Ahnberg Corporation had 580,000 shares of common stock issued and outstanding at January 1. No common shares were issued during the year, but on January 1, Ahnberg issued 200,000 shares of convertible preferred stock. The preferred shares are convertible into 400,000 shares of common stock. During the year Ahnberg paid $120,000 cash dividends on the preferred stock. Net income was $1,222,000. Required:
What were Ahnberg's basic and diluted earnings per share for the year?

basic earnings per share = $1.90

diluted earnings per share = $1.25

Explanation:

Basic Earnings per share = Earnings attributable to holders of Common Stock ÷ Weighted Average Number of Common Stocks Outstanding.

where,

Earnings attributable to holders of Common Stock = $1,222,000 - $120,000 = $1,102,000

and

Weighted Average Number of Common Stocks Outstanding = 580,000 shares

therefore,

Basic Earnings per share = $1.90

Diluted  Earnings per share = Adjusted Earnings attributable to holders of Common Stock ÷ Adjusted Weighted Average Number of Common Stocks Outstanding.

where,

Adjusted Earnings attributable to holders of Common Stock = $1,222,000

and

Weighted Average Number of Common Stocks Outstanding = 580,000 + 400,000 = 980,000 shares

therefore,

Diluted Earnings per share = $1.25

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