Reference no: EM133033552

Question - The following information pertains to Shane's Sports Collections Limited (SSCL):

The tax rate is 40%.

SSCL ended 20X5 with 700,000 common shares outstanding, after issuing 200,000 common shares for cash on 31 December.

There were no other common share transactions during the period.

Net earnings were $1,300,000.

The following are elements of SSCL's capital structure:

ASCL had $5,000,000 (par value) of 8% bonds payable outstanding during the year. The bonds are convertible into 80 common shares for each $1,000 bond. Bond interest expense was $403,000 for the year.

SSCL had 40,000 options outstanding throughout 20X5 to purchase 120,000 common shares for $3 per share. The average share price during the year was $15. The options were not exercisable until 20X10.

SSCL had 70,000, $1.25 preferred shares outstanding. The shares were cumulative. No dividends were declared in 20X6. The shares were convertible into 50,000 common shares.

SSCL had a contingent share agreement outstanding to issue 50,000 common shares to the prior shareholders of a company that SSCL had acquired in 20X2. The shares become issuable if the acquired company's operations accumulate $5,000,000 of post-acquisition earnings before the end of 20X8. Earnings have been $3,500,000, to date, and the target is expected to be met in 20X7.

SSCL had $8,000,000 (par value) of 6% bonds payable, issued on 31 March 20X5. The bonds are convertible into 40 common shares for each $1,000 bond. Bond interest expense was $285,750 for the nine months of the year that the bond was outstanding.

Required -

1. Compute SSCL's basic EPS for 20X5.

2. Compute SSCL's diluted EPS for 20X5.

Diluted EPS takes into account the impact on EPS that occurs if the convertible securities outstanding at the end of the fiscal year are exercised, and all options to purchase shares that are outstanding at the end of the year are exercised.