Question

During 2011, Angel Corporation had 900,000 shares of common stock and 50,000 shares of 6 percent preferred stock outstanding. The preferred stock does not have cumulative or convertible features. Angel declared and paid cash dividends of $300,000 and $150,000 to common and preferred shareholders, respectively, during 2011. On January 1, 2010, Angel issued $2,000,000 of convertible 5% bonds at face value. Each $1,000 bond is convertible into 5 common shares. Angel's net income for the year ended December 31, 2011, was $6 million. The income tax rate is 20%. What will Angel report as diluted earnings per share for 2011, rounded to the nearest cent?A. $6.25B. The correct answer isn't given.C. $6.43D. $6.22

Answer 1

Answer:

B. The correct answer isn't given.

Explanation:

Step 1 Calculate Basic Earning per Share

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

Earnings Attributable to Common Stock Holders :

Net income for the year ended December 31, 2011            6,000,000

Preference dividend                                                                 (150,000)

Interest on Bonds  ($100,000×80%)                                         (80,000)

Earnings Attributable to Common Stock Holders                5,770,000

Basic Earning per Share = $5,770,000/900,000 shares

                                        = $6.41

Step 2 Calculate Diluted Earnings per Share

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

Adjusted Earnings Attributable to Common Stock Holders :

Earnings Attributable to Common Stock Holders                5,770,000

Add Interest on Bonds  ($100,000×80%)                                   80,000

Earnings Attributable to Common Stock Holders                5,850,000

Adjusted Weighted Average Number of Common Stock Holders

Shares of common stock                                                          900,000

Add Convertible Bonds (2,000,0000/1,000×5)                          10,000

Weighted Average Number of Common Stock Holders         910,000

Diluted Earning per Share = 5,850,000/910,000

                                           = $6.43

The Convertible Bonds are Anti-Dilutive on comparison with the Basic Earnings per share.