Klothez, Ltd., reported the following items related to the shareholder equity on its balance sheet as at December 31, 2016:

$1.90 Convertible Preferred shares, 160,000 shares outstanding $ 4,000,000

Common shares, 375,000 shares issued and outstanding 11,250,000

Contributed surplus on repurchase of common shares 186,000

Retained earnings 4,300,000

Additional Information

A. The preferred shares were cumulative and participative. These shares had been issued several years ago when the company was incorporated. As at January 1, 2017, each preferred share could be converted into 2 common shares. Dividends for any given year are determined on the number of shares issued and outstanding at the end of that year. Dividends on preferred shares were last declared in 2014.

B. The company reported net earnings of $1,166,494 for 2017. There were no extraordinary or discontinued items to report in 2017.

C. Assume a 30% tax rate for 2017. The average market adjusted common share price during 2017 was $27.

The following transactions occurred during the year, 2017:

i] On February 1, the company purchased 60,000 common shares for $34.00 per share and retired them on the same day.

ii] On March 1, it issued common share subscriptions for 46,000 shares at $40 each. The subscribers were required to pay $10 on application, $25 at the first instalment call and $5 at the second instalment call.

iii] On April 1, issued 17,500 common shares in exchange for plant and equipment assessed at $420,000.

iv] On May 1, the first instalment of $25 on the share subscription was called. Subscribers for 1,000 failed to pay.

Simulation 1- Section A- continued

v] On July 1, the remaining subscribers paid the second instalment of $5. The company issued share certificates to the remaining subscribers. Those subscribers who had failed to pay on May 1 forfeited the amount they paid on their subscriptions application.

vi] On July 15, the company declared and distributed a 8% stock dividend on all outstanding common shares. The common shares were being traded on that day at the adjusted market price of $28.50 per share after the stock dividend distribution.

vii] On August 1, 30% of the preferred shares converted their shares into common shares.

For this section, IGNORE the transactions contained in [vi] and [vii] Section A above.

Instead, assume that the company reported 408,000 weighted average common shares with a share capital of $14,032,000 and 160,000 preferred shares -cumulative dividend of $1.90 each paid on end of year number of shares-convertible into 2 common shares- with a share capital of $4,000,000 as being outstanding on December 31, 2017 In addition to the convertible preferred shares, assume Klothez had also reported the following securities existing as at December 31, 2017:

A. On December 31, 2016, the company had outstanding 8% $1,000 par, convertible bonds, for $2,500,000. The bonds had been issued at par in 2014. No amount was applicable to the conversion rights thus bond liability was credited for the full amount received. Each $1,000 bond was convertible into 11 common shares. All of the bonds were outstanding on December 31, 2017.

B. In 2016, the company had issued 45,000 call options to purchase common shares at a price of $34 per share. All of these options were outstanding for all of year 2017.

C. Also outstanding on December 31, 2017, were 78,000 put options that allow the holder of each option to sell three shares to Klothez at a price of $36 per share. The company had issued these options to its directors as compensation in 2015.

D. On January 1, 2015, Klothez had issued an 8% three-year note to the First National Bank for $900,000. The note is convertible into 30,000 common shares at the option of the bank at any time before it becomes due on December 31, 2017. Interest is payable in cash only at the end of each year.

E. The tax rate for 2017 was 30% and assume the average market price of common shares was $27 per share.

Required:

1. Identify the potentially dilutive securities which could be included in the computation of diluted earnings per share. Be sure to support your answer with supportive computations and rank these securities where required.

2. Determine the diluted earnings per share to be reported by the company in 2017.

3. If management decides to pay dividends in 2017, how much do the preferred shareholders receive prior to any being paid to common shareholders if dividends were last declared in 2014 on the 160,000 preferred shares?