Carbondale Enterprises had 200,000 shares of common stock issued and outstanding at December 31,2013.On July 1,2014,Carbondale issued a 10 percent stock dividend.Unexercised stock options to purchase 40,000 shares of common stock (adjusted for the 2014 stock dividend)at $20 per share were outstanding at the beginning and end of 2014.The market price of Carbondale's common stock (which was not affected by the stock dividend)was $25 per share during 2014.Net income for the year ended December 31,2014,was $1,100,000.What should be Carbondale's 2014 diluted earnings per common share,rounded to the nearest penny?

Question

Quizplus · Accepted Answer

To calculate diluted earnings per share (EPS), we first adjust the number of shares for the stock dividend and options. The stock dividend of 10% on 200,000 shares adds 20,000 shares (200,000 * 10%), totaling 220,000 shares. The options for 40,000 shares are in-the-money (exercise price of $20 < market price of $25), so we use the treasury stock method to calculate the net increase in shares. This method assumes that the company uses the proceeds from the exercise of options to buy back shares at the market price. The calculation is 40,000 shares from options - (40,000 * $20 / $25) = 8,000 net additional shares. Therefore, the total shares for diluted EPS calculation are 220,000 + 8,000 = 228,000 shares. Diluted EPS = Net income / Adjusted shares = $1,100,000 / 228,000 = $4.82.

Carbondale Enterprises Had 200,000 Shares of Common Stock Issued and Outstanding