1. The company is authorized to issue 8,000,000 shares of $10 par value common stock. As of December 31, 2006, 3,000,000 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, 2006 $20.00
January 1, 2007 21.00
April 1, 2007 25.00
July 1, 2007 11.00
August 1, 2007 10.50
November 1, 2007 9.00
December 31, 2007 10.00

3. A total of 700,000 shares of an authorized 1,200,000 shares of convertible preferred stock had been issued on July 1, 2006. The stock was issued at its par value of $25, and it has a cumulative dividend of $3 per share. The stock is convertible into common stock at the rate of one share of convertible preferred for one share of common. The rate of conversion is to be automatically adjusted for stock splits and stock dividends. Dividends are paid quarterly on September 30, December 31, March 31, and June 30.
4. East Aurora Corporation is subject to a 40% income tax rate.
5. The after-tax net income for the year ended December 31, 2007 was $13,550,000.

The following specific activities took place during 2007.
1. January 1—A 5% common stock dividend was issued. The dividend had been declared on December 1, 2006, to all stockholders of record on December 29, 2006.
2. April 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 2007.
3. July 1—A 2-for-1 split of the common stock became effective on this date. The board of directors had authorized the split on June 1.
4. August 1—A total of 300,000 shares of common stock were issued to acquire a factory building.
5. November 1—A total of 24,000 shares of common stock were purchased on the open market at $9 per share. These shares were to be held as treasury stock and were still in the treasury as of December 31, 2007.
6. Common stock cash dividends—Cash dividends to common stockholders were declared and paid as follows.
April 15—$0.30 per share
October 15—$0.20 per share
7. Preferred stock cash dividends—Cash dividends to preferred stockholders were declared and paid as scheduled.


SO I had to Instructions
(a) Determine the number of shares used to compute basic earnings per share for the year ended December 31, 2007.

My problem was I got the begnning balance of Beginning Balance, including 5% stock dividend was 3,150,000. Because I did the (3,000,000 X 5%) = 150,000 so my beginning balance was 3,000,000+ 150,000 = 3,150,000.

My next step is where I get a little lost I have to now compute the Conversion of preferred stock which I came up with 3,350,000. Because I took my beg. bal. of 3,150,000 + 200,000 shares on April 1st.

but my teacher said the answer is 3,360,000.

But didn't show me where I went wrong. I ask where the 10,000 difference was coming from and what I over looked, he simply told me to figure it out. I get the tough love of learning thing but I really don't know what I over looked. I asked a second time for help and he suggested tutioring because its something I should know at this stage in my education.

I don't know what else to do... so I turned here...

Thanks,
Lost!

Well, truthfully I would have screwed it up too because it's been since college that I've done conversions. (You said "basic" EPS and that I can do - I didn't know what I was getting into. LOL.)

But since the instructor has said there's an extra 10,000, I went back to read to see what I could make sense of, and I did find it.

Honestly, this isn't something I remember learning, but 10,000 is 5% of the 200,000 shares -- it says automatically adjusted for splits and stock dividends. The split hasn't happened yet. But I have to assume that means that when a stock dividend of 5% was added, that means the conversion includes the extra 5%. That's your 10,000. i.e. it was a 1 to 1 conversion at the time it was issued, but since each common share is now 1.05 shares, it's now like a 1 to 1.05 conversion, if that makes sense.

(Someone who has learned this more recently can maybe confirm whether this is correct. But I'm pretty sure it is.)