On January 1, 2014, Lennon Industries Had Stock Outstanding

On January 1 2014 Lennon Industries Had Stock Outstanding As Follows

Assuming a 50% tax rate, compute the earnings per share data that should appear on the financial statements of Lennon Industries as of December 31, 2014. Assume that the expropriation is extraordinary.

Paper For Above instruction

Introduction

The calculation of earnings per share (EPS) is a pivotal aspect of financial reporting as it provides insight into the profitability available to each share of common stock. When analyzing the EPS for Lennon Industries for the year ended December 31, 2014, it is essential to consider all relevant income components, including the net income, extraordinary items, and the effects of share issuance due to acquisitions. The purpose of this paper is to accurately determine the basic and diluted EPS considering the given data and accounting standards.

Company Background and Stock Outstanding

As of January 1, 2014, Lennon Industries had the following stock outstanding:

  • Preferred stock: 10,000 shares of 6% cumulative preferred stock, with a par value of $100, totaling $1,000,000.
  • Common stock: 200,000 shares with a par value of $10, totaling $2,000,000.

In addition, Lennon authorized the issuance of 160,000 common shares to acquire three smaller companies during 2014, issued as follows:

  • Company A: April 1, 2014, 30,000 shares
  • Company B: July 1, 2014, 50,000 shares
  • Company C: October 1, 2014, 80,000 shares

Income Components for 2014

The company recorded a net income before tax of $300,000, excluding a recognized insurance gain of $90,000 (before taxes) from expropriation of investments on May 14, 2014. Since the expropriation is considered an extraordinary item, appropriate financial reporting standards require its separate disclosure and impact on net income.

Tax Considerations

The corporate tax rate is 50%. Therefore, the after-tax effect of income and extraordinary items must be calculated. Specifically, the net income and the expropriation gain after tax are:

  • Net income before taxes: $300,000
  • Tax expense on net income: $150,000 (50% of $300,000)
  • Net income after tax: $150,000
  • Expropriation gain before tax: $90,000
  • Tax on the expropriation gain: $45,000 (50% of $90,000)
  • Net gain after tax: $45,000

Hence, total net income including the extraordinary gain is:

$150,000 + $45,000 = $195,000.

Adjustments to Income for EPS Calculation

Given that preferred stock dividends are preferred claims on earnings, they must be deducted from net income to arrive at income attributable to common shareholders. The preferred stock is cumulative and has a 6% dividend rate:

  • Preferred dividends: 10,000 shares x $100 par x 6% = $60,000 annually.
  • If the preferred dividends are not explicitly stated as paid, assume they are paid to calculate EPS.

Therefore, income attributable to common shareholders is:

$195,000 - $60,000 = $135,000.

Weighted Average Shares Outstanding

Beginning shares: 200,000

Additional shares issued for acquisitions:

  • Company A: April 1, 2014, 30,000 shares — held for 9 months.
  • Company B: July 1, 2014, 50,000 shares — held for 6 months.
  • Company C: October 1, 2014, 80,000 shares — held for 3 months.

Weighted average of these new shares:

  • Company A: 30,000 x (9/12) = 22,500 shares
  • Company B: 50,000 x (6/12) = 25,000 shares
  • Company C: 80,000 x (3/12) = 20,000 shares

Adding these to the original shares gives:

  • Original shares: 200,000
  • Additional: 22,500 + 25,000 + 20,000 = 67,500
  • Total: 267,500 shares on average during 2014.

Calculation of Earnings Per Share

Using the above data, the basic earnings per share (EPS) is calculated as:

Basic EPS = Income attributable to common shareholders / Weighted average number of common shares

Basic EPS = $135,000 / 267,500 ≈ $0.50

Since there are no indications of dilutive securities, the diluted EPS is assumed to be equivalent to basic EPS.

Conclusion

In conclusion, the earnings per share for Lennon Industries as of December 31, 2014, are approximately $0.50 per share. This calculation accounts for the net income, extraordinary gain net of taxes, preferred dividends, and the weighted average shareholders' equity based on share issuance during the period. The separation of the extraordinary item ensures clear visibility of operational performance separate from non-recurring events, conforming to accounting standards for financial reporting.

References

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