On January 1, 2013, 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 averaged $9 per share during the quarter ending on March 31, 2013. There was no change in the 100,000 shares of outstanding common stock during the quarter ended March 31, 2013. 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:

Question

Quizplus · Accepted Answer

The number of shares used in computing diluted earnings per share must take into account the potential dilution of the incentive stock options. Since the exercise price of the options is lower than the market price, it is assumed that they will be exercised and new shares will be issued. Therefore, the number of additional shares that could be issued is calculated as (18,000 options x [$9 - $7]) / $9 = 4,000 shares. The number of shares used in computing diluted earnings per share is then 100,000 + 4,000 = 104,000 shares.

On January 1, 2013, Hage Corporation Granted Incentive Stock Options