On December 31, 2017, Dow Steel Corporation had 610,000 shares of common stock and 31,000 shares of 9%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $410,000 and $70,000 to common and preferred shareholders, respectively, on December 15, 2018. On February 28, 2018, Dow sold 63,000 common shares. Also, as a part of a 2017 agreement for the acquisition of Merrill Cable Company, another 24,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2019, if Merrill's 2019 net income is at least $510,000. In 2018, Merrill's net income was $640,000. In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $2,150,000. The income tax rate is 40%. As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows: Date Granted Options Granted Share Price (adjusted for the stock dividend) December 31, 2016 9,000 $ 10 December 31, 2017 4,000 $ 19 December 31, 2018 7,500 $ 18 The market price of the common stock averaged $18 per share during 2018. On July 12, 2016, Dow issued $500,000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 50 common shares (adjusted for the stock dividend). Required: Compute Dow's basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.)

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter16: Retained Earnings And Earnings Per Share

Section: Chapter Questions

Problem 10MC

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On December 31, 2017, Dow Steel Corporation had 610,000 shares of common stock and 31,000 shares of 9%, noncumulative, nonconvertible preferred stock issued and outstanding. Dow issued a 4% common stock dividend on May 15 and paid cash dividends of $410,000 and $70,000 to common and preferred shareholders, respectively, on December 15, 2018.

On February 28, 2018, Dow sold 63,000 common shares. Also, as a part of a 2017 agreement for the acquisition of Merrill Cable Company, another 24,000 shares (already adjusted for the stock dividend) are to be issued to former Merrill shareholders on December 31, 2019, if Merrill's 2019 net income is at least $510,000. In 2018, Merrill's net income was $640,000.

In keeping with its long-term share repurchase plan, 2,000 shares were retired on July 1. Dow's net income for the year ended December 31, 2018, was $2,150,000. The income tax rate is 40%.

As part of an incentive compensation plan, Dow granted incentive stock options to division managers at December 31 of the current and each of the previous two years. Each option permits its holder to buy one share of common stock at an exercise price equal to market value at the date of grant and can be exercised one year from that date. Information concerning the number of options granted and common share prices follows:

Date Granted	Options Granted	Share Price
	(adjusted for the stock dividend)
December 31, 2016		9,000	$	10
December 31, 2017		4,000	$	19
December 31, 2018		7,500	$	18

The market price of the common stock averaged $18 per share during 2018.

On July 12, 2016, Dow issued $500,000 of convertible 10% bonds at face value. Each $1,000 bond is convertible into 50 common shares (adjusted for the stock dividend).

Required:
Compute Dow's basic and diluted earnings per share for the year ended December 31, 2018. (Enter your answers in thousands.)

This image depicts a structured table designed to calculate the Earnings per Share (EPS) for Dow, using both basic and diluted approaches. The layout of the table is as follows:

### Table: Dow's Earnings per Share Calculation

| | Numerator | / | Denominator | = | Earnings per share |
|-----------------------|-----------|-----|-------------|-----|-----------------------|
| **Dow's basic** | | / | | = | |
| **Dow's diluted** | | / | | = | |

### Explanation:
1. **Columns Headers:**
- **Numerator**: The top part of the fraction which typically represents the Net Income or Profit attributable to shareholders.
- **/**: Indicates division, showing that the numerator will be divided by the denominator.
- **Denominator**: The bottom part of the fraction which usually represents the weighted average number of shares outstanding.
- **=**: Equals sign denoting the result of the division.
- **Earnings per Share**: The resulting value which indicates earnings per individual share.

2. **Rows:**
- **Dow's basic EPS**: Basic Earnings per Share which is calculated by dividing the net income by the weighted average number of common shares outstanding.
- **Dow's diluted EPS**: Diluted Earnings per Share which includes all potential shares that could be issued, such as convertible bonds or stock options.

### Usage:
This table is used in financial analysis and reporting to determine the profitability of a company on a per-share basis, thus helping investors assess the earnings performance of the company. This representation is ideal for courses or modules that cover Financial Accounting, Corporate Finance, or Investment Analysis.

Note: The actual numerators, denominators, and resulting Earnings per Share values need to be computed or inserted based on Dow’s financial data for precise calculations.

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