P16-7 (Computation of Basic and Diluted EPS) Charles Austin of the controllers office of Thompson

Corporation was given the assignment of determining the basic and diluted earnings per share values for

the year ending December 31, 2015. Austin has compiled the information listed below.

1. The company is authorized to issue 8,000,000 shares of $10 par value common stock. As of

December 31, 2014, 2,000,000 shares had been issued and were outstanding.

2. The per share market prices of the common stock on selected dates were as follows.

Price per Share

July 1, 2014 $20.00

January 1, 2015 21.00

April 1, 2015 25.00

July 1, 2015 11.00

August 1, 2015 10.50

November 1, 2015 9.00

December 31, 2015 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been

issued on July 1, 2014. The stock was issued at its par value of $25, and it has a cumulative dividend

of $3 per share. The stock is convertible into common stock at the rate of one share of convertible

preferred for one share of common. The rate of conversion is to be automatically adjusted for stock

splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31,

and June 30.

4. Thompson Corporation is subject to a 40% income tax rate.

5. The after-tax net income for the year ended December 31, 2015, was $11,550,000.

The following specific activities took place during 2015.

1. January 1A 5% common stock dividend was issued. The dividend had been declared on

December 1, 2014, to all stockholders of record on December 29, 2014.

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2. April 1A total of 400,000 shares of the $3 convertible preferred stock was converted into common

stock. The company issued new common stock and retired the preferred stock. This was the only

conversion of the preferred stock during 2015.

3. July 1A 2-for-1 split of the common stock became effective on this date. The board of directors had

authorized the split on June 1.

4. August 1A total of 300,000 shares of common stock were issued to acquire a factory building.

5. November 1A total of 24,000 shares of common stock were purchased on the open market at

$9 per share. These shares were to be held as treasury stock and were still in the treasury as of

December 31, 2015.

6. Common stock cash dividendsCash dividends to common stockholders were declared and paid

as follows.

April 15$0.30 per share

October 15$0.20 per share

7. Preferred stock cash dividendsCash dividends to preferred stockholders were declared and paid

as scheduled.

Instructions

(a) Determine the number of shares used to compute basic earnings per share for the year ended

December 31, 2015.

(b) Determine the number of shares used to compute diluted earnings per share for the year ended

December 31, 2015.

(c) Compute the adjusted net income to be used as the numerator in the basic earnings per share calculation

for the year ended December 31, 2015.