January 1, 2009, Hage Corporation granted incentive stock options to purchase 18,000 of its common shares at $7 each. The options are exercisable after one year. The market price of common was $10.50 per share on March 31, 2009, and averaged $9 per share during the quarter then ended. There was no change in the 100,000 shares of outstanding common stock during the quarter ended March 31, 2009. Net income for the quarter was $8,268. The number of shares to be used in computing diluted earnings per share for the quarter is:
A)100,000.
B)104,000.
C)106,000.
D)118,000.Proceeds from exercise of options = 18,000 shs.$7 = $126,000 Used to repurchase common stock at average market price = $126,000 $9 = 14,000 shs.Shares for Diluted EPS = 100,000 + 4,000 = 104,000

Question

Quizplus · Accepted Answer

The number of shares to be used in computing diluted earnings per share for the quarter is 104,000. This is because the proceeds from the exercise of options can be used to repurchase common stock at the average market price, which in turn will increase the number of outstanding shares. In this case, the proceeds are $126,000 and the average market price is $9, resulting in the repurchase of 14,000 shares. Therefore, the total number of outstanding shares is 100,000 + 14,000 = 104,000.

January 1, 2009, Hage Corporation Granted Incentive Stock Options to Purchase