Paul Company had 100,000 shares of common stock outstanding on January 1, 2016. On September 30, 2016, Paul sold 50,000 shares of common stock for cash. Paul also had 11,000 shares of convertible preferred stock outstanding throughout 2016. The preferred stock is $100 par, 5%, and is convertible into 3 shares of common for each share of preferred. Paul also had 520, 8%, convertible bonds outstanding throughout 2016. Each $1,000 bond is convertible into 30 shares of common stock. The bonds sold originally at face value. Reported net income for 2016 was $320,000 with a 40% tax rate. Common shareholders received $2.20 per share dividends after preferred dividends were paid in 2016. RequiredCompute basic and diluted earnings per share for 2016. (Round your answers to 2 decimal places.)

basic earnings per share (EPS) = $2.36

diluted EPS = $1.64

Explanation:

weighted average common stocks:

January 1: 100,000 shares x 12/12 = 100,000

September 30: sold 50,000 shares x 3/12 = 12,500

total 112,500

net income = $320,000

preferred dividends = $100 x 5% x 11,000 = $55,000

diluted shares:

preferred stocks = 11,000 x 3 = 33,000

convertible bonds = 520 x 30 = 15,600

total 48,600

basic earnings per share (EPS) = (net income - preferred dividends) / weighted average shares = ($320,000 - $55,000) / 112,500 = $2.36

diluted EPS = (net income - preferred dividends )/ (weighted average shares + convertible preferred stocks + convertible bonds)  = ($320,000 - $55,000) / (112,500 + 48,600) = $1.64

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