The net income of Foster Furniture, Inc., amounted to $1,920,000 for the current year.

a. Compute the amount of earnings per share assuming that the shares of capital stock
outstanding throughout the year consisted of:
1. 400,000 shares of $1 par value common stock and no preferred stock.
Earnings per share =Net income/number of shares = 1,400,000/400,000 = $3.50
2. 100,000 shares of 8 percent, $100 par value preferred stock and 300,000 shares of $5 par
value common stock.
Solution:
Net Income
1,400,000
Less: Dividend on preferred stock
800000
Earnings for common stock holders
600,000
Earnings per share = 600,000/300,000 = $2
b. Is the earnings per share figure computed in part a(2) considered to be basic or diluted?
Explain.
The earnings per share computed above is a basic earnings per share as there was no potential
equity shares (i.e. those securities which will be converted in to equity shares at a later date).
Thus no effect in earnings was given to compute the diluted earnings per share.