Eastern Corporation began operations on January 1st, 2020. The company reported the following information on its balance sheet as of December 31st, 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 31st, 2026 $ 237,500
Contributed surplus, bond conversion rights (see Note 1 below) $518,800
Note 1: On January 1st, 2020, the company issued $7,500,000 convertible 5% six-year bonds. Interest is paid on December 31st 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 1st, 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 1st, 2021, and April 30th, 2024. The common shares were trading at $9.00 per share on January 1st.
- On March 31st, the company repurchased 750,000 common shares for $15 per share.
- The company declared and distributed a stock dividend of 4% on August 1st.
- On December 15th, the company declared $600,000 in Class A preferred dividends and $600,000 in Class B preferred dividends. The dividends were paid on December 31st.
- 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.