(EPS with Convertible Bonds) On June 1, 2005, Andre Company and Agassi Company merged to form Lancaster Inc. A total of 800,000 shares were issued to complete the merger. The new corporation reports on a calendar-year basis.

On April 1, 2007, the company issued an additional 400,000 shares of stock for cash. All 1,200,000 shares were outstanding on December 31, 2007.

Lancaster Inc. also issued $600,000 of 20-year, 8% convertible bonds at par on July 1, 2007. Each $1,000 bond converts to 40 shares of common at any interest date. None of the bonds have been converted to date.

Lancaster Inc. is preparing its annual report for the fiscal year ending December 31, 2007. The annual report will show earnings per share figures based upon a reported after-tax net income of $1,540,000. (The tax rate is 40%.)

Instructions Determine the following for 2007.

(a) The number of shares to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share.

(b) The earnings figures to be used for calculating:

(1) Basic earnings per share.

(2) Diluted earnings per share.