Textbook Problem

Roseau Company is preparing its annual earnings per share amounts to be disclosed on its 2019 income statement. It has collected the following information at the end of 2019:

1. Net income: $120,400. Included in the net income is income from continuing operations of $130,400 and a loss from discontinued operations (net of income taxes) of $10,000. Corporate income tax rate: 30%.

2. Common stock outstanding on January 1, 2019: 20,000 shares.

3. Common stock issuances during 2019: July 6, 4,000 shares; August 24, 3,000 shares.

4. Stock dividend: On October 19, 2019, the company declared a 10% stock dividend that resulted in 2,700 additional outstanding shares of common stock.

5. Common stock prices: 2019 average market price, $30 per share; 2019 ending market price, $27 per share.

6. 7% preferred stock outstanding on January 1, 2019: 1,000 shares. Terms: $100 par, nonconvertible. Current dividends have been paid. No preferred stock issued during 2019.

7. 8% convertible preferred stock outstanding on January 1, 2019: 800 shares. The stock was issued in 2018 at $130 per share. Each $100 par preferred stock is currently convertible into 1.7 shares of common stock. Current dividends have been paid. To date, no preferred stock has been converted.

8. Bonds payable outstanding on January 1, 2019: $100,000 face value. These bonds were issued several years ago at 97 and pay annual interest of 9.6%. The discount is being amortized in the amount of $300 per year. Each $1,000 bond is currently convertible into 22 shares of common stock. To date, no bonds have been converted.

9. Compensatory share options outstanding: Key executives may currently acquire 3,000 shares of common stock at $20 per share. The options were granted in 2018. To date, none have been exercised. The unrecognized compensation cost (net of tax) related to the options is $4 per share.

Required:

1. Compute the basic earnings per share. Show supporting calculations.

2. Compute the diluted earnings per share. Show supporting calculations.

3. Show how Roseau would report these earnings per share figures on its 2019 income statement. Include an explanatory note to the financial statements.