As auditor for Checkem & Associates, you have been assigned to review Tao Corporation's calculation of earnings per share for the current year. The controller, Mac Taylor, has supplied you with the following calculations:
Net income ................................................. $3,374,960
Common shares issued and outstanding:
Beginning of year ........................................... 1,285,000
End of year .................................................. 1,200,000
Average ....................................................... 1,242,500
Earnings per share:
$3,374,960 / 1,242,500 = $2.72 per share
You have gathered the following additional information:
1. The only equity securities are the common shares.
2. There are no options or warrants outstanding to purchase common shares.
3. There are no convertible debt securities.
4. Activity in common shares during the year was as follows:
Outstanding, Jan. 1 ...................................... 1,285,000
Shares acquired, Oct. 1 .................................. (250,000)
1,035,000
Shares issued, Dec. 1 ...................................... 165,000
Outstanding, Dec. 31 ................................... 1,200,000
Instructions
(a) Based on the information, do you agree with the controller's calculation of earnings per share for the year? If you disagree, prepare a revised calculation.
(b) Assume the same facts except that call options had also been issued for 140,000 common shares at $10 per share. These options were outstanding at the beginning of the year and none had been exercised or cancelled during the year. The average market price of the common shares during the year was $20 and the ending market price was $25. Prepare a calculation of earnings per share.