Eastern Corporation began operations on January 1^st, 2020. The company reported the following information on its balance sheet as of December 31^st, 2020:

Liabilities

Convertible bonds payable, $7,500,000, 5%, matures on Dec 31, 2025:                      $7,184,073

(See Note 1 below)

Equity

Common shares (unlimited authorized, 9,000,000 issued and outstanding).         $18,000,000

Class A Preferred shares, cumulative $7 annual dividend, convertible

to common shares at 4 common shares for each preferred share

(400,000 authorized, 80,000 issued and outstanding)                                                 $3,000,000

Class B Preferred shares, non-cumulative $15 annual dividend, convertible

to common shares at 2 common shares for each preferred share

(4,000,000 authorized, 100,000 issued and outstanding)                                              $750,000

Contributed surplus, common stock warrants for the purchase of

common shares for $12 per share at any date before December 31^st, 2026          $ 237,500

Contributed surplus, bond conversion rights (see Note 1 below)                              $518,800

Note 1: On January 1^st, 2020, the company issued $7,500,000 convertible 5% six-year bonds. Interest is paid on December 31^st each year. Each $1,000 bond can be converted into 50 common shares. Total proceeds of the issuance were $7,650,000. If the company had issued the same bonds without the conversion rights, it would have collected proceeds of $7,131,201 to yield 6%. The company uses the incremental method to account for the issuance and the effective interest method to amortize the bond. In the event of any stock split or stock dividend, the conversion factor is adjusted in a similar manner.

Note 2: Preferred dividends for both classes were not paid in 2020. According to the terms of the preferred shares, the conversion factor must be adjusted for any stock dividends or stock splits.

The following transactions occurred in 2021:

• On January 1^st, the company issued 1,500,000 employee stock options. Each stock option allows for the purchase of one common share for $10.50 per share at any date between December 1^st, 2021, and April 30^th, 2024. The common shares were trading at $9.00 per share on January 1^st.

• On March 31^st, the company repurchased 750,000 common shares for $15 per share.

• The company declared and distributed a stock dividend of 4% on August 1^st.

• On December 15^th, the company declared $600,000 in Class A preferred dividends and $600,000 in Class B preferred dividends. The dividends were paid on December 31^st.
• Net income(after-tax) for the year amounted to $18,000,000. The company pays income tax at a rate of 25%. The average common share price was $12.00 during the year.

Required:

1. Prepare a schedule of the weighted average common shares outstanding for 2021.

2. Calculate basic earnings per share for 2021.

3. Identify all potentially dilutive securities and present their related incremental EPS.

4. Calculate the diluted earnings per share for 2021 Indicate any anti-dilutive securities.

Answer rating: 100% (QA)

1 Weighted average common shares outstanding 9000000 1500000 900 1200 10500000 Basic earnin... View the full answer