Problem 1 - Diluted earnings per share

Dunbar Company had 500,000 shares of common stock outstanding during the year 2015. In addition, at December 31, 2015, 90,000 shares were issuable upon exercise of executive stock options which require a $40 cash payment upon exercise (options granted in 2015). The average market price during 2015 was $50.

Instructions - Compute the number of shares to be used in determining diluted earnings per share for 2015.

Problem 2 - Weighted average shares outstanding

On January 1, 2015, Warren Corporation had 1,000,000 shares of common stock outstanding. On March 1, the corporation issued 150,000 new shares to raise additional capital. On July 1, the corporation declared and issued a 2-for-1 stock split. On October 1, the corporation purchased on the market 500,000 of its own outstanding shares and retired them.

Instructions - Compute the weighted average number of shares to be used in computing earnings per share for 2015.

Problem 3 - Derivative financial instrument

Hummel Company purchased a put option on Olney common shares on July 7, 2014, for $100. The put option is for 200 shares, and the strike price is $30. The option expires on January 31, 2015. The following data are available with respect to the put option:

Date Market Price of Olney Shares Time Value of Put Option

September 30, 2014 $32 per share $52

December 31, 2014 $31 per share 22

January 31, 2015 $33 per share 0

Instructions - Prepare the journal entries for Hummel Company for the following dates:

(a) July 7, 2014-Investment in put option on Olney shares.

(b) September 30, 2014- Hummel prepares financial statements.

(c) December 31, 2014- Hummel prepares financial statements.

(d) January 31, 2015-Put option expires.