumulative Convertible Preferred Stock Sold at par, convertible into 180,000 shares of common (adjusted for split). $900,000 Stock Options Exercisable at the option price of $25 per share. The average market price in 2021, $30 (market price and option price adjusted for split).

Compute the basic earnings per share for 2021. (Round to the nearest penny.)

Compute the diluted earnings per share for 2021.

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  1. 26 May, 22:05
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    (a) Basic earnings per share $1.94

    (b) Diluted earnings per share $1.74

    Explanation:

    Cullumber Company

    Computation of weighted average shares outstanding during the year:

    January 1 Outstanding 740,000

    March 1 Repurchase (5/6 * 60,000) (50,000) 690,000

    June1 2-for-1 split 1,380,000

    (740,000+690,000-50,000)

    November 1 Issued (1/6 * 234,000) 39,000

    (1,380,000+39,000) 1,419,000

    Additional shares for purposes of diluted earnings per share:

    Potentially dilutive securities

    6% convertible preferred stock 180,000

    Stock options

    Proceeds from exercise of 90,000 options (90,000 * $25) $2,250,000

    Shares issued upon exercise of options

    $90,000

    Less: treasury stock purchasable with proceeds ($2,250,000 : $30) 75,000

    ($90,000-$75,000) $15,000

    Dilutive securities-additional shares ($180,000+$15,000) $195,000

    (a) Basic earnings per share:$2,820,000 - $60,000/1,419,000

    =$2,760,000/$1,419,000

    =$1.94

    (b) Diluted earnings per share:

    $2,820,000/$1,419,000+$195,000

    =$2,820,000/$1,614,000

    =$1.74
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