(CMA adapted)
P15.7B (LO 4,5) (Computation of Basic and Diluted EPS) JaimeTurino of the controller's office
of Reed Corporation was given the assignment of determining the basic and diluted earnings per share
values for the year ending December 31, 2026. Jaime has compiled the information listed below.
1. The company is authorized to issue 10,000,000 shares of $1 par value common stock. As of Decem-
ber 31, 2025, 4,500,000 shares had been issued and were outstanding.
2. The per share market prices of the common stock on selected dates were as follows:
Price per Share
July 1, 2025
January 1, 2026
April 1, 2026
July 1, 2026
August 1, 2026
November 1, 2026
December 31, 2026
$20.00
21.00
25.00
11.00
10.50
12.00
10.00
3. A total of 500,000 shares of an authorized 1,500,000 shares of convertible preferred stock had
been issued on October 1, 2025. The stock was issued at its par value of $100, and it has a cumu-
lative dividend of $4 per share. The stock is convertible into common stock at the rate of one share
of convertible preferred for five shares of common. The rate of conversion is to be automatically
adjusted for stock splits and stock dividends. Dividends are paid semi-annually on September 30
and March 31.
4. Reed Corporation is subject to a 20% income tax rate.
5. The after-tax net income for the year ended December 31, 2026, was $6,890,000.
The following specific activities took place during 2026.
1. January 1-A 2-for-1 split of the common stock became effective on this date. The board of direc-
tors had authorized the split on December 15, 2025.
2. April 1-A total of 500,000 shares of common stock were issued to acquire a distribution center.
3. July 1-A total of 200,000 shares of the $3 convertible preferred stock was converted into common
stock. The company issued new common stock and retired the preferred stock. This was the only
conversion of the preferred stock during 2026.
4. October 1-A 10% common stock dividend was issued. The dividend had been declared on
September 10, 2026, to all stockholders of record on September 29, 2026.
5. November 1-A total of 90,000 shares of common stock were purchased on the open market at
$12 per share. These shares were to be held as treasury stock and were still in the treasury as of
December 31, 2026.
6. Common stock cash dividends-Cash dividends to common stockholders were declared and paid
as follows:
November 15$0.40 per share
7. Preferred stock cash dividends-Cash dividends to preferred stockholders were declared and paid
as scheduled.
Instructions
a. Determine the number of shares used to compute basic earnings per share for the year ended
December 31, 2026.
b. Determine the number of shares used to compute diluted earnings per share for the year ended
December 31, 2026.
c. Compute the adjusted net income to be used as the numerator in the basic earnings per share calcu-
lation for the year ended December 31, 2026.
