Baldwin Company had 40,000 shares of common stock outstanding on January 1,2016.On April 1,2016,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 average market price of common stock for the year was $12.What number of shares of stock (rounded)should be used in computing diluted earnings per share?
A)65,000.
B)56,667.
C)55,000.
D)46,667.

Question

Quizplus · Accepted Answer

In computing diluted earnings per share, we need to consider the effect of potentially dilutive securities. In this case, the incentive stock options are potentially dilutive because they allow executives to purchase additional shares of common stock at a price lower than the market price. To calculate the dilutive effect of the options, we use the treasury stock method, which assumes that the company uses the proceeds from exercising the options to repurchase its own shares at the average market price.

The calculation is as follows:

- Number of shares for basic EPS: 40,000 + 20,000 = 60,000
- Number of shares from assumed exercise of options: 10,000
- Proceeds from assumed exercise of options: 10,000 x $10 = $100,000
- Number of shares that could be repurchased with proceeds: $100,000 / $12 = 8,333 (rounded)
- Number of shares for diluted EPS: 60,000 + 8,333 = 68,333 (rounded)

Therefore, the rounded number of shares to be used in computing diluted earnings per share is 56,667 (i.e., the average of 60,000 and 68,333). The answer is B.

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