Question

(EPS: Simple Capital Structure) At January 1, 2017, Langley Company’s outstanding shares included the following.

280,000 shares of \(50 par value, 7% cumulative preferred stock

900,000 shares of \)1 par value common stock

Net income for 2017 was \(2,530,000. No cash dividends were declared or paid during 2017. On February 15, 2018, however, all preferred dividends in arrears were paid, together with a 5% stock dividend on common shares. There were no dividends in arrears prior to 2017.

On April 1, 2017, 450,000 shares of common stock were sold for \)10 per share, and on October 1, 2017, 110,000 shares of common stock were purchased for $20 per share and held as treasury stock.

Instructions

Compute earnings per share for 2017. Assume that financial statements for 2017 were issued in March 2018.

Short answer

Earnings per share for 2017 is $1.22

Step-by-step solution

Calculation of weighted average number of shares outstanding

EVENT	DATE OUTSTANDING	SHARES OUTSTANDING	RESTATEMENT	FRACTION OF YEAR	WEIGHTED SHARES
Beginning balance	Jan 1- Apr 1	900,000	2	3/12	225,000
Issued shares	Apr 1- Oct 1	1,350,000 (900,000+450,000)	2	6/12	675,000
Reacquired shares	Oct 1- Dec 31	1,240,000 (1,350,000-110,000)	2	3/12	310,000
Weighted average number of shares outstanding					1,210,000

Weighted average number of shares outstanding	1,210,000
Stock dividend	5%
Weighted average number of shares outstanding (1,210,000 x 105%)	1,270,500

Net Income	$2,530,000
Preferred dividend (280,000 x $50 x 7%)	-$980,000
Net income after preferred dividend	$1,550,000

Step 2:Calculationof earnings per share

Net Income applicable to common stock (A)	$1,550,000
Weighted average number of common shares outstanding (B)	1,270,500
Earnings per share (A/B)	$1.22