On March 1 of the current year, Johanne Stores acquired 100% of the voting shares of Ferry Furniture Company. Johanne only reports annually on a calendar basis. As part of the merger agreement, Johanne agreed to distribute 0.2 additional shares for each share of outstanding stock to its current stockholders if, by the end of the current fiscal year, five new Ferry outlets are opened. On December 31, Johanne provided you with the following information:
• Net income for the year is $ 4,500,000.
• There are 1,000,000 outstanding common shares for the entire year. • There are 200,000 contingently issuable shares (i.e., 0.2 × 1,000,000).
• Seven new Ferry outlets were opened by December 31, with the fifth store opened on November 1.
• Johanne had $ 3,000,000 par value, 5% cumulative, nonconvertible preferred shares outstanding for the full year.
a. Provide a general discussion of the effect of contingently issuable shares on basic earnings per share.
b. Provide a general discussion of the effect of contingently issuable shares on diluted earnings per share.
c. Compute basic earnings per share for Johanne Stores.
d. Compute diluted earnings per share for Johanne Stores.