Baldwin Company had 40,000 shares of common stock outstanding on January 1, 2013. On April 1, 2013, 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

To calculate diluted earnings per share, we need to consider the potentially dilutive securities, which includes the incentive stock options. To calculate the number of potentially dilutive shares, we use the treasury stock method.

Under the treasury stock method, we assume that the proceeds from the exercise of the incentive stock options will be used to buy back common shares at the average market price of the stock.

Number of potentially dilutive shares = (10,000 x $10) / $12 = 8,333

Total number of shares outstanding = 40,000 + 20,000 = 60,000

Number of shares to be used for diluted earnings per share = 60,000 + 8,333 = 68,333

Rounded to the nearest thousand, the answer is 56,667 (Choice B).

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