Question

(EPS: Simple Capital Structure) On January 1, 2017, Lennon Industries had stock outstanding as follows.

6% Cumulative preferred stock, \(100 par value,

issued and outstanding 10,000 shares \)1,000,000

Common stock, \(10 par value, issued and

outstanding 200,000 shares 2,000,000

To acquire the net assets of three smaller companies, Lennon authorized the issuance of an additional 160,000 common shares. The acquisitions took place as shown below.

Date of Acquisition Shares Issued

Company A April 1, 2017 50,000

Company B July 1, 2017 80,000

Company C October 1, 2017 30,000

On May 14, 2017, Lennon realized a \)90,000 (before taxes) gain on discontinued operations.On December 31, 2017, Lennon recorded income of $300,000 from continuing operations.

Instructions

Assuming a 50% tax rate, compute the earnings per share data that should appear on the financial statements of Lennon Industries as of December 31, 2017.

Short answer

Income from continuing operations	$300,000
Discontinued operations loss, net of tax ($90,000 x 50%)	45,000
Net income	$345,000

Per share of common stock
Income from continuing operations	0.8421
Discontinued operations loss, net of tax	0.1579
Net income	1

Step-by-step solution

Computation of Weighted-average number of shares outstanding:

Dates Outstanding	Shares Outstanding	Fraction of Year	Weighted Shares
January	200,000	12/12	200,000
April 1	50,000	9/12	37,500
July 1	80,000	6/12	40,000
Oct 1	30,000	3/12	7,500
Weighted-average number of shares outstanding			285,000

Computation of income from continuous operation-

$\begin{array}{c}\mathbf{Income}\mathbf{}\mathbf{from}\mathbf{}\mathbf{continuous}\mathbf{}\mathbf{operation}\mathbf{=}\frac{\mathrm{Net}\mathrm{income}-\mathrm{Dividend}}{\mathrm{Weighted}\mathrm{average}\mathrm{no}\mathrm{of}\mathrm{shares}\mathrm{outstanding}}\\ \mathbf{=}\frac{300,000-60,000}{285,000}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{8421}\end{array}$

Computation of income from discontinued operations-

$\begin{array}{c}\mathbf{Income}\mathbf{}\mathbf{from}\mathbf{}\mathbf{discountinued}\mathbf{}\mathbf{operations}\mathbf{=}\frac{\mathbf{Gain}\mathbf{}\mathbf{on}\mathbf{}\mathbf{discountinued}\mathbf{}\mathbf{operations}(\mathbf{1}\mathbf{-}\mathbf{Tax}\mathbf{}\mathbf{rate})}{\mathrm{Weighted}\mathrm{average}\mathrm{no}\mathrm{of}\mathrm{shares}\mathrm{outstanding}}\\ \mathbf{=}\frac{\mathbf{90}\mathbf{,}\mathbf{000}(\mathbf{1}\mathbf{-}\mathbf{0}\mathbf{.}\mathbf{50})}{285,000}\\ \mathbf{=}\mathbf{0}\mathbf{.}\mathbf{1579}\end{array}$