Soliman Corporation began the year 2018 with 25,000 shares of common stock and 5,000 shares of convertible preferred stock outstanding. On May I, an additional 9,000 shares of common stock were issued. On July I, 6,000 shares of common stock were acquired for the treasury. On September I, the 6,000 treasury shares of common stock were issued. The preferred stock has a $4 per-share dividend rate, and each share may be converted into two shares of common stock. Soliman Corporation's 2018 net income is $230,000. Required:
a. Compute earnings per share for 2018.
b. Compute diluted earnings per share for 2018.

Answer and Explanation:

The computation of the earning per share and the diluted earning per share is as follows;

a. The earning per share is

= (Net income - Preferred dividend) ÷ outstanding shares  

= ($230,000 - (5,000 × $4)) ÷ 30,000 shares

= $210,000 ÷ 30,000 shares

= $7 per share

b. The diluted earning per share is

= Earnings ÷ outstanding shares

= $230,000 ÷ (30,000 + (5,000 × 2)

= $5.75 per share

The 30,000 shares come from

Period            Outstanding shares      Fraction          outstanding shares

1-Jan-18 to 30-Apr-18 25000                 4 ÷12               8333.33

1-May-18 to 30-Jun-18 34000                 2÷ 12              5666.67

1-Jul-18 to 31-Aug-18    28000                 2 ÷ 12             4666.67

1-Sep-18 to 31-Dec-18  34000                  4 ÷ 12                11333.33

Weighted average outstanding shares                           30000

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