The following are selected details of Kingston Objects Inc.’s capital structure as at January 1, 2018: 

■ 200,000 ordinary shares issued and outstanding. 

■ 100,000 cumulative preferred shares “A” that are each entitled to dividends of $4 per annum. 

■ 50,000, $100 non-cumulative shares “B” with a stated dividend rate of 3% per annum. At the option of the holder, each preferred share can be converted into two ordinary shares on December 31, 2023. 

■ Bonds A—$1,000,000, 6%, semi-annual bonds maturing December 31, 2022. 

■ Bonds B—$2,000,000, 5%, semi-annual bonds maturing June 30, 2028. At the option of the holder, each $1,000 bond can be converted into 10 ordinary shares at any time between January 1, 2023, and December 31, 2023. 

■ Bonds C—$500,000, 3%, semi-annual bonds maturing December 31, 2023. At the option of the holder, each $1,000 bond can be converted into eight ordinary shares. 

■ Option A—grants the holder the right to purchase 10,000 ordinary shares at any time before December 31, 2021, for $20 per share. 

■ Option B—grants the holder the right to purchase 5,000 ordinary shares for $12 per share. The option expires on December 31, 2019.

During the year, Kingston issued ordinary shares as follows: 

■ March 1, 2018—issued (sold) 20,000 ordinary shares. 

■ October 1, 2018—issued (sold) 10,000 ordinary shares. 

■ December 1, 2018—declared and distributed a 20% stock dividend. 

Kingston was subject to a 30% tax rate. Its net income for the year ended December 31, 2018, totalled $1,339,000. During the year, Kingston declared and paid the stated dividends on both classes of preferred shares as well as $200,000 of dividends on its ordinary shares. The average market rate in 2018 for Kingston’s ordinary shares was $15. 

The recorded exercise prices and number of shares under the stock options plans that can be acquired have already been adjusted for the stock dividend. Similarly, the recorded conversion factors for the convertible bonds and preferred shares have already been adjusted for the stock dividend. 

Assume that the effective rate of interest on the bonds equals the coupon rate. 

Required:

a. Calculate Kingston’s basic EPS for the year ended December 31, 2018. 

b. Prepare a schedule that sets out the income effect, share effect, and incremental EPS for each security that is convertible into ordinary shares. Rank the potential ordinary shares by their dilutiveness. 

c. Calculate Kingston’s diluted EPS for the year ended December 31, 2018.