Question -
A. On December 31, 2015, Entity A Company had 100,000 shares of common stock outstanding and 30,000 shares of 7%, $100 par, cumulative preferred stock outstanding. The following events occurred
- On February 28, 2016, Entity A purchased 30,000 shares of common stock on the open market as treasury stock paying $45 per share.
- Entity A sold 6,000 of the treasury shares on September 30, 2016, for $47 per share.
- Net income for 2016 was $540,000. The income tax rate is 40%.
- Outstanding at December 31, 2015, were fully vested incentive stock options giving key personnel the option to buy 50,000 common shares at $40. The market price of the common shares averaged $50 during 2016. No stock options were exercised during the year.
- Five thousand 6% bonds (each with a face value of $1,000) were issued at par on January 1, 2016. Each $1,000 bond is convertible into 125 shares of common stock. None of the bonds had been converted by December 31, 2016.
Compute basic and diluted earnings per share (rounded to 2 decimal places) for Entity A for 2016.
B. Why are preferred dividends deducted from net income when calculating EPS? Name two circumstances when preferred dividends would not be deducted.