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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Palo Alto Company earned net income of $43,800 during 2019. At the beginning of 2019, it had 10,000 shares of common stock outstanding; an additional 4,000 shares were issued on July 2. During 2019, 600 shares of 8%, $100 par, convertible preferred stock were outstanding the entire year. Dividends on this preferred stock were paid in 2019. Each share is convertible into 5 shares of common stock. The corporate income tax rate is 30%.

Required:

Compute the 2019 diluted earnings per share.

To determine

Calculate the diluted earnings per share.

Explanation

Earnings per share (EPS):

The amount of net income available to each shareholder per common share outstanding is referred to as earnings per share (EPS).

Calculate the diluted earnings per share.

Diluted earnings per share =Net income Weighted number of shares outstanding (4) =$43,80015,000=$2.92

Working notes:

(1) Calculate the number of shares outstanding on common stock:

Number of shares outstanding = (Number of shares of common stock outstanding )×Time  period=10,000×6(July to December)12=$5,000

(2) Calculate the number of shares outstanding on issue of additional shares on common stock:

Number of shares outstanding on issue of additional shares on common stock} = (Number of shares of common stock outstanding + Is

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