Question

On January 1, 2020, Headland Company issued 10-year, $1,840,000 face value, 6% bonds, at par. Each $1,000 bond is convertible into 16 shares of Headland common stock. Headland net income in 2020 was $473,800, and its tax rate was 20%. The company has 103,000 shares of common stock outstanding throughout 2020. None of the bonds were converted in 2020.
a. Compute diluted earnings per share for 2014.
b. Compute diluted earnings per share for 2014, assuming the same facts as above, except that
$1,000,000 of 6% convertible preferred stock was issued instead of the bonds. Each $100 preferred
share is convertible into 5 shares of Crocker common stock.

Answer 1

Answer:

a. $3.64

b. $3.56

Explanation:

Basic Earning per Share = Earnings Attributable to Holders of Common Stocks / Weighted Average Number of Common Shares

Earnings Attributable to Holders of Common Stocks Calculation :

Net income                                                                           $473,800

Less Interest on bonds after tax ($1,840,000×6%×80%)   ($88,320)

Earnings Attributable to Holders of Common Stocks       $385,480

Weighted Average Number of Common Shares Calculation:

Common Shares                                                                    103,000

Weighted Average Number of Common Shares                103,000

Basic Earning per Share = $385,480/103,000

                                          = $3.74

Diluted  Earning per Share = Adjusted Earnings Attributable to Holders of Common Stocks / Adjusted Weighted Average Number of Common Shares

Adjusted Earnings Attributable to Holders of Common Stocks Calculation:

Earnings Attributable to Holders of Common Stocks             $385,480

Add Back Interest on bonds after tax ($1,840,000×6%×80%) $88,320

Earnings Attributable to Holders of Common Stocks             $473,800

Adjusted Weighted Average Number of Common Shares Calculation:

Weighted Average Number of Common Shares                       103,000

Add Convertible Bonds (1840,000/1000×16)                               26,440

Adjusted Weighted Average Number of Common Shares       129,880

Diluted  Earning per Share = $473,800/ 129,880

                                              = $3.64