GROUPWORK (Computation of Basic and Diluted EPS) Charles Austin of the controller’s office of Thompson
Corporation was given the assignment of determining the basic and diluted earnings per share values for the year ending
December 31, 2018. Austin has compiled the information listed below.
1. The company is authorized to issue 8,000,000 shares of \(10 par value common stock. As of December 31, 2017, 2,000,000
shares had been issued and were outstanding.
2. The per share market prices of the common stock on selected dates were as follows.
Price per Share
July 1, 2017 \)20.00
January 1, 2018 21.00
April 1, 2018 25.00
July 1, 2018 11.00
August 1, 2018 10.50
November 1, 2018 9.00
December 31, 2018 10.00
3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2017.
The stock was issued at its par value of \(25, and it has a cumulative dividend of \)3 per share. The stock is convertible into
common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be
automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31,
March 31, and June 30.
4. Thompson Corporation is subject to a 40% income tax rate.
5. The after-tax net income for the year ended December 31, 2018, was \(11,550,000.
The following specific activities took place during 2018.
1. January 1—A 5% common stock dividend was issued. The dividend had been declared on December 1, 2017, to all stockholders
of record on December 29, 2017.
2. April 1—A total of 400,000 shares of the \)3 convertible preferred stock was converted into common stock. The company
issued new common stock and retired the preferred stock. This was the only conversion of the preferred stock during 2018.
3. July 1—A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split
on June 1.
4. August 1—A total of 300,000 shares of common stock were issued to acquire a factory building.
5. November 1—A total of 24,000 shares of common stock were purchased on the open market at \(9 per share. These shares
were to be held as treasury stock and were still in the treasury as of December 31, 2018.
6. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows.
April 15—\)0.30 per share
October 15—$0.20 per share
7. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled.
Instructions
(a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2018.
(b) Determine the number of shares used to compute diluted earnings per share for the year ended December 31, 2018.
(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation for the year
ended December 31, 2018.
