Assume that the following data relative to Cullumber Company for 2021 is available: Net Income $2,820,000 Transactions in Common Shares Change Cumulative Jan. 1, 2021, Beginning number 740,000 Mar. 1, 2021, Purchase of treasury shares (60,000) 680,000 June 1, 2021, Stock split 2-1 680,000 1,360,000 Nov. 1, 2021, Issuance of shares 234,000 1,594,000 6% Cumulative Convertible Preferred Stock Sold at par, convertible into 180,000 shares of common (adjusted for split). $900,000 Stock Options Exercisable at the option price of $25 per share. The average market price in 2021, $30 (market price and option price adjusted for split).
Compute the basic earnings per share for 2021. (Round to the nearest penny.)
Compute the diluted earnings per share for 2021.

(a)Basic earnings per share $1.94

(b)Diluted earnings per share $1.74

Explanation:

Cullumber Company

Computation of weighted average shares outstanding during the year:

January 1 Outstanding 740,000

March 1 Repurchase (5/6 × 60,000)(50,000) 690,000

June1 2-for-1 split 1,380,000

(740,000+690,000-50,000)

November 1 Issued (1/6 × 234,000)39,000

(1,380,000+39,000) 1,419,000

Additional shares for purposes of diluted earnings per share:

Potentially dilutive securities

6% convertible preferred stock 180,000

Stock options

Proceeds from exercise of 90,000 options (90,000 × $25)$2,250,000

Shares issued upon exercise of options

$90,000

Less: treasury stock purchasable with proceeds ($2,250,000 ÷ $30)75,000

($90,000-$75,000) $15,000

Dilutive securities—additional shares ($180,000+$15,000) $195,000

(a)Basic earnings per share:$2,820,000 -$60,000/1,419,000

=$2,760,000/$1,419,000

=$1.94

(b)Diluted earnings per share:

$2,820,000/$1,419,000+$195,000

=$2,820,000/$1,614,000

=$1.74