Question

On January 2, 2018, Ava Co. issued at face value $53,300 of 9% bonds convertible in total into 9,649 shares of Ava's common stock. No bonds were converted during 2018. Throughout 2018, Ava had 10,000 shares of common stock outstanding. Ava's 2018 net income was $120,226. The income tax rate is 30%. No potential common shares other than the convertible bonds were outstanding during 2018. The numerator in the diluted earnings per share calculation for 2018 would be: $___________

Answer 1

Answer: $123,583.90

Explanation:

Given the following Parameters,

Net income = $120,226,

Interest rate = 9%

Tax = 30%

The following formula then applies,

Diluted EPS = (Net income + Interest after tax)/Total outstanding shares outstanding

Now, Interest(Before tax) = $53,300 * 0.09 = $4797

Now we have to calculate it After Tax

= 4,797 (1-tax rate)

= 4,797(1-0.3)

= $3,357.90

The numerator is,

= (Net income + Interest after tax)

= 120,226 + 3,357.90

= $123,583.90

The numerator in the diluted earnings per share calculation for 2018 would be $123,583.90

Answer 2

Answer:

$171,927

Explanation:

Formula for diluted earnings per share is $\frac{Net Income+(Interest Expense*(1-tax rate))}{Diluted Potential Common Stock}$

Therefore the Numerator will be: Net Income+(Interest Expense *(1 - tax rate))

We have :

Ava's 2018 Net Income: $120,226

Interest Expense: $53,300

Tax rate: 30% or 0.03

So we replace the above values in in Numerator:

Numerator = $120,226 +($53,300(1-0.03))

Numerator = $120,226 + $51,701

Numerator = $171,927

Therefore, the numerator in the diluted earnings per share calculation for 2018 would be: $171,927