Faucet Company has 2,500,000 shares of common stock outstanding on December 31, year 1. An additional 500,000 shares of common stock were issued on April 1, year 2, and 250,000 more on July 1, year 2. On October 1, year 2, Faucet issued 5,000, $1,000 face value, 7% convertible bonds. Each bond is convertible into 40 shares of common stock. No bonds were converted into common stock in year 2. What is the number of shares to be used in computing basic earnings per share and diluted earnings per share, respectively, for the year ended December 31, year 2?

Number of Shares for Basic Earnings per Share = 3,000,000

Number of Shares for Diluted Earnings per Share = 3,200,000

Explanation:

Basic Earnings per Share = Earnings Attributable to Holders of Common Stock / Weighted Average Number of Common Shares

Weighted Average Number of Common Shares

Common Shares Outstanding - December 31, year 1 2,500,000

April 1, Year 2 Issue, 9/12 * 500,000 375,000

July 1, Year 2 Issue, 6/12 * 250,000 125,000

Number of Shares for Basic Earnings per Share 3,000,000

Diluted Earnings per Share = Adjusted Earnings Attributable to Holders of Common Stock / Adjusted Weighted Average Number of Common Shares

Adjusted Weighted Average Number of Common Shares

Number of Shares for Basic Earnings per Share 3,000,000

Add 7% convertible bonds (5,000*40 shares) 200,000

Number of Shares for Diluted Earnings per Share 3,200,000