Question

EPS with Contingent Issuance Agreement) Winsor Inc. recently purchased Holiday Corp., a large midwestern home painting corporation. One of the terms of the merger was that if Holiday’s income for 2017 was \(110,000 or more, 10,000 additional shares would be issued to Holiday’s stockholders in 2018. Holiday’s income for 2016 was \)120,000.

Instructions

(a) Would the contingent shares have to be considered in Winsor’s 2016 earnings per share computations?

(b) Assume the same facts, except that the 10,000 shares are contingent on Holiday’s achieving a net income of $130,000 in 2017. Would the contingent shares have to be considered in Winsor’s earnings per share computations for 2016?

Short answer

1. Yes, contingent shares will be considered
2. No, contingent share will not be reflected.

Step-by-step solution

Consideration of Contingent shares

(a) The contingent shares would need to be reflected in diluted earnings per share because the earnings level is as of now being achieved. Actual income of $120,000, exceeds the limit of $110,000.

Consideration of Contingent shares

(b) Since the earnings level isn't by and large right now achieved, contingent shares are excluded from the calculation of diluted earnings per share. Actual income of $110,000 is less than $130,000.