Question

Rockland Corporation earned net income of $300,000 in 2014 and had 100,000 shares of common stock outstanding throughout the year. Also outstanding all year was $800,000 of 10% bonds, which are convertible into 16,000 shares of common. Rockland’s tax rate is 40 percent.
Compute Rockland's 2014 diluted earnings per share.

Answer 1

Answer:

$3 per share

Explanation:

Given that,

Net income earned in 2014 = $300,000

Common stock outstanding throughout the year = 100,000 shares

Tax rate = 40%

(After-tax interest on convertible debt + Convertible preferred dividends), B:

= [(Outstanding all year × 10% bonds) × (1 - Tax rate)]

= [($800,000 × 10%) × (1 - 0.4)]

= $80,000 × 0.6

= $48,000

Therefore, the Rockland's 2014 diluted earnings per share is as follows:

= (Net income earned in 2014 + B) ÷ (Common stock outstanding throughout the year + Convertible shares)

= ($300,000 + $48,000) ÷ (100,000 + 16,000)

= $348,000 ÷ 116,000

= $3 per share