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On December 31, 2020, Jackson Company had 100,000 shares of common stock outstanding and 24,000 shares of 7%, $50 par, cumulative preferred stock outstanding. On February 28, 2021, Jackson purchased 16,000 shares of common stock on the open market as treasury stock for $27 per share. Jackson sold 5,200 treasury shares on September 30, 2021, for $29 per share. Net income for 2021 was $172,905. Also outstanding during the year were fully vested incentive stock options giving key executives the option to buy 42,000 common shares at $32. The market price of the common shares averaged $31 during 2021. Required: Compute Jackson's basic and diluted earnings per share for 2021. (Round your answers to 2 decimal places.)

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Answer:

Basic earning per share = 1.01 per share

Diluted earning per share = = 0.95 per share

Explanation:

The computation of basic earning per share and diluted earning per share is shown below:-

Income after 7% dividend on cumulative preference share = Net income - (Shares percentage × Shares × par, cumulative preferred stock outstanding)

= $172,905 - (7% × 24,000 × $50)

= $172,905 - $84,000

= 88,905

We assume the closing of books company are closed on 31 Dec so according to that 3 months are taken from Oct to Dec and 10 months are taken from March to Dec

Outstanding shares = Shares of common stock - (Purchased shares × 10 ÷ 12) + (Sold treasury shares × 3 ÷ 12)

= 100,000 - (16,000 × 10 ÷ 12) + (5,200 × 3 ÷ 12)

= 100,000 - 13,333 + 1,300

= 87,967

Now,

Basic earning per share = 88,905 ÷ 87,967

= 1.01 per share

Diluted earning per share

shares to be buy back with proceeds = (42,000 × $27) ÷ $31

= 36,580

Difference = Option to be exercised - Outstanding shares

= 42,000 - 36,580

= 5,420

Outstanding shares = 87,967 + 5,420

= 93,387

So,

Diluted earning per share = 88,905 ÷ 93,387

= 0.95 per share

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