Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2009. On April 1, 2009 the company issued 20,000 shares of common stock. The company had outstanding fully vested incentive stock options for 10,000 shares exercisable at $10 that had not been exercised by its executives. The end-of-year market price of common stock was $11 while the average price for the year was $12. What number of shares of stock should be used in computing diluted earnings per share?
A)65,000.
B)56,667.
C)55,000.
D)61,667.40,000 + (20,000 9/12) + (10,000 - 8,333*) = 56,667 *(10,000 $10)/$12 = 8,333

Question

Quizplus · Accepted Answer

The diluted earnings per share calculation includes all potentially dilutive securities, which include the shares issued during the year and the outstanding stock options. The shares issued during the year are included in full, but the stock options are only included to the extent that they are in the money (i.e. the exercise price is less than the average market price). Therefore, the number of shares used in computing diluted earnings per share is 40,000 + (20,000 x 9/12) + (10,000 - 8,333) = 56,667.

Baldwin Company Had 40,000 Shares of Common Stock Outstanding on January