At December 31, 2020, Spearmint Inc. had 300,000 common shares outstanding (no preferred shares issued). In addition, the corporation had granted 90,000 stock options to certain executives, and which gave them the right to purchase Spearmint's shares at the option price of $ 37 per share. None of these options have yet been exercised. The average market price of Spaniel's common shares during 2020 was $ 50. What is the number of shares that should be used in calculating diluted earnings per share for 2020?

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The calculation for diluted earnings per share includes the potential shares that could be created by stock options. The treasury stock method is used for this calculation. It assumes that the options are exercised at the beginning of the period (or at the time of issuance if later), and the company uses the proceeds from the exercise of the options to buy back as many shares as possible at the average market price. Here, 90,000 options could potentially buy 90,000 shares at $37 each, totaling $3,330,000. This amount could then theoretically be used to buy back shares at the average market price of $50, resulting in 66,600 shares bought back ($3,330,000 / $50 per share). Therefore, the diluted shares would be the original 300,000 shares plus the net increase of 23,400 shares (90,000 options - 66,600 shares bought back), totaling 323,400 shares.